Want to Hit Home Runs in the Market? Follow These Four Steps
Everyone loves home runs.
That’s why they make up such a large portion of ESPN SportsCenter’s baseball highlights. It’s also why so many people ignored the steroid use of power hitters like Mark McGuire and Sammy Sosa all those years ago. As long as guys were hitting 420-foot bombs, who cared how they did it?
In the words of Hall of Fame pitchers Greg Maddux and Tom Glavine, “Chicks dig the long ball.”
It isn’t just baseball fans who love home runs, either. Investors often swing for the fences. And there’s nothing wrong with that – if you understand the risks (in addition to the potential rewards).
I’ve heard from Oxford Club Members who have hit home runs on some of my recommendations – who have bought houses as a result of a big winner or flown first-class to Europe. One gentleman wrote to me last week saying that he made $200,000 after we took profits on a recent play.
But you can’t just blindly invest in speculative stocks, hoping they’ll become big winners. There are specific steps you should take before stepping into the batter’s box with your portfolio and swinging away.
- Make sure speculative stocks are suitable for your portfolio. You can make a lot of money investing in some smaller stocks that end up doubling, tripling or more. But those kinds of stocks often have more risk. You shouldn’t be taking on that kind of risk until your long-term portfolio is set. Own some Perpetual Dividend Raisers and low-cost index funds that you plan on holding for years as the core of your long-term holdings first. Once that’s taken care of, you can start to speculate.
- Never let a trade become an investment. Are you buying it because the chart looks good or because you’re expecting an important announcement? Whatever the reason, make sure you know what it is… and if the situation changes, act accordingly.In other words, if you buy a stock because the chart looks strong and then that chart no longer looks positive, don’t continue to hold it. If you own a biotech stock because you’re expecting strong clinical trial data, and it turns out the drug doesn’t work – sell it and find another trade. Don’t rationalize why you should hang on to the stock. Your thesis was wrong, move on.
- For the love of God, use a trailing stop. Speculative stocks have more risk than other stocks. Make sure you don’t let a winner become a loser, or a small loss become a big one. A trailing stop will take you out of your stock so that you don’t let your emotions get the best of you and control your trading.And don’t – I repeat, don’t – ignore or cancel your stops once they’re in place. A stop is placed without emotion. Ignoring your stop is not a rational decision, it’s an emotional one. And emotional traders are rarely successful traders.
- Let your winners run. Believe it or not, this is not always easy to do. Traders get a decent-sized winner, and they want to put that profit in their pockets. But the big winners come from giving those plays some room and letting them run higher. The stop will make sure you don’t give up too much of the gain and will take the emotion out of the equation so you don’t sell too early.Many professional profitable traders have more losing trades than winning ones. Their secret is that their winning trades are big and their losers are small. The only way to get those big wins is by allowing them to move higher over days and weeks. Don’t take your profits too early.
Trying to hit home runs in the market can be a lot of fun. The companies that have the best opportunities for huge gains usually have amazing new technologies or fascinating breakthrough businesses.
And if you’ve ever had a position double, triple or more, you know how exciting that can be. Just make sure you adhere to the four steps I just outlined.
Chicks might dig the long ball. But everyone loves a big stock market winner.
About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.