Strategies
There are many strategies to use to when buying and selling
stocks. Most are contradictory, 
and
are based on historical analysis. Remember that past performance
is no guarantee of future performance. No matter what strategy
worked in the past, there is no way of knowing whether it will
work in the future. As winning strategies become known, they
become less likely to give you the expected result, (this is
the theory behind the efficient
market hypothesis) because more people are using the same
strategy which will change the way the strategy behaves. Bad
news, such as war, terrorism, storm, or other disaster can cause
every one of these strategies to be thrown out the window. There
is no perfect strategy, because if there was the inventors wouldn't
tell you how it worked, they'd be on the beach. Please see our
disclaimer.
Please note the below is a list of strategies not a recommendation
to use these strategies. These strategies are just starting points.
Make sure you do your due diligence.
For any strategy to be useful, it should be statistically back tested. Though even, if it presents excess returns historically, it is no guarantee of future performance. Most strategies eventually fail when transaction costs are included.
Click here to randomly select a strategy.
| Basic Strategy |
- Invest as much money as you can in your IRA and 401k as early as you can as hesitating can cost you millions.
- Sell if a stock is down 7 - 8% from your buy in point. You should buy in only when stock is trending upward
- Diversify your portfolio to reduce risk
- Take profits if we feel a stock is overvalued or has had a climax run
- Buy stocks only when they're trending up, don't bottom fish.
- Buy stocks that have good earnings and show good earnings growth
- Don't try to predict tops or bottoms of stocks.
- The best time to buy is when you're fearing the market and the best time to sell is when you get greedy
| Strategy List |
| Dogs of the Dow |
This strategy invests in the 10 stocks of the Dow with the highest dividends. These stocks are the ones that have been beaten down. Described in the book Beating the Dow
| Hussman |
John Hussman from Hussman.net uses a very interesting strategy. He identifies the current market climate, based on valuations and what he calls "Trend Uniformity" and will hedge out the market risk if he feels that its not a good time to invest. See how his fund is doing here. He also has very interesting commentary on his site.
| Growth Investing - Foster Friess |
- Growth investing is for risk takers.
- Great Management
- Great Product
- Find Societal trends
- Buy High and Sell Higher
- Don't look where a stock has been, look at where it's going
- Market P/E ratio's range from 10 - 20 where 10 is undervalued and 20 is overvalued
- Select stocks with P/E ratios 16 - 26, 30 or over is too high
- Buy stocks growing faster than Wall Street expects
- Find what hasn't been discovered
- Look for company selling off a bad division
- His analysts are also the portfolio manager so they can't place blame for bad stock picks
- Look at new high list and ask why company is hitting new highs?
- Do bottom up investing.
- Look at the product yourself and ask
- Are markdowns necessary?
- How does company match up against competition?
- Claims to have picked 60% winners and 40% losers
- Must have the ability to manage and take risks
- Company must have high quality, strong franchise
- Favorable momentum, earnings growth
- Good value
- He has average turnover of 200% which means an average holding of 6 months
- Do detailed homework, line by line
- View how his fund is doing here
He was featured on one of the tapes in Beyond Wall Street - The Art of Investing (4-Video
Set)
| Buy Stocks with Price to Sales Ratio < 1 and High Relative Strength |
According to a study done by James O'shaughnessy, the strategy that had the best returns over the 40 years he analyzed the market was to buy stocks with a price to sales ratio < 1 and buy the 50 with the highest 1 year relative strength. He excluded the small cap stocks in his study. This strategy and others are outlined in the book "What Works on Wall Street"
| Buy Stocks which have gone up in price for the last year |
With this strategy you will only buy a stock if has moved up for the previous year with the idea that stocks that are moving up tend to go up and stocks that go down tend to continue down. Bring up a 1 year stock chart on Yahoo, for the stock in question and draw a trend line, up is good and down is bad.
| Buy when a stock is above its 200 day Moving Average and sell when below |
This strategy uses a very simple timing mechanism, the 200 day moving average. If your stock closes below then you sell it, if it closes above then you buy it. Click here to see the 200 day moving average for IBM. Note this strategy can be applied to any timing period. 50 day is another popular one. One problem with this strategy is that it can perform poorly if your transaction costs are high.
| Exit a stock with a trailing stop order |
Have you thought that the stock you own has moved up too quickly, so you sell it only to see it continue to rise. If you have a stock that's doubled in a short period of time, and you want to sell it, use a trailing stop, instead of just selling outright. The advantage is if the stock still has upward momentum, you can squeeze out extra gains on a stock. If the stock continues to rise you can move the stop order upwards to follow the price.
| Buy Stocks which hold up when market goes down |
When the market is doing poorly, look for stocks which hold up. Most stocks will go down if the market is down, but some very strong stocks will not, because the demand for the stock is still higher than the supply.
| Buy and Hold |
What is it?
The idea is simple, buy great stocks and just hold on to them for the long term. The idea is that over time, stocks move up in price. Also this helps you from having to time the market.
What are its advantages and disadvantages?
The advantages of "buy and hold" are reduction of transaction costs, the reduction of market timing mistakes, and the fact that over the longer holding periods, stocks tend to go up. Also, the time and stress saved in closely monitoring your portfolio, and the savings in taxes due to long term capital gains vs. short term. The disadvantages are if you buy a losing company that under performs the market, you may be hesitant to sell the stock
How has it performed historically?
For some stocks, like IBM, GE, Microsoft, Wal-mart, Home Depot,
Dell, Cisco it's been a great method. For others, not so
good. It's all dependent on the stock. Buy-and-hold
on a bad stock means you will probably lose all of your money
on that stock. Although buy-and-hold on the Dow, would
have returned a rate of approximately 12% on average over the
last 50 years. In addition, you get the advantages of a
lower tax rate if you hold the stock for one year (20%) versus
the high marginal rate.
Buy and Hold weaknesses
Buy and hold can be a terrible strategy if you are heavily
in margin, and stuck with losing stocks. Not all stocks,
come back and many do go out of business. Also, you
may not have the fortitude to really hold when the bear market
hits. In a bull market, it seems easy to hold, but in a
real bear market it might not be so easy.
Links
| Growth Stocks |
This strategy is to invest in companies with high growth rates and low dividend or dividend yields. The benefit is that you don't have to pay taxes on dividends. The risk is that growth stocks usually rise faster than the market and usually sink faster than the market.
| ChangeWave Investing |
Attempts to get other new economy professionals to help do the research for picking ChangeWave stocks. . According to Tobin Smith's book, his investing strategy has "delivered 150 percent-plus annual gains since 1995." You can purchase his book here. This book was very interesting and difficult to put down. See his website here.
| Aggressive Growth |
With this strategy you pick the stocks with the most aggressive growth rates to try to get the highest return. These are the stocks with the highest risk.
| Indexing |
In this strategy you attempt to match an indexes return. This strategy will get you the return of the S&P 500. There is a stock SPY which tracks this index. You can also index to the Nasdaq via QQQ and the Dow Jones via DIA. You can also trade with other indexes here. S & P has a study (pdf format) that shows how their index compares to actively managed funds.
| Low Price, New High |
Look for stocks at low prices which are hitting new highs. Low priced stocks can appreciate and depreciate better that high priced stocks. It's easier to go from 2 to 4 then it is to go from 100 to 200. Though be aware that you should limit your investment to the amount of money you'd be willing to lose. Remember that low priced stocks are low for a reason. Also spread costs will eat up a chunk of your return. MSN Moneycenral has a stock screener that will allow you to perform this search. It requires download of software.
| Follow Sites with email recommendations |
Sign up for sites that send you email recommendations and track how well they do, and where the gain is. Does a site do well for short term? Does the price turn around quickly and create a shorting opportunity? Does the site tell you when to sell? What is the sites return? Make sure you watch their picks in both up and down markets and do your due diligence.
| Short Term Strategies |
Buy on the close sell on the open
In a bull market stocks sometime open higher that the previous nights close.
Short on the close, buy on the open
In a bear market, stocks sometimes have excessive selling in the morning.
| Sell Losers Buy Winners |
This strategy says that you should sell your losers if it goes down more than 8% and put that money into your winning stocks. About.com has a nice page here.
| Sell 50% of a stock that has doubled |
If a stock doubles, you should sell half of it. This way you cannot lose any money on the stock. Though had you done this with a stock like Microsoft early on you could lose a tremendous amount over time
| Let your winners ride |
This strategy says that winning stocks will continue to go up. If you bought and held Microsoft, Dell or Home Depot, when they were first issued, you'd be rich. In addition, if you hold the stock for over a year and sell, you can take a long term capital gain which is 20% instead of your marginal tax rate. In the current market environment great stocks can go up multiple times. If you sell too early you will miss out on this gain.
Losers are losers because the are lousy stocks and winners are great stocks. If you have a stocks that drops by 50%, that stock will have to return 100% for you to break even. A stock down 66% will have to return 200% for you to break even. The normal recommendation is to cut your losses from 8% - 15%.
| Investor Business Daily Strategies |
Investor Business Daily is a daily newspaper that can help with your investment decisions. You can get a 2 week free trial here. It's well worth it. There basic strategy is:
- New America - are stocks with either a new CEO or new product
- Buy 80/80 AAA stocks
- Earnings per share Rating - stocks that outperform 80% of all publicly-traded companies based on its short and long term earnings growth rates.
- Relative Price Strength (RS) Rating - stocks that outperformed 80% of all publicly-traded companies in terms of its stock price performance over the last 12 months.
- Industry Group Relative Strength (Grp RS) Rating - stocks that belongs to an industry group that has performed in the top 20% of the 197 industry groups tracked by Investor's Business Daily, measured over the last six months
- Sales + Profit Margins + ROE (SMR) Rating - stocks that rates in the top 20% of all publicly-traded companies based on four fundamental factors used by many analysts today: a company's sales growth rate over the last three quarters, before- and after-tax profit margins, and return on equity (ROE).
- Accumulation/ Distribution (Acc/Dis) Rating - stocks that has been experiencing heavy buying, based on its daily price and volume changes over the last 13 weeks.
- Buy stocks hitting new highs in top sectors
- Buy stocks in italics
- Buy stocks that Mutual funds are buying
- Buy stocks that are mutual funds top holdings
- Buy companies with RS of 80 or above
- climax runs which stocks shoot up 50% to 100% in a week or two, usually precede an equally sharp decline.
Their strategy can be found here.
Also see the FAQ
or buy the book 24 Essential
Lessons for Investment Success or How to
Make Money in Stocks : A Winning System in Good Times or Bad
| Dollar Cost Averaging |
This strategy is intended to reduce down side risk by building up your portfolio over time. If there is a dip in the market, you will buy at the lower price. This is seen as not trying to time the market. There are some down side risks. You can have an increased transaction costs. If the market rises while you buy and sinks right after you finish buying, you will lose more money than if you just bought the stock in one lump sum. You can reduce your transaction costs by purchasing the stock through a DRIP (Dividend ReInvestment Plan)
| Day Trading |
The idea behind day trading is to reduce risk by not holding positions overnight. Some day trading strategies you become a market maker and trade between the spread. Most day trading strategies try to make you money by trading a lot of money in one stock, and capture a small 1/4 to 1/2 point increase. It is important to have very fast execution to make the most of this strategy. The negatives for this strategy is the high transaction costs incurred, the constant attention to the market and the risk of losing your capital very quickly. Click here for our day trading page.
| Buy on rumor and sell on Fact |
A well known strategy says the when a positive rumor is in effect, the price of a security will go up and when the rumor actually becomes true the price of the stock will drop.
| Gorilla Game strategies |
This is a very interesting strategy which defines how to pick the "Gorillas", the Microsoft's, Cisco's, Intel's, and at the same time reducing your risk in technology stocks. The book can be purchased at Amazon, it is highly recommended. You can check out their web site here .
| Stock Split Strategies |
One strategy, is to buy stocks that announce splits 3 days after the announcement and hold them until the day of the split, or just hold them for the long term.
| Short
Strategies |
A short strategy allows you to make money when a stock goes down in price. The three main methods are "short selling", "buying puts" and "selling covered calls". An excellent site Viwes.com. on active short data.
A good book on the subject is the "Art of Short Selling"
| Technical Analysis |
Is reading patterns on stock charts to determine what a stock might do in the future.
| IPO |
See our IPO section here
| Motley Fools Rule Breakers |
Any Rule-Breaking company needs to fulfill all six of these criteria:
1. The top dog and first-mover in an important, emerging industry...
2. Sustainable advantage gained through business momentum, patents,
visionary leadership, and/or inept competition...
3. Excellent past share appreciation, measured by a relative
strength of
90 or higher...
4. Good management and smart backing...
5. The greater the consumer brand, the better...
6. A significant constituent of the financial media is recently
on record
for calling it overvalued..
| Michael Murphy |
You've probably gotten one of his mailings, and wondered what his strategy is.
- buying the dominant industry leaders on any dip and holding them for higher prices at year's end.
- Own 100 - your age in tech stocks.
- Own MSFT, ORCL, INTC, AMAT, CSCO, he'll tell you when.
- Other stocks to own NITE, WCOM
- Buy winning stocks only after they're beaten down and not when they get overvalued
- Buy stocks of companies who are investing in R&D
You can subscribe to his newsletter at http://www.techinvestingonline.com. What
do you have to lose except for your money. He also writes the
California
Technology Stock Newsletter and manages 3 funds, MNWBX,
Murphy Biotech, MNWTX,
Murphy Technology, and MNWCX,
Monterey New World Technology Convertibles.
His book Every
Investor's Guide to High-Tech Stocks and Mutual Funds, explains
his stock picking strategy in easy to read detail.
Click here to get the report "The Five Tech Stocks Every Investor Must Own"
 Click to buy |
Michael Murphy's book,"Every Investor's Guide to High-Tech Stocks", explains how the technology sector works, explains his growth/flow investing strategy and lists some of his top picks in tech and biotech. |
Scathing article about Murphy appeared in the Tech 2000 issue of Money Magazine. which was available on 10/4/00. The article sub-head states "The king of tech analysts is a two-time bank robber and a ex-con prone to kooky pronouncements, controversial stock calls and lackluster returns". Also, according to the article:
- he has 145,000 subscribers,
- His "California newsletter model portfolios since 1983 would have earned just 10.3% anually..", though his "Tech Investing ..portfolio returned 157% in 1999..."
- His "...New World Technology Fund had the worst three-year performance of 44 tech mutual funds..."
| Calendar Strategies |
Selling occurs before April 15, to cash in on profits, to pay tax bills
Monday has historically been the worst trading day
Friday has been the best
Days after holidays are usually good
September
Historically the worst month for stock performance.
October
Mutual funds realize their gains and losses for tax purposes by the end of October
November
Mutual funds "window dress" their portfolios so
it looks good in their annual report
December: Losing stocks get sold so people can take a tax right off
January: Losers from the previous year perform well
March:
- End of March portfolio window dressing can take place
- End of March Earning disappointments
| Volume |
Volume can tell you where the market or your stock is headed. Rising prices on rising volume and falling prices on falling volume are bullish signals. Falling prices on rising volume and rising prices on falling volume are bearish signals.
On Balance Volume (OBV) is a technical indicator which was developed by Joseph Granville. E-analytics.com has a nice description of it here. Smartmoney.com uses a slightly different mechanism here.
| Neural Networks |
Neural Networks is a strategy which emulates the way the brain's neurons work. A computerized system will monitor all trading data and try to establish a trading pattern and make buy/sell recommendations based on this information. See NueroDimensions for more information.
| Large Cap |
This strategy involves investing only in the companies with the largest market capitalization, with the idea that these companies must have done something right to have so many investors put their money into the companies stock.
| Contrarian |
Contrarian investors also called value investors will place bets in undervalued companies or go against the crowd since the crowd is usually wrong. See David Dreman's book Contrarian Investment Strategies. Click here for MSN Moneycentral stock screen for Contrarian picks.
| Earnings |
Buy stocks that have earninngs and those earnings are growing by 10 - 15% per year. See our Earning links here.
Top
Warren Buffet
| Buy on rumor and sell on Fact |
One of the best known investment managers, known for his Value
style of investing. You can purchase his expertise by buying
his Berkshire Hathaway stock. BRKa
and BRKb
Though, what will happen to the stock when he retires? One excelent
book about him and his strategies is How
to Pick Stocks Like Warren Buffet.
| Peter Lynch |
Known as the manager for Fidelity's Magelan fund for many years. Well known as one of the most successful investors. You can purchase his book Beat the Street here or his book One Up on Wall Street to find out more about his strategies.
| Buy on weakness |
With this strategy you buy leading stocks when the market is weak.
| Motley Fool R4 |
The Motley Fool R4 is a strategy that takes the 5 worst performing stocks in the Dow and drops the worst performing, and invests money in these stocks at the beginning of the year. See www.fool.com
| PBHG Slattery |
Quint Slattery led the PBHG New opportunity fund up 404% in 1999. Very impressive to say the least. Interview of him appeared in the 4/7/2000 Investor's Business Daily.
"Buy market leaders the dominant companies, ...accelerating top-line growth, increasing market share and some type of proprietary technology or intellectual property that makes them a leader in a field and provides barriers to entry... company should be exceeding earnings"
| Tech Sub sector | Recommend Stock |
| Web hosting | |
| Semiconductors | |
| Wireless devices | Research In Motion |
| Broadband networking | Broadcom* |
| Fiber channel products | |
| Optical components | |
| Optical routing | Juniper |
| Internet content | Infospace |
| Consumer Relationship Management | Siebel Systems |
| Voice over IP | Audocodes |
| Network Registration and security | Verisign |
| Business to consumer |
Vignette Art Technology |
| Digital Rights Management | Intertrust Technologies |
| Advertising |
This strategy looks for companies with good advertising, with the idea that if the advertising is good, business will increase. Also, someone in the company, picked the ad, had good judgment, which may mean that the people and/or procedures at the company are showing positive results.
| Motley Fools |
See their strategies here.
| Products you use |
There are products you use every day which you really enjoy, may make good investments. Crowded stores, products that work well and are well made are a good starting point for looking for winners.
| Management |
One key to a companies success is their management. Management
motivates, hires, decides and makes the company profitable. Find
a company with great management and you've found a good investment.
2 indicators of a well managed company are Return on Assets and
Returnn on Equity.
| Mutual Funds |
With this strategy, you've decided that professionals can do a better job picking stocks than you can. After all, they're professionals. You leave your accounting to a CPA, law to a lawyer. What makes you think you can do better than a fund manager. Though I'm sure you've seen the quote that 80% of fund managers don't beat the S&P 500. If you're still interested in funds, see our funds section here.
| Value Line |
Value Line rates their top picks from 1 to 5, with 1 being their recommendations and 5 being their list of worst performing stocks. You can purchase a 3 Month trial for $65 (as of 1/15/03, check their site for the current price) at 1-800-535-2937 or here.
| Magic Numbers |
If a stock hits 82 then it will soon split.
Resistance and support at magic numbers of 1, 5,10, 20, 30, 50, 70, 75, 100. For some reason people will sell when a stock reaches this level. A good strategy may be to by a stock that's coming down from 100 approaching 50 and put a price stop at 45 - 47.
Put sell stops at 100 for stocks which are growing very quickly. Some times a stock will make it to 110. note this can happen if it really shoots up in the time span of a week to a month.
| Timing Strategies |
Investor Business Daily
- Advance on weaker volume (from previous days ) is a negative sign
- Trading drying up during a rally is bearish
- Bear markets usually take longer than 5 weeks to hit bottom
- Market fear usually proceeds a major upturn, i.e. bullish advisors below 37%
- Rallies should be confirmed in 4 to 7 days with an upside on higher volume
- High put/call ratios triggers an upside reversal
- After every correction, stocks eventually rally and move to new highs
- Look for stocks that are holding up better than others during a correction, usually in the best performing industry groups
Precision Buy/Sell Point (PBSP) claims as all market timers do that they can time the market. Why would they sell this to you. Wouldn't they use the system to become richer than Bill Gates.
Vector Vest claims to have a timing system that has never failed timing the market.
| LEAP Strategies |
Leaps are long term options. We like the strategy of buying a Leap on a stock that's been beaten down. Of course with options you can lose all of your money, but you also have a very high upside potential.
| Buy a stock only if the company is making money |
When selecting a stock, pick stocks that actually earn money, they are usually safer than ones that don't.
| Don't buy stocks just reaching $100 |
For some reason a stock will hit $100 and turn right back around usually winding up at $50 or lower. Of course this doesn't happen with all stocks. Just be aware this can happen. You can protect yourself by dollar cost averaging or by placing stop orders on your stock. It may be good to short these stocks either through selling short, buying puts or writing a covered call.
| Lockup Strategies |
Lockup is the time period after an IPO where company insiders at newly public companies are allowed to trade their shares. This data can be retrieved from the S-1 document filed with the SEC. You could also check the website IPOExpress. The period is usually 180 days.
| Buy Stocks which come from $100 and hit $50 with a stop at $45 |
Many high-flier stocks will shoot up to $100, and then find support at $50 and then head back up. One strategy could be to buy as stock approaches $50 and put a stop at $45 - $47 to protect yourself.
To send us your strategies please email us here.
