Lessons From Legends On How To Hit It Big On Stocks
This article will reveal many of the techniques that helped Mark Gomes to turn a $2,000 credit card loan into a multi-million dollar fortune. It represents decades of accumulated wisdom from his stock market mentors and Wall Street legends, including Warren Buffett (and Mr. Buffett’s mentor, Benjamin Graham).
As a compilation of lessons learned, this Methodology is the basis for Mr. Gomes’ Poised To Triple selection process, asset allocation, and trading techniques. PTT Research views the Methodology as required reading for anyone who follows or seeks to invest in Mr. Gomes’ Poised To Triple stock selections.
Ian Karnell – Founder & President, PTT Capital, LLC
The Multi-Millionaire Method
by Mark Gomes (updated Aug 2014)
Warning: This document encapsulates 20+ years of education and experience. It is lengthy. However, it was written to help you optimize your investment returns. To do so, it is critical to understand my process and philosophy.
- Picks to triple can be based on short-term or longer-term situations. Be sure to know which category each pick falls under. Short-term selections should not be assumed to have long-term staying power.
- Barring a manual close-out, our picks to triple automatically graduate at triple the initiation price. If/when we decide to close out a position before it triples, we immediately inform PTT Research customers via an email Alert.
- The only Methodology-approved entry points are 1) the PTT Research customer initiation price and 2) Risk/Reward Chart lows. Follow-on articles should not be viewed as entry-point catalysts unless they coincide with a Methodology-approved entry point. See our section on how to draw Risk/Reward Charts for more on this topic.
- PTT Research is under no obligation to provide updates to the general public. However, frequent updates are provided to PTT Research customers. Followers of our free offerings should consult the Methodology for preferred ways to play our selections.
- Under any circumstance (news, stock movement, earnings, etc.), if we do not provide an update, PTT Research customers should assume that there is no change to our thesis.
Table of Contents
Lesson 1: Stick To The Lessons
Lesson 2: Choose Your Mentors & Analysts Wisely
Lesson 3: Stock Investment Cycles
Lesson 4: Position Sizing
Lesson 5: Investing In My Picks
Lesson 6: When To Buy
Lesson 7: When To Sell
Lesson 8: The Trend Is Your Friend
Lesson 9: Avoiding & Weathering Corrections
Lesson 10: Don’t Worry!
My interest in stocks began in the mid-80s, but I didn’t make my first investment until 1993.
The reason was simple. I had no money to invest. I got through college on a track scholarship and a $300 a month budget. That was just enough to share the basement of a three-level apartment with two teammates. My area of the cellar was just big enough for a twin-size bed and a narrow path to get in and out.
It might sound grim, but those were some of the best days of my life. I was learning what it meant to support one’s self and pave one’s own future. Mom sent me whatever she could each month. I hocked baseball cards at weekend flea markets to cover the rest.
During my senior year (1993), I applied for a credit card which enabled me to take out a $2,000 cash advance. I opened a stock account at Waterhouse Securities (which eventually became Ameritrade). I was on my way…
…on my way to years of losses, that is.
I made every mistake in the book. Technical analysis, pump n dumps, buying high and selling low. Despite graduating with honors from Northeastern University with a degree in Finance, I was a terrible investor.
Luckily, my first real job put me in direct contact with some of Wall Street’s brightest minds. My job mainly entailed looking up esoteric information and faxing it to their offices. It was menial, but afforded me the opportunity to ask some of the friendlier customers an occasional question about how to do it right.
In 1995, two of my customers kindly took me under their wings (one of whom was taught by the famous billionaire, Jim Rogers). Their lessons changed my life forever. They taught me about the misconceptions that keep most investors from producing exceptional returns (I had fallen prey to most of them). They also introduced me to the teachings of Wall Street legends, including Benjamin Graham, Warren Buffett, and Peter Lynch.
The details are a story for another day. Suffice it to say that I would be nothing without the generous teachings of those mentors and legends. Indeed, I am just a student of the game. This article summarizes what I took away from their teachings. It serves as a reminder for me, but also as a guide for anyone who is interested in following in my fortunate path.
The next 13 years were a whirlwind. “Irrational exuberance”, the Internet bubble, and real estate crash all tested the limits of my mentors’ teachings. In each case, their lessons kept me away from trouble and delivered profitable returns (in every year except 2002!)
In 2004, I founded Pipeline Data, a Wall Street consulting firm. After a blessed string of successes, I semi-retired in 2008.
Eager to help others (as my mentors had helped me) I started donating stock selections on Seeking Alpha in early 2009. For more than four years, I provided free advice and picks to help investors build a better future. It was my way of giving back to a world that has blessed me with so much.
The results were nothing short of extraordinary.
During that four-year span, most of my picks tripled in value. Many others doubled or were acquired before getting the chance to triple. The average stock in my Core Portfolio (publicly available here, via my Portfolio Tracker) rose by well over 100%.
It went on to be named the #1 tech stock of 2013 by CNBC. A billion dollars of market value was created. My readers made millions.
In late-2013, I sought to expand my efforts to help the investing public.
I launched PTT Research, offering subscription services to bring Wall Street’s top analysts to Main Street investors. More than 90% of the revenue goes toward consulting with industry experts, attracting top professionals, hiring promising young analysts, and supporting our growing number of readers.
As of early-2014, our worldwide following exceeds 50,000 investors across various Internet channels.
I developed this Methodology over the course of many years because I cannot provide one-on-one guidance to 50,000 followers. If you are one of them, my advice is to read and re-read this Methodology until you know and understand it completely.
Remember, the Methodology is what turned me into a winning investor. When I stray from it, I often revert back to my losing ways (I’m only human!). Accordingly, you should view the rules of the Methodology as taking precedence over anything I do or say publicly.
In fact, I wouldn’t want anyone to follow or act on my picks until they have a full understanding of this Methodology, from start to finish. After all, education is always the path to success.
Important Things To Know:
1. Before you act on any of my research, identify whether you are a trader or an investor. A trader tries to predict where a stock’s price is going next. An investor determines what a company is worth and buys the stock when it is cheap relative to the company’s true value.
A trader is proven right or wrong very quickly. An investor has to wait for the company’s performance to convince the world of its value (which can take months or even years). Benjamin Graham was an investor. Peter Lynch is an investor. Warren Buffett is an investor.
Because I follow their lead, I am also an investor. Accordingly, my research is geared toward investors, not traders. That being said, traders can certainly benefit from my selections. I believe fundamental + technical research can be a potent combination.
2. Companies don’t become major successes overnight. My picks usually focus on companies that have just started unlocking their potential, but haven’t been discovered yet. To inexperienced investors, these companies often look like losers. They may have mediocre balance sheets, low or negative earnings, no Wall Street coverage, etc.
In actuality, these companies have been forming the building blocks of future success. They are coming out of a period of investment and primed to reap the rewards. I like to buy these companies when they are on cusp of cashing in on those investments. Often times, this is exactly when the stock price is at rock-bottom.
Peter Lynch: Lesson 1
Peter Lynch: Lesson 2
3. Investors must be prepared to see their stocks decline in value. An undervalued stock is undervalued because most people don’t know (or don’t believe) that it should be worth much more. 90%+ of the time, when a stock drops, there’s nothing wrong.
If you don’t hear from us, we have nothing new to report. Thus, you can assume that the decline is due to panicky investors. That’s usually a great time to buy!
If you are not prepared to endure a stock’s ups and downs, do not invest in the companies I discuss. It is likely that you will lose money (even when I’m right) because you will be prone to misinterpreting a stock’s movement as being correlated with the company’s value.
Warren Buffett: Lesson 1
Peter Lynch: Lesson 3
Peter Lynch: Lesson 4
4. Investors who follow my investing technique must also be prepared to sell their stock if/when they triple. My method does not focus on investing in the “best companies” — it focuses on investing in the most undervalued stocks.
When one of my picks triples, the odds of it still being significantly undervalued are low. By that time, everybody knows about it. Wall Street analysts may even be smothering it with love (like Himax, after it tripled from $3.44 to $10.32). Once the Wall Street consensus is bullish, the stock may only have a 50/50 shot of outperforming the market.
Benjamin Graham: Lesson 1
Peter Lynch: Lesson 5
I want undervalued stocks… and undervalued stocks are generally unknown, misunderstood, or even hated (like Facebook in late-2012).
5. Learn the principles of Position Sizing (Lesson 4, below). Buying the right amount of each stock is critical. If you buy too much of a risky pick, it could crush your portfolio. If you buy too little, it could limit your potential gains.
This article will provide a simple set of rules to help you determine how much to allocate into each stock. My system is based on identifying a stock’s risk profile, which is more important than a stock’s potential for gains. My guidelines are very clear and easy to understand.
One of the biggest mistakes investors make is to stray from proven rules. A common error is to invest too much into a pick. Sometimes this happens because they fall in love with the pick. Make no mistake — emotion has no place in the world of stock investing. Another mistake is to make “forced investments” because they think they are sitting on too much cash.
Warren Buffett: Lesson 3
My methods are designed to help you allocate your cash appropriately. When the market gets too expensive, we won’t find as many good picks. That will leave fewer of our selections in your portfolio. That’s generally a sign to keep some excess cash on the sidelines.
That’s good news, because when stocks get cheap, I find a lot more picks. Make no mistake, cash is a position… and sometimes it should be your largest position!
6. Utilizing Risk/Reward Charts is not required but can enhance buy-and-hold gains. Over the years, I developed a trading methodology that creates a visual view of a stock’s risk/reward ratio by combining its fundamental value with its expected growth rate and adding a dash of rudimentary technical analysis. The result enables us to see when a stock we own has gotten a little ahead of itself (or pulled back too much).
Learning this strategy is a little tougher than following the Position Sizing rules, but it can be worthwhile. HOWEVER, I do not use my Risk/Reward Charts to make trading calls to newsletter subscribers or the public. If you choose to use this strategy, you must make that choice on your own…and accept the gains or losses that result. I provide insight into my trading technique hesitantly, but willingly, for those who seek to expand their repertoire of money-making tools.
In my opinion, a better route is to utilize my premium newsletter (PTT Pipeline) or service (PTT Elite) to help with your decisions. PTT Pipeline provides insight into the stocks in my research pipeline along with at least one new Risk/Reward Chart each week. Occasionally, I even provide Risk/Reward alerts. PTT Elite gives subscribers one-on-one phone access to me for 30 minutes every month. During that time, members can ask me virtually anything.
When drawn properly, Risk/Reward Charts can literally enable an investor to “buy low and sell high” like a pro. But again, I’m an investor first, so before playing around with this trading technique, be sure you are willing to take full responsibility for the results.
For most investors, I believe the best policy is to buy my picks near the price where I pick them (using my Position Sizing rules as a guide) and hold them until they succeed (triple) or fail (when that happens, I will admit being wrong ASAP and tell you that it’s time to sell).
7. As I alluded to above, I never (ever) predict where a stock will go over a short period of time.
This is because nobody can consistently predict what the total population of market participants will do next. My Methodology focuses on calculating the value of companies (and therefore their stocks). Even when I’m right, it sometimes takes the world months (and often years) to catch on.
This is integral to my Methodology (which has earned me close to 40% annually for the past 18 years)! It’s boring and requires a LOT of patience (and faith), but it’s effective. I fault no one who decides that this Methodology is not for him or her… but if you decide to follow it, you have to follow it completely. If there was a way to make it more “fun”, trust me, I’d do it.
8. Despite not predicting short-term prices, I do keep an eye on each stock’s potential risk and reward. If you buy a stock at 10 that could go down to 5 or up to 30, you are taking on $5 of risk in pursuit of $20 of reward. All else being equal, situations like this make great investments. However, too many investors lose sight of this equation as it changes. For example, if the same stock quickly jumps to $25, your risk may now be $20, while your potential reward is only $5.
Quickly is the operative word here. Good stocks are supposed to go up. True risk and reward is determined by how fast it moves up relative to its expected growth rate. This is why I believe that Risk/Reward is best measured by using a Risk/Reward Chart. A Risk/Reward Channel (consisting of two parallel lines) moves upward at a pace that the company’s growth can presumably keep up with. This gives us a constant view of the relative risk and reward (i.e. is the stock high in the channel or low?).
For shorter-term trades on longer-term investments, we utilize risk/reward charts like the one you see below:
If you’re a day trader or a technical analyst, you probably have tools that are far more sophisticated than this (FYI, I was a technical / quant analyst from the mid-80s until the mid-90s). As a long-converted fundamental analyst, I simply attempt to find the longer-term path the stock is likely taking (depicted by the two long parallel lines).
It’s important that the slope of those lines is sustainable (in the case of AMZN, the lines are moving up at a rate of 19% per year, which feels quite sustainable). If the lines are too steep, you are likely drawing a short-term trend (depicted by the short parallel lines in bold). Unsustainable trends generally end in a reversal, as it did in this case.
By following these tips, you can find better entry and exit points. Take note of the fact that every time that a stock hits the top (or bottom) of its Risk/Reward channel, there’s a very good chance that it will gravitate at least halfway back toward the opposite end (if not all the way). When the stock first reverses course, it creates new trend, opposite of the one that previously existed (i.e. if it rises to the top, the up-trend is liable to reverse into a down-trend, and vice versa).
Incidentally, the concept of risk and reward is also why our picks usually “graduate” from our portfolios once they triple. After tripling, only the rare stock triples again as easily. When we see an exception to that rule, we’re sure to let our subscribers know.
9. Many of our picks will entail bottom-fishing small-cap value stocks. Performance-wise, this equity asset class has dominated all others for 6 decades running. It is also the class with the least amount of institutional competition. Thus, you’re not dealing with companies that are being extensively researched by over 100 MBAs.
You want to avoid this sort of competition if you can help it. Trust me. Every week, Pipeline Data invests thousands of dollars into research so we can help buy-side institutions predict the quarterly performance of larger companies like ORCL. Unless you’re an industry expert, you don’t want to compete with that level of research and expertise.
Focusing on smaller companies gives smaller investors a distinct advantage. Such an advantage is rare in today’s market environment.
This is where the likes of Warren Buffett cut their teeth. In fact, Warren Buffett once said that he would never have abandoned this asset class if he hadn’t become so rich. Once you have billions like him, investing in such small companies becomes virtually impossible (his typical position often represents several-times the entire market cap of my picks!) I hope this helps to illustrate the point.
10. Even though my website and picks are called “Poised to Triple” I do not expect every pick to triple. That would be foolish. More accurately, I pick stocks that I believe are poised (in other words, “have the potential”) to triple. As my historical performance shows, many do. Many more double or get acquired. Of course, some simply don’t work out (you can see my work on Seeking Alpha for examples).
Dating back to the 1990s, my winners have routinely overwhelmed the losers, leading to nearly two decades of outstanding gains for my Pipeline Data (institutional / Wall Street) clients and PTT Research (retail / Main Street) subscribers. This is the key to our portfolio, which takes calculated risks on stocks based on the companies’ odds of success and failure (a.k.a. risk and reward) in the real world.
This is the #1 thing that determines the success or failure of any company’s stock.
Specifically, I seek the rare combination of relatively low risk and very high potential reward. I do this by sticking to my knitting and employing a virtual army of industry experts who understand the ins and outs of the companies I consider. All told, I spend 6-figures on research annually… so my subscribers don’t have to.
11. Beware of the losers. I try to identify and shed my losers before they implode. When we pick a stock, it is generally at a price that we believe is near the floor of where it should go. A significant decline from those levels is usually a sign that we’ve made a bad pick. Because of this, if one of our picks drops 20% from its initial price, I revisit my thesis, take a hard look in the mirror, and decide if I’ve made a mistake. If nothing has changed with the story, I tend to get excited — after all, if I like the stock at $10, I’m going love it at $8.
If something has changed with the story, I will let you know as soon as possible. Generally, the loss will be limited to 20%, but could exceed that under certain circumstances. Luckily, my winners tend to double, triple, or get acquired, which more than makes up for the occasional 20% loss.
To be clear, we do not advise placing stop-loss orders. These orders are very easy prey for stock manipulators. Many brokerage firms operate something known as “dark pools” to which High Frequency Traders pay for access. This enables them to prey on trades, milliseconds before those trades are sent to the exchanges.
Dark pool participants can often see all conditional orders (like trailing stops) that have not yet triggered. They can push the stock down (by shorting it) to trigger those orders. Seconds later, the stock is even lower, enabling the traders to cover their shorts for a quick profit (at your expense). Of course, we also suffer because subscribers inevitably deluge us with emails insisting that “someone must know something is wrong at the company”. Nobody wins (except the bad guys).
Our Speculative picks (defined in Lesson 4 below) tend to be the exceptions. Speculative picks can easily fall 20% or more before taking off. In fact, my biggest winner ever dropped 25% over a nine month period before going from $3 to $30!
Because of this, I keep a special eye on the fundamental progress of my Speculative picks, rather than their stock price. As long as management keeps making progress, things should turn out ok. If they encounter stumble after stumble and provide excuse after excuse, it’s likely a signal to cut our losses and move on. My PTT Newsletter updates will assist.
The rest of this article is lengthy, but is meant to provide a complete view of my 25-years of education and experience. Though the lessons and explanations are lengthy, it all comes down to a short and simple set of rules designed to significantly enhance your financial future. Just remember, patience is a virtue. My methods can help you become rich over time, but it doesn’t guarantee that you’ll make money every month.
As discussed above, the true value of a company doesn’t actually fluctuate much, but stock prices do. Since most investors don’t understand how to truly value the kinds of stocks I pick (hint: it has little to do with P/E ratios), they tend to oscillate wildly. This is actually a good thing for us. While we may “lose” money for a couple months here and there, my methods are designed to limit those losses and maximize the gains that inevitably follow.
OK, let’s get down to business. Before we do, I’d like to offer my deepest thanks to mentors and legends everywhere. Thanks to them, we have a chance. Without them I would be nothing. This work is dedicated to them.
Swim Like The Sharks
Poised /poizd/ – verb – not moving but ready to move; ready or prepared for something
Tri·ple /tri-pəl/ – verb – to become three times as great
There are always a number of overvalued and undervalued stocks in the market. Most investors act as though they know one from the other. However, without years of education, mentorship, and experience, an investor is as lost in the stock market as I am under the hood of a tractor. Most investors can’t compete against seasoned professionals and have to settle for average returns (7% per year), while the top sharks walk away with 20%, 40%, or more.
Putting that into perspective, 40% a year turns $50,000 into $7.8 million in just 15 years. At 7% per year, it takes 60 years longer.
To perform like the sharks, I studied hard and turned my teachers’ lessons into an investing Methodology. It is built on three pillars:
1. Lose Little & Win Big
2. Stock Evaluation Methodology
3. Portfolio Management Methodology
Lose Little & Win Big
I’m not always right…not even close. This is by design.
Arguably, the most important thing to know about my philosophy is that it does not center around being right every time. Rather, it centers around investing in companies that have the potential for extraordinary gains.
Over the past few years, only about half of my selections have tripled (or better). The other half have been 20-30% losers in our portfolio.
If half of your picks gain exactly 200% and the other half decline by exactly 30%, your average profit will be 85% (200% – 30% = 170%/2 = 85%). If you average 85% every two years, you will make 100 times your money in 15 years (and 10,000 times your money in 30 years).
This is how thousands become millions (and millions become billions).
Stock Evaluation Methodology
Executing a Stock Evaluation Methodology is the hardest part by far. For most, much of this process should be outsourced to an professional.
My personal Stock Evaluation Methodology represents an amalgamation of the more important lessons taught by the world’s most notable investing legends (namely Benjamin Graham, Warren Buffett, and Peter Lynch), along with two personal mentors.
The one upgrade I added to their teachings was the concept of leveraging domain expertise — the wisdom of experts on a given topic. Without a access to domain experts and a formal background in stock analysis, it is prohibitively difficult (and time-consuming) to compete with those who have it.
Early in my investing life I learned this the hard way. Separating great companies from weaker ones often requires access to experienced industry professionals and consultants. In fact, PTT Research now spends six-figures annually to access experts to help us discover new picks for our customers.
In other words, we do the hard part for you.
Portfolio Management Methodology
My final pillar can be very easy if the investor so chooses. For those who enjoy a bit of extra challenge, I provide advanced instruction. The easy part is easy because all you have to do is follow the rules. Doing so should only be a challenge to your psychological fortitude.
Understand The Guppies
Over 90% of investors don’t have the proper training to truly understand the value of a company. I affectionately call them guppies. Even among the 10% of investors who are thoroughly trained and educated, I believe that only 10% are really good at it (like all-stars in a professional sport). This means that 99% the of investing public is prone to selling cheap stocks and buying expensive ones on a regular basis. Because guppies outnumber sharks by a wide margin, they are capable of driving stocks in the wrong direction for weeks, or even months.
In other words, anything can happen in the short-term. In fact, my portfolio has never gone up for 12 months in a row. However, I’ve only lost money once in the past 15 years (2002). Yes, I even made money in 2000, 2001, 2007, and 2008, while the markets melted down (more on that later).
How PTT Research Works For You
My process for finding winners is a time-consuming three-step process. My team starts by spending over 100 hours investigating 100 prospective investments. Step two is to take the 10 most promising candidates and spend another 10 hours digging deeper into each one. The final step is to take the 3 most exciting candidates and spend yet another 50 hours on each of them. After this 350 hour process, we end up with 1, 2, or 3 winners (usually 1).
Think about that for a second. 350 hours to pick 1 or 2 winning stocks. 51 hours spent specifically on each pick. How much time does the average investor spend? This should give you a sense of how many things investors don’t do when investigating their picks. It will also give you a sense of the advantage we possess at the end of our investigative process. By the time we’re done, we know the company better than almost anyone. As a result, we know exactly how to profit when our stocks are rising or falling.
It’s an intense process, but it pays off in a big way. In fact, it creates a game-changing advantage over the rest of the investing community.
A stock always gravitates to its fair value over time. Thus, all we have to do is buy the undervalued ones, sell the overvalued ones, and wait for everyone else to figure out what we already know. We are consistently among the first ones in and the first ones out, so we make the most money. Everyone else fights for a piece of what’s in the middle.
And because we get out while the getting is good, we end up sitting on a lot of cash while the market is falling. That sets us up to be the bargain buyers when the market bottoms out. Using this Methodology, I have averaged nearly 40% per year for the past 18 years.
That’s over four-hundred times my money going back to 1996.
While that might sound outlandish, it’s actually just simple math applied over a long timeframe. Indeed, Warren Buffett did much better in his first 18 years. Also, Peter Lynch grew the Magellan fund by 26x in 13 years. That’s not as good as my personal account did from 1996-2009, but it’s much more impressive because he did it with a multi-billion dollar fund. If he started with just a few thousand dollars, I’m sure he would have trounced my performance.
In other words, as awesome as my results might sound, I believe they are actually very achievable for anyone.
Impromptu Math Lesson: To do the math for yourself, just type 1.4^18 into Google. The 0.4 is the decimal representation of 40%. The ^ is a compounding symbol (just as + is an adding symbol) and 18 is the number of years.
With that formula you can figure out how any amount of money can grow over time. Just understand that the “1” represents the 1 initial investment you have made. So, the answer to 1.4^18 will tell you how many times your initial investment will have multiplied.
If your initial investment is $3,000 simply multiply the result of the first equation by $3,000 to see how much money you will have. In this case, $3,000*1.4^18 = $1.28 million.
Doing It Right
Everything I’ve discussed thus far tells you why there are no traders or technical analysts among the world’s twenty richest investors. The richest investors all have a longer-term view of things, but apply that view to companies that have yet to fully-blossom. This is how Warren Buffett made his early billions.
Long-ago I decided, “If that’s how Warren Buffett did it, that’s how I’m going to do it too!”
It’s important to note that I don’t take credit for having made money in 14 of the past 15 years. I’ve simply been following the Methodology, a consolidated representation of the lessons my most-brilliant mentors taught me. I’m just a robot following the rules.
Thus, I believe that anyone who follows a good Methodology and has access to an expert’s best picks and updates can do it too!
In the meantime, I can’t stop the world from misanalysing companies or panicking out of undervalued stocks. The Founder of MicroCapClub wrote a great piece on emotional investing; basically saying that emotional investing will make you go broke (so if you can’t control yourself, don’t invest in stocks).
In fact, I hope for investors to panic and crush my stocks! When they do, we get the option to buy more shares cheaply (assuming the resultant position-size adheres to my Methodology) and therefore make a bigger profit over time. Perfect. While we wait for the stock(s) to rebound, I try to ignore what the masses are doing (because I’m an emotional human like everyone else). Instead, I turn off the TV and do my homework (50+ hours per week). Continuous research ensures that our calculations and analyses are all in order.
That’s what our team does.
The next step is your job. If you decide to buy my picks, you have to decide when and how much. You also have to decide when to sell. This is another skill that required years for me to master. However, this one is much easier to learn.
As we pondered the launch of PTT Research, I quickly realized that my readers would need something that could help them learn my trading secrets in minutes, not years. Based my personal experience, if you’re not making money on our picks, we’ve probably done a poor job of explaining how.
So take a few minutes to continue reading this Methodology. And come back frequently. We are constantly updating it with new and valuable information. It encapsulates everything I have learned from 6 years of schooling, 20 years of experience, and the never-ending teachings of my Wall Street mentors (one of whom was taught by the famous billionaire and former George Soros partner, Jim Rogers). It will give you the ground rules I use in my investing. More importantly, it will arm you with the secrets I have used to make millions in the stock market.
Let’s get started!
Lesson 1: Stick To The Lessons
The first thing to know is that I cannot and will not provide “specific recommendations”. I have a legal right to publish my research and opinions, but I cannot advise you on what to do without a broker’s license. As a semi-retired person, I have no plans to obtain one. However, as someone interested in helping others, I am providing you with my complete set of personal rules. You can do with them as you wish
For starters, this Methodology is not meant to be “tweaked”. It incorporates the best lessons from the most influential investors I have ever known. They know much more than me! Accordingly, this Methodology always works best when I follow every rule, as it is written… without exceptions.
There is nothing in the Methodology that tells us what to do if we violate one of its rules. When I do (it happens; I’m only human), the only solution is to quickly rectify the error by making the move I should have made in the first place.
Case Study: Himax (HIMX)
The Methodology helped us to discover Himax when it was just $3.44 per share. I told investors that HIMX would be Google’s choice to power Google Glass, which would cause the stock to triple in value. Four months later, Google and Himax announced a relationship around Google Glass. The stock soon tripled to $10.32!
At that point, our Methodology said “sell”.
It was hard to do. There was a ton of hype and everyone loved the stock! However, rules are rules, so HIMX graduated from our Portfolio. The stock continued higher for a few months, driven by Wall Street hype, but soon collapsed to less than $7. That’s 33% below our $10.32 exit price. In the meantime, Glu Mobile (GLUU) was selected to take HIMX’s place. When HIMX hit $7, GLUU was up 25%.
Up 25% versus down 33%. That’s the power of ignoring emotions and adhering to a proven Methodology.
The lesson here is clear. “Hype” and “Love” are strong emotional influences. Both can make people do crazy things. This can be deadly on Wall Street. I’ve seen it send many of my personal friends to the poor house. The Methodology takes emotion out of the equation. It tells us what to do, regardless of how we feel. As easy as it sounds, you’ll still find it challenging. Emotions are very good at overriding logic. Keep this in mind!
Lesson 2: Choose Your Mentors & Analysts Wisely
Before you act on anyone’s stock analysis or advice, you should know as much about that person as possible. The Internet has made it easy for anyone to sway public perception regarding any topic, including the value of stocks. Many of them only want to do one thing — rip you off.
I’m not ashamed to admit that in my early 20’s I fell victim to a few rip-off newsletters. The profit they promised was too good to resist. As it turned out, the editors weren’t Wall Street professionals — they were crooks. I was just one of the million suckers born every minute; a patsy in a pump-n-dump pyramid.
So beware of “analysts” who tout penny stocks. Most of them don’t have the credentials to pick stocks. As a result, their picks are pure gambles
As for me, I started learning how to evaluate stocks in the mid-80s, a few years before the crash of ’87. In 1988, I earned a Track & Field scholarship to attend Northeastern University. It was the only way I’d be able to afford such a school, so I took full advantage of it. I studied Finance and spent as much time in the library as I did in class. I wanted to become the best stock-picker possible.
By the time I graduated from college, I thought I knew a lot. In reality, it took another 10 years of training and real-world experience before I really started to know what I was doing.
Looking at the stuff I see on the Internet and written in newsletters, I can tell you one thing for sure — most of the stuff you read is just as likely to hurt you as help. It’s very clear that most “analysts” have no idea what they are doing. They cite P/E ratios and regurgitate press clippings with no real analysis. This is because most “analysts” don’t have the necessary training.
This is why you should always do a background check. Many aspects of my background are posted here. But don’t stop there. Google me. Learn more about who I am before listening to a word I say. Your fortune is on the line.
Lesson 3: Stock Investment Cycles
OK, let’s get down to the fun stuff!
Before investing in my selections, you should understand how I categorize picks. Lesson 3 and 4 will prepare you for action.
By design, our picks often focus on unknown, unloved, or even hated stocks. After a careful screening process, we only choose stocks that we believe will reward investors for navigating three major investment cycles, which we define as 1) Great Find, 2) Wait Time, and 3) Gold Mine.
These investment cycle designations are not ratings. They are descriptions of an undervalued stock’s typical cycle. The Great Find occurs if/when we discover that a company is working on something that has great potential. The Wait Time occurs if/when the investing public gets excited about the potential before that potential is unlocked (thus, we must “Wait” for that to happen). The Gold Mine occurs if/when the company finally figures out how to unlock its potential.
You can find more details in my Seeking Alpha article entitled The Three Stages Of A Winning Stock Pick. As you can surmise, there’s good money to be made by investing early in a company’s Great Find phase. You can also guess, that investors can get frustrated waiting for the Gold Mine phase to begin. As we’ve already discussed, companies generally don’t change overnight.
That being said, buy-and-hold investors should simply be aware of these cycles and be prepared to ride them out. Traders and opportunistic investors can try to take advantage of the tendency for stocks to mark time or decline during Wait Time.
Keep in mind, being a “Gold Mine” doesn’t mean the stock will go straight up. It means that the company has figured out a winning formula for producing sustainable growth. That makes the company a “Gold Mine”, regardless of what the stock does today, this week, or next month.
Stocks go up and down. Quarterly reports surprise to the upside and downside. This happens to all companies, including the best ones. The key is in the growth the company delivers over time (often measured in years).
Understanding this principle is critical if you want to apply Methodology successfully during those times when the market is falling or when one of my picks reports a bad quarter. Remember, a quarter is just three months. If you haven’t had a bad three-month stretch in your life, you’re more fortunate than anyone I’ve ever known.
Lesson 4: Position Sizing
For the purposes of Position Sizing, we give most of our picks one of four risk designations: “Core”, “Speculative”, “Momentum”, or “Value”. These designations help to determine my position size.
Keep in mind that our Portfolio Tracker is the ultimate arbiter of whether a stock represents an “official” pick. I discuss many stocks in public (often to maintain a high profile with the public). However, only the stocks appearing in my Portfolio Tracker are official picks. Readers should also understand that paying members are privy to picks that I have not yet released to the public. We maintain a special Portfolio Tracker for paying members (at PTTResearch.com) and a separate one for non-paying followers (on PoisedToTriple.com).
It is also important to understand that Risk/Reward Charts determine how quickly I build my position. If I decide that a stock is a “Gold Mine” (see Lesson 3) and should be a “Core”, I will want to hold a 10% position. However, if the Risk/Reward Chart is near its upper trend line, I will exhibit patience and wait for a better price to build my position.
As you can see below, Pixelworks (PXLW) was a great winner for our readers. However, anyone who bought PXLW near the top line was always forced to endure months of pain to before seeing a gain.
What’s worse, human psychology is built to run from pain and flock toward euphoria. Thus, most investors are actually compelled to buy PXLW near the tops (usually on the release of exciting news). Sadly, they also sell near the lows (because they can no-longer take the pain). This is why our ongoing updates (available first and usually exclusively to PTT subscribers) make the difference between earning mammoth gains and taking big losses. See Become A Millionaire For Free! for more on this.
FYI, here’s the long-term Risk/Reward Chart PXLW:
This is the actual chart investors should care about. As you can see, the long-term channel has been rising at a 22% clip annually. This is in-line with the company’s expected growth rate. As previously discussed, it’s important that the channel isn’t growing faster than the company can. If it does, it must eventually break down — over the long-haul, a stock’s appreciation should always match the company’s underlying earnings growth.
By understanding PXLW’s expected growth rate, we can ascertain that the 2013-2014 trading channel is unsustainable. It is rising at a 58% annual rate, which the company’s fundamental growth cannot sustain. This enables us to classify the channel as being “short-term”. In generally, short-term channels break when 1) the company’s fundamentals start to deteriorate or 2) when they bump up against a longer-term channel boundary.
From the look of my chart, the short-term channel will collide with the long-term channel at the end of this year, around $12 per share. If the company continues to execute, the stock could certainly get there (but there are no guarantees).
FYI, the “Channel Width” is defined as the distance between the bottom line and the top line. If the bottom line is $4 and the top line is $8, the Channel Width is 100% (since a $4 stock has to rise 100% to reach $8). The “Recovery Factor” defines how many years it will take for the bottom line to reach the current top-line price. It gives you a sense of how long an investor might have to wait to make a profit if they “buy high”.
Sorry for the tangent, but it’s very important to understand that stock appreciation is ultimately driven and bounded by company growth.
Getting back to the Position Sizing designations, Core stocks have generally established themselves and possess great upside potential. A Core stock might have the potential to drop from $10 to $5, but that might come with the potential to reach $30. Accordingly, 5-10% of a portfolio can be allocated to each Core stock.
Value stocks are the safest. They have underlying value that creates a floor under their valuation. A Value stock might only have the potential to go from $10 to $18, but if the lowest it should go is $8, that’s a great risk/reward ratio. Accordingly, 10% of a portfolio can be allocated to each Value stock.
Momentum picks are represented by companies that seem to be seeing accelerating business trends. If we’re right, these picks have the greatest potential for short-term gains, though other picks may have a better shot at actually tripling. Based on their risk/reward profiles, 3-7% of a portfolio can generally be allocated to each Momentum stock.
Speculative picks are those that have yet to fully establish themselves. The success of a Speculative pick is usually dependent on the company fulfilling certain expectations. These stocks can triple, but they can also fall 50% or more.
Some of our Speculative picks will be called “Ten Baggers Or Bust”. These stocks have the potential of being “poised to triple” twice in a row (tripling twice is actually a nine-bagger, but ten has a better ring to it).
Despite their admittedly-promotional moniker, they still fall under the sell-when-it-triples rule. If one of these stocks is poised to triple again, I will be sure to let you know before it completes the first triple. Most importantly, be sure to pay the utmost respect to the possibility that these picks can go “bust”. If they do, the loss can be 100%.
Ideally, I would also like to find and hold several speculative stocks totaling 10% of my portfolio. I place roughly 0.5%-3% of my money in each, with most being under 1% (especially the Ten Bagger Or Bust selections).
Investing just 1% of one’s money in a Speculative pick may seem silly, but it’s prudent when the risk-level is elevated. Even CNBC’s Jim Cramer (a former client of mine, from his days at Cramer & Co. and Cramer Berkowitz) advocates only allocating a total of 10% of one’s portfolio to Speculative picks.
This is absolutely crucial to understand.
By limiting one’s Speculative holdings to 10% of one’s total portfolio, catastrophic losses should be more than covered by the winners. Newer investors are probably best-served to limit their Speculative positions to 1% apiece. This can change over time, as the investor becomes accustomed to market gyrations and the psychological impact of suffering losses (and gains, for that matter!)
More experienced investors may choose a larger fraction or even waive this rule entirely, assuming they are fully-appreciative of the risks.
Our goal is for each pick is for them to triple in value over time. When they do, they automatically “graduate” from our Portfolio. Many of our readers don’t like this rule. When a stock triples, investors typically become attached (or even enamored) with them. This is exactly why we auto-graduate them. We don’t want to own over-appreciated stocks. Under-appreciated stocks are the ones that offer the greatest potential.
Value picks are unlikely to triple, but they offer fantastic risk/reward ratios. They often have a high ratio of tangible and under-appreciated assets. As of April 15, 2014, we had made three Value picks, with two winners returning 200% and 68%. The one loser fell 20%, dragging our overall average return down to 87%. The average annualized return of these picks was 69%. Not bad for low-risk investments!
Overall, the total value of stocks in my portfolio will fluctuate based on how many stocks look attractive at any point in time. When we don’t have many picks outstanding, it’s likely because the stock market is offering weak potential rewards for the risk involved.
During those times, it’s critical to be patient. Cash is sometimes the best investment. Soon enough, the picks will start rolling in again. They always do. Barring global Armageddon, they always will.
Just understand that the rules of my Methodology will rarely have you 100% invested — it’s designed for the safety of newer investor.
If you don’t like sitting in cash, it’s your prerogative to increase your position sizes, invest it into ETFs like SPY, or the stock selections of another analyst you trust. You just won’t ever hear me recommend it because I focus on safety first. Let your level of experience and expertise serve as your personal guide.
Additional Pick Types
1. Every Spring we offer special short-term picks. A maximum total of 10-20% of one’s money can be invested in these Spring Portfolio picks (with no more than 10% going into any one pick). The more picks we make, the closer to 20% we can go. If we make fewer picks, less money should be invested. This is because our knowledge of the underlying companies is generally peripheral in nature.
For that reason, we don’t place price targets on our Spring Picks. However, they have traditionally produced excellent average returns over a very short period of time. As of April 15, 2014 we had selected a total of 19 Spring picks, which produced an average peak return of 26% and an average final return of 16%. That’s an annualized return well in excess of 100%.
These picks automatically “graduate” on Russell Investment’s annual reconstitution day, which is usually the last Friday of June each year. Investors may choose to hold them longer, but our official coverage ends on July 1.
2. Short ideas hold the promise of extra profits, while simultaneously helping to protect your portfolio from market-related losses. About 1-5% of one’s money can be invested into each Short pick. We will generally provide guidance on when we think the short position should be closed out. As of April 15, 2014 we had made one official Short pick. It produced a 62% profit in just over 3 months.
As you can see, our Position Sizing rules can provide good diversification. This allows an investor to benefit from the winners, while being protected from the occasional (but inevitable) losers.
Lesson 5: Investing In My Picks
Before I begin, I’ll jump ahead and give you two rules to write down and memorize: 1) Don’t chase stocks up and 2) Don’t place “market orders”. Doing either of these things is asking for trouble. The first one will be discussed in the next section. The second one is related.
When you place a “market order” your order is placed in a queue behind all market orders that were placed before you. By the time you get to the front of the queue, the stock may be a much higher price than you were willing to pay.
In my opinion, the proper process for investing in our picks is to read our reports in their entirety first. Then, if you choose to utilize some of my advanced strategies, create a Risk/Reward Chart. Either way, decide on a reasonable limit-price at which you want to buy the stock (perhaps 5-10% above my initiation price). Then, place your “limit order” (ask your broker if you don’t know how… it’s very easy to learn!) and stick with it.
If the stock quickly runs away from you, don’t worry — they often come right back (more on this in a moment). If it doesn’t, don’t worry — there will be many more picks and opportunities in the future. I’ve been doing this for 20+ years and I can say with certainty that the world has never run out of picks.
Similarly, jumping in months after I make a selection or after a pick has graduated can create confusion, uncertainty, and losses. This often sends readers into a desperate search for help or guidance. Sometimes, the investor will blame me for his/her losses. This is not healthy investing behavior.
“12 Easy Moves To Double Your Money In 12 Months” showed how even a child could have doubled your money in 2013. All it required was following our picks and utilizing this Methodology.
Often, the problem is that investors inherently fear and/or avoid new things. They feel more comfortable with what they already know. That “knowledge” provides comfort and the feeling of less risk. In fact, the reverse is usually true. The biggest opportunities lie with the stocks that nobody likes or knows about.
Hopefully you get the message, because I can’t control your actions.
When searching for our next triple, my job is to spend countless hours making sure that the potential reward far outweighs the risk. Before deciding to buy the stock, your job is to read my analysis carefully. Psychologically, building confidence in my work and the company’s story is very important. Along the way to greatness, every stock can drop 20%, 30%, and even 50% or more. You need confidence to weather those storms. In over 80% of cases, they are temporary. With those odds, you have to take the bad with the good!
This actually makes sense if you think about it. If I pick a stock to triple from $5 to $15 and it drops 25% to $3.75, it essentially becomes a pick to quadruple (from $3.75 to $15). The exception is if the stock is dropping because we’re wrong about the company.
Of course, that does happen. However, if we’re right 75% of the time and the winners double, a 20% loss on 25% of our picks won’t put much of a dent in our overall gains. Further, if we size our positions properly, we have the option of selling at a small loss or buying more to enhance our eventual gain.
The exception is if my opinion of the company changes, but if that happens, I will let you know as soon as humanly possible. In other words, if you don’t hear from me, you can (and should) assume that everything is ok.
As you can guess by now, having the discipline and psychological fortitude to stick to my Methodology is critical to making it work. Frequent updates and in-depth research provide the confidence needed to stay the course. This is a big part of the reason why our readers upgrade to our PTT Newsletter, PTT Pipeline, or PTT Elite offerings. Each one represents a higher level of service, respectively.
If you choose, you can monitor your companies’ news and SEC filings on your own. You can also monitor my ongoing comments and/or Instablog on Seeking Alpha, along with my articles on PoisedToTriple & PTTResearch. I also provide comment notifications on Facebook & Twitter, as well as additional conversations in our Member Forum.
It can be a lot of work if you wish. But frankly, I don’t believe it’s necessary for you to succeed.
In fact, I would argue that you can make more money by keeping it simple. By following PTT Research, you are effectively hiring trained veterans. For 20 years, Wall Street came to me for winning picks. I did the heavy lifting. Now, I’m delivering the same level of work and expertise to Main Street investors. In many cases, all you have to do to make money is buy the stock and patiently wait.
Lesson 6: When To Buy
I believe it is best to buy my picks within 5-10% of my initiation price. However, novice subscribers are prone to jumping in with market orders, which can drive our new picks up 25%, 50%, or even 100% in just a few minutes. Yes, minutes.
For the record, I do not like when this happens.
Moves like that are ridiculous and have no place among investors. It also perpetuates the idea that I’m pumping the stock. This notion is enhanced if/when the stock pulls back to my initiation price, which unknowledgeable investors construe as a “dump”. I worked too hard to build a reputation, only to have it sullied because a few novices don’t know how to relax and buy the stock gradually with limit orders. Alas, such is life.
For the rest of you, understand that a weekly move of only 1.1% will more than triple your money in just 2 years. Since 1996, I have “only” tripled my money every three years or so, but that’s enough to turn a few thousand dollars into a few million in 15 years.
If a stock to triple goes from $5 to $10 in an instant, that’s over a year worth of gains. Further, it is no longer poised to triple — it is only poised to rise 50% (from $10 to $15). It also holds the risk of pulling right back to $5 (or lower). Thus, the best thing to do is wait. In many cases the stock will come back to Earth.
Opportunistic investors and short sellers inevitably come out of the woodwork to sell or short the stock, respectively. This will drive the stock back to levels closer to my initiation price. I see it happen time and time again. When it doesn’t, no worries — another opportunity will present itself. There are plenty of fish in the sea.
For those of you pursuing some of my advanced strategies, 2-3 years is my initial/default timeframe for drawing Risk/Reward Charts and planning my investments. Of course, things get adjusted accordingly as situations dictate — this isn’t an exact science. I want to buy stocks near the bottom of my Channels and sell them near the top. Not “at” the top or bottom, because nobody can predict that with consistency.
Resetting your position (advanced): It’s important to note that I don’t wait for a Risk/Reward low to make an initial purchase. If I think a stock can triple from a given level, I don’t care where the stock goes in the short-term — I just want to own it. If my initial position falls to a Risk/Reward low, this creates an opportunity to reset my initial stake by buying more.
For example, if I buy a Core stock (10% position) at $15 and it falls to $12, my 10% position will likely now be an 8% position. At that point, I can buy an additional 2% to get back to up to 10%.
Lesson 7: When To Sell
This one is easy. As we’ve already discussed, the Methodology tells me to sell when one of two things happens:
1. If my pick triples. The only exception is if I reinitiate coverage on the stock as a new stock to triple from that point.
2. If I decide that I’ve made a mistake and give up.
The first one is easy and automatic. If there’s any confusion, check the status in my Portfolio Tracker. If there isn’t a new entry with a new initiation price, the pick is graduated. End of story.
Similarly, if I give up on a pick, it will also show up in the Portfolio Tracker. In addition, I will issue a mea culpa, letting everyone know that it was a bad pick and that it’s time to move on.
If none of this occurs, you can assume that the pick is still live and that my last update is still how I feel. Remember, companies don’t change fast. Therefore, my opinion doesn’t either.
Resetting your position (advanced): If my initial position rises to a Risk/Reward high, this creates an opportunity to reset my position by selling some (or hedging, perhaps by selling calls).
For example, if I buy a Core stock (10% position) at $12 and it rises to a Risk/Reward high of $18 (for example), my 10% position will likely now be an 15% position. At that point, I can sell or hedge to get back down to 10%.
Lesson 8: The Trend Is Your Friend
Technical analysts and traders believe that “the trend is your friend”. In other words, if the stock has been moving up, it will likely keep moving up for some time. If it is moving down, it will likely keep moving down for some time. Because of this, once buyers have exhausted themselves, many traders will short the stock (even if the company’s fundamental prospects are great). This will cause the stock to gravitate lower. Many traders won’t stop shorting until sellers are exhausted. At that point, the trend reverses and the up-trend can resume.
To me, it’s all a game. In real life, companies don’t get stronger and weaker every few weeks. Keep this in mind the next time you are wondering why your stock is on the decline. It’s usually just traders playing their game… but a good stock will ultimately go where it belongs (in due time).
In the meantime, as the stock falls, even optimistic investors can lose patience (or even panic), thinking that “something is wrong” with their stock. 90%+ of the time, there is nothing terminally wrong with your stock. Usually, investors are only selling because other investors are selling… which scares more investors into selling. Until every panicky investor runs out of shares to sell, professional investors will often sit back and let the herd sell, waiting for the right moment to jump in and buy at bargain basement prices.
Usually, the moment is when the downward trend reverses. This is why “the trend is your friend”.
Trust me, in most cases, nobody “knows something”. My career was built around providing Wall Street companies with the best legal information that money could buy. I often “knew something”, but the frequency was very small relative to the number of times the average stock goes into correction mode.
Just take a look at how many times Salesforce.com (CRM) dropped 25%. This was on the way to tripling multiple times:
As you can see, panicking out is one of the best ways to miss out on a big winner. Corrections are just like turbulence in an airplane. It can be scary, but it rarely results in catastrophe. More often, it represents an opportunity to buy more of a good thing. That’s how investors like Warren Buffett got rich. So, it stands to reason that doing the opposite will make you poor.
If you wish to use something more than a buy-and-hold strategy, see our article on How To Draw a Risk/Reward Chart for more details and specifics on how to use this to your advantage.
Lesson 9: Avoiding & Weathering Corrections
Every one of the investing masters I follow has said the same thing about corrections: nobody can predict them with consistency.
These are their words, not mine! But if Warren Buffett and Peter Lynch say it’s true, I believe them. Thus, for most investors, trying to avoid a correction makes little sense. It is better to gain the confidence needed to weather a correction, knowing that new highs lay ahead in the future.
That being said, Buffett and Lynch also talk extensively about making risk and reward work in your favor. Peter Lynch once said that if a stock moves well-beyond its 3-5 year growth rate for a while, it can become overvalued for a period of time.
As I heard and learned these lessons, I started to believe that their philosophies on risk, reward, and stock movement could be leveraged to help investors to protect profits when a stock moves too far too fast.
Their lessons led me to invent “Risk/Reward Channels”. A Risk/Reward Channel is the path a stock should travel to get from Point A to Point B (for example, from $5 to $15). The stock may move up and down along the path (as all stocks do), but the path’s trajectory will ultimately lead it to its future value. If the path is wide, the stock may be prone to large drops, but as long as the long-term trajectory remains positive, a good company will always rebound and provide greater gains down the road.
For those who choose to do so, drawing a Risk/Reward Chart can help an investor see where their stock is situated at every step of the journey. We can see if it has gone up too fast or down too low.
Because of this, I also believe that Risk/Reward Charts can also help you to avert market corrections. It is very common for the market to correct when most stocks are sitting at the high end of their Risk/Reward channels.
If you do a disciplined job of “hedging your positions” (by shorting the market, shorting stocks with poor fundamentals, selling calls, buying puts, or raising cash by trimming your positions — all of which are advanced topics for “PTT University”, a regular feature of the PTT Newsletter) you will often avoid some of the pain that a market correction can inflict.
Suffice it to say, with the knowledge gleaned from Risk/Reward Charts, we can take advantage of normal market volatility, instead of being shaken by it.
Occasionally, I will warn readers when the market feels frothy. These warnings are called “Stock Market Yellow Alerts“. Remember, I am not a market timer, trader, or short-term investor. Accordingly, Yellow Alerts are not calls to run for the hills and sell our favorite stocks (especially if they aren’t high in their Risk/Reward Channels). Rather, you should view a Yellow Alert as a “proceed-with-caution” (and hedges) signal to position yourself to comfortably weather a potential storm. I say “potential” because (once again) nobody can call corrections with long-term consistency.
That being said, when I’m concerned about the market, I will short the market, sell my ETFs, and/or sell call options. Unless the Risk/Reward Charts say otherwise, I do not want to sell my favorite stocks.
To reiterate, a Yellow Alert is just a warning to be extra vigilant and hedge your positions for the near-term. They do not represent “official” sell signals. That is reserved for Red Alerts… but I have only issues two of those in my career (in November 1999 and July 2007). Red Alerts occur when I see fundamental signs that a major economic storm is impending (and therefore, that stocks are fundamentally overvalued).
Note that I don’t not have an alert that warns investors that market correction is coming. This is because nobody can predict market corrections with consistency. If anyone could, they would likely be richer than Buffett.
Generally speaking, when a Yellow Alert triggers, I will engage in one of many hedging techniques. For example, I might short the market (with a beta-weighted commensurate with the longs in my portfolio). Alternatively, I may sell short-term call options on my favorite stocks and just hold them until they expire. If the market drops (or even remains flat) those options will expire worthless, providing a nice profit to offset some short-term pullbacks in your favorite stocks. However, if you are not familiar with advanced hedging techniques, it is best to learn before attempting any.
Our PTT University series is designed to help. In addition, I disclose my specific hedges via my frequent PTT Elite Videocasts.
FYI, if a correction does hit, understand that it is very common for investors to panic. Indeed, emotions (especially fear and euphoria) are an investor’s worst enemy. They compel you to buy (or hold) when you should be hedging or selling. They also compel you to sell when you should be buying (or at least holding on). Look up “capitulation” to see the result of extreme emotion in the investing world. It will illustrate how powerful and dangerous emotional investing can be.
Worst of all, when stocks are falling, fear will compel you to look for reasons to justify that fear. For example, when my picks are falling for no apparent reason, innumerable readers will flood my inbox with comments like, “Insiders are selling. Something must be wrong!”
I can sympathize with the sentiment, but one of the first lessons I learned (over 20 years ago!) is that insider selling is not a data point. Therefore it should always be ignored. In reality, insiders often have most of their wealth tied up in their company’s stock. Thus, it is wise for them to diversify their wealth (even if they have 100% faith in the future of their company’s stock). The only way for them to do that is to sell shares of their company’s stock. It is right. It is just. It is normal.
For an in-depth explanation of this subject, check out my December 2013 article, “Glu Insider Transactions — Why You Should Buy“.
Lesson 10: Don’t Worry!
Despite investors’ obsession with quarterly earnings, I do not make earnings predictions. In fact, in many cases, I don’t even care about the numbers my companies report. As long as they’re close, I’m more interested in what management has to say about their progress.
I believe that investors hurt themselves by over-analyzing every shred of quarterly data. This might make sense if you’re invested in a well-covered, fairly-valued stock, but why investors waste their time with investments like that is beyond me. If I want to invest in coin flips, I’ll go to the casino.
By comparison, an undervalued stock often has one or two analysts covering them, if any. Thus, there may be no estimates to judge the company by. If there are, it’s the opinion of one or two people who may or may not know the story as well as you or me. So what’s the point in worrying about what they think?
Ultimately, almost every winning team takes losses on the way to a championship. Guessing when those losses will occur is a losing strategy. Further, earnings estimates are often a poor (and incomplete) way of judging a quarter.
Similarly, how a stock reacts to earnings is often not a good indication of whether the company made good progress during the quarter. Most people don’t listen to the earnings calls, so their trading reaction in uninformed… and therefore invalid (and often wrong). In fact, I make a lot of money by taking advantage of overreactions and wrong reactions. This is how professionals invest (and beat the average investor).
Make no mistake, when something major happens, I will provide my analysis to PTT’s paying subscribers ASAP. If you don’t hear from me, you can assume that nothing major has occurred (and that my opinion remains unchanged).
If it isn’t already clear, I do not advise investors to place 20% stop losses. That would be very easy prey for stock manipulators. If one of our picks is down 15%, a large trader (and his large-trader friends) might be able to quickly and easily push it down another 5% on a quiet day (by shorting the stock).
That would leave the stock down 20%, triggering a cascade of stop-losses (we have tens of thousands of followers across various channels). They could then step in and cover at a considerably lower price… and everyone else would deluge us with emails insisting that “someone must know something is wrong at the company”.
Believe me, I invest in every one of my picks, so I’m on top of them. More importantly, I fear nothing more than causing my readers to take unnecessary losses. That’s a easy way to get fired.
As you read more and more of my reports, you will learn what to look for. When you see it, you’ll be better armed to act, even before I provide my analysis. This is an important part of becoming a successful self-investor. Honing this skill can give you a critical advantage in reacting to news and events before everyone else does!
Premium Services & Information Priority
Free subscribers need to understand that PTT Research Newsletter subscribers and members of our premium services (i.e. Pipeline Data; PTT Elite) almost always get first priority, if not exclusive access to our picks. Subscribers to our free PTT Insider get second priority. We generally share all of our best picks with PTT Insider subscribers. However, the delay relative to our paid-service members tends to be substantial. The same policy applies to the general public, who takes final priority.
Based on this policy, our free (PTT Insider) members get a lot of value… but our paying subscribers get much more. Our free services are meant to give new investors the opportunity to make enough money to justify paying for our premium services. Our premium services often take a customer’s investing profits to a whole new level. In other words, as long as I continue working hard and making great stock picks, everyone wins!
By the way, we highly recommend that our Newsletter subscribers continue to subscribe to the PTT Insider (and Follow me on Seeking Alpha), so they can stay abreast of what we’re telling those subscribers and the general public (so be sure to sign up!)
*** FYI, an annual subscription to the PTT Newsletter costs less than $4 per day. The average expense at Starbucks is nearly double that, but they don’t offer picks to triple your money! Keep that in mind — just $4 per day. Just one triple can pay for a Lifetime subscription many times over! ***
Kindest Regards & Best Wishes,
Mark Gomes, CEO
Pipeline Data & PTT Research
p.s. One last thing — I donate a fair amount of time to this endeavor. As such, I have to carefully choose how to allocate this time. Please take no offense if you submit a question and I don’t answer it. With 50,000 followers, you can imagine how many questions come in every day. Hopefully, we can all agree that my time is best spent finding the next big winner for everyone!
Also, for the sake of having some privacy in my life, I don’t disclose my specific trades or other personal information. This Methodology provides a lot of insight into how I think. From there, our subscription and consulting products can help you make your fortune.
I sincerely hope that you’ll decide to join the thousands of investors who profit from my insight. There are few things I enjoy more than making a difference in people’s lives. I hope yours is next!
- MG’s Stock Evaluation Methodology
- Make Sure You’re Not Being Scammed
- Beware Of Who You Trust
- How The Masters Make Their Millions
- Become A Billionaire Like Buffett
- The Three Stages Of A Winning Stock Pick
- How To Make Four Hundred Times Your Money
- Lessons From My Biggest Winner Ever
- Why Aren’t I Making Money?
- How To Draw a Risk/Reward Chart
- Benjamin Graham’s “Intelligent Investor” w/Warren Buffett
- Benjamin Graham and the Power of Growth Stocks
- Why I Missed Himax’s Ride From $10 To $16
- “Profitable Insurance” – Protection From Market Corrections
- Secondary Offerings Are Often GOOD News!
- Doubling, Tripling, & Disclosures
- Poised To Triple Portfolio Tracker
* Footnote: CNBC’s top picks of 2013 required the stock to have a market cap in excess of $1 billion to ensure its credibility. Indeed, we focus on real companies with real opportunity, not pink sheet penny stocks which are often pushed by stock promoters.