Methodology: Your Key To Hitting It Big In The Stock Market
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. This is a must-read for anyone who wants to maximize their profits on Mr. Gomes’ Poised To Triple stock picks.
After semi-retiring in 2008, I started donating time to write for SeekingAlpha (in early 2009). Helping people make money is my way of giving back to a world that has blessed me with so much.
However, helping people to get rich (or richer) is easier said than done. My skills required six years of formal education, twenty years of experience, and two multi-millionaire mentors (one of whom was taught by the famous billionaire investor Jim Rogers).
I quickly realized that my readers would need something that could help them learn my secrets in minutes, not years — a methodology. A methodology details the process by which something is done. Based our 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 read this article. It will arm you with the secrets I have used to make millions in the stock market.
Let’s get started!
First things first. Before you listen to anyone’s stock analysis or advice, you should know as much as possible about that person. 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.
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 an athletic 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 gradated 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 what 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.
OK, let’s get down to the fun stuff!
My picks are not a simple matter of buy-and-hold. You have to do at least a little work yourself. For example, you can see my ongoing comments on any covered company by tracking my Comments and/or Instablog. Those sections allow you to click on the ticker symbol(s) you care about and see my commentary regarding those stocks. I also invite you to read my articles titled Why Aren’t I Making Money Yet? and How To Draw a Risk/Reward Chart.
Risk/Reward charts are an integral part of my investing strategy. Risk/Reward charts make it easy to see when a stock is relatively cheap (or expensive). This makes it easier to decide when to buy (or sell). If one of my picks reaches the upper end of its Risk/Reward chart range, you can bet that I will be taking some profits off the table!
Another thing you should do is monitor the news and SEC filings made by the companies in which you own stock. Make no mistake, when something major happens, I will look to provide my analysis on a best-efforts basis. However, if you’ve read my reports, they should help you understand 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 terms of reacting to news and events before the masses do!
What kind of stocks do we pick?
By design, our picks at PTT often focused on unknown, unloved, or even hated stocks. After a careful screening process, we only choose stocks that we believe will reward investors for navigating its three major investment cycles, which we define as 1) Great Find, 2) Wait Time, and 3) Gold Mine. These are our official ratings. You want to be long during the Great Find and Gold Mine stage, but much more cautious during Wait Time. I highly recommend reading more about this here. It’s critical to maximizing your returns.
For your convenience, we also classify some of our picks as “speculative”. This means that the company has not yet fully-established itself. The success of the pick is generally dependent on the company fulfilling certain expectations. CNBC’s Jim Cramer (a former client of mine, from his days at Cramer & Co. and Cramer Berkowitz) is an advocate of allocating 10% of one’s portfolio to speculative picks.
This is absolutely crucial to understand.
In my personal portfolio, my aim is to hold 10 or 20 “core” (non-speculative) stocks, representing a total of 90% of my portfolio. Following my advice above, I also like to hold 10 or 20 speculative stocks, totaling 10% of my portfolio. This provides good diversification, allowing me to benefit from the winners, while being protected from the occasional, but unavoidable losers.
Some of our picks will be called “Ten Baggers Or Bust”. Be sure to pay respect to the possibility that these picks can go “bust”. If they do, the loss can be 100%. By limiting one’s speculative holdings to 10% of one’s total portfolio, such catastrophic losses should be more than covered by the winners. As a rule of thumb, 10% allocation implies that one’s investment in a speculative stock should be 10% (1/10th) of what one would put into a non-speculative one.
Another thing to remember is even though the series is entitled “Poised to Triple” we do not expect every pick to triple (that would be foolish). More accurately, we pick stocks that we believe are poised (in other words, “have the potential”) to triple. Many do, but many more simply double or get acquired. Of course, some simply don’t work out. (you can see my work on SeekingAlpha for examples). Overall, the winners more than make up for the duds. This is the key to our portfolio, which takes calculated risks on companies based on their odds of success and failure (a.k.a. risk and reward).
Thus, we recommend a few of things:
2) I 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. If one of our picks drops 20% from its initial price, it usually goes much lower. So, I generally sell my losers if they drop 20%. My winners more than make up for it! Yours should too.
The exception to this rule is our Speculative picks. 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, it’s better to keep a special eye on the progress of your 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 your losses and move on. Our updates will assist.
3) Another method we often use is to constantly update each stock’s potential risk and reward. If you buy a stock at 10 that could go down to 5 or up to 20, you are taking on $5 of risk in pursuit of $10 of reward. Too many investors lose sight of this equation as it changes. For example, if the same stock jumps to $18, your risk is now $13, while your potential reward is only $2.
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, we 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.
FYI, many of our picks will entail bottom-fishing among 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 are being closely researched by over by 500 MBAs.
You want to avoid this sort of competition if you can help it. Trust me. Pipeline Data invests thousands of dollars every week into research to help buy-side institutions to predict the quarterly performance of larger companies like ORCL. You don’t want to compete with our resources, experience, and expertise on that front ;^)
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 Buffet cut their teeth. In fact, he has said that he would never have abandoned this asset class if he hadn’t become too rich to be able to invest in such small companies (his typical position often represents several-times the entire market cap of my picks!). I hope this helps to illustrate the point.
Good Luck & Kindest Regards,
p.s. One last thing — I donate a fair amount of time to this endeavor. As such, I have carefully chosen how to allocate this time. I don’t provide timing calls on when to buy or sell (though we may be adding this feature in the near future, by recruiting some top-notch trading talent). Also, I don’t disclose my specific trading actions, though that may also change in the future. In the meantime, suffice it to say that I’m a big proponent of the risk and reward methods described herein.
Finally, I tend not to reply to the deluge of emails I receive. Please take no offense. I have thousands of readers and simply can’t allocate time to everyone and find great stocks! I hope you understand. Posting in the comments section of SeekingAlpha is your best bet for getting a response. Kindest regards and good luck!