#65 A shortlist Of Your Own — Stock Trading Strategy
A Shortlist Of Your Own – Stock Trading Strategy (#65)
A successful stock trader knows what he is doing. Focusing on a few stocks is essential. Why? Nobody has the time to follow thousands of stocks out there that move everyday. Jumping from one stock to another based on news or rumors without a clear strategy is a fool’s game. You must narrow the list down to a few that you can manage. How do you make a shortlist? What should be your criteria?
Price
The easiest decision is to define a price range based on the amount of money you have to invest. Two kinds of stocks you can rule out immediately. On one extreme are the high flyers: Berkshire Hathaway Class B ($3300 per share), Google ($595), or Apple ($195). They are likely winners for the long term, but can you afford them?
How about penny stocks at the other extreme costing $1 or less? You can afford to buy plenty of them. However, can you sell them at the price and quantity you want? Companies becoming penny stocks are not accidental. They have degenerated to near-death status. I don’t want to bet on a dying man if I were you. How much confidence do you have for a revival?
The best price range for a small player is from $5 to $20 per share. This price range presents downward safety and upward potential. When you find a stock with the right price, you have to know when was its recent high and low points. For instance, if a stock is currently worth $7, you find that six months ago it was at $2 and two years ago at $55. It definitely looks like a good buy because you have seen a peak falling to a bottom followed by a sustained recovery. If this continues, the upward potential should be great.
Industries
Picking a stock for the shortlist requires you to know something about how different industries are performing. As you know, money flows into the stock market through the funnels of hot industries that are benefiting from the current economic situation. When an industry booms, most stocks in that category will rise except some real bad ones. When that industry reaches a peak, money will flow out from there into another one. You must have some idea about which industry is hot now and which one will be later.
Different industries have different dynamics of growth. Some industries compete with each other (online shopping against retail shopping). Some new industries disrupt and even kill older ones (PC against typewriter). Most industries complements others (high-tech avionics boost aircraft/space)
Focusing at the industry level enables you to narrow down to a small range of stocks to be selected for your shortlist. It also increases your understanding about the dynamics and relationships between industries.
Updating
The world is changing faster year after year. You have to constantly review your shortlist to see which industries and companies are getting hot and which ones are fading. In addition, some stocks you are holding may have risen above your price range. After you sell them, you will have to buy some others at a lower price. That means you have to find good substitutes.
My Shortlist
Banking: Bank of America (BAC), Citigroup (C).
Reasons: Meltdown in late 2008, recovery since March 09. Big banks are the first to recover when the general economy picks up.
Materials: Alcoa (AA), Goodyear Tires & Rubber (GT).
Reasons: Recovering after hitting bottoms in March 09. Materials demands and prices will rise when the economy picks up.
High Tech: Advanced Micro Devices (AMD), Motorola (MOT), Applied Materials (AMAT).
Reasons: High tech industries are very sensitive to the general economic situation, especially chips and cell phones. It will be one of the first to advance when conditions improve.
Solar: Yingli Green (YGE), Suntech Power (STP).
Reasons: Largest solar companies in China listed in NY Stock Exchange. New industry play. Also tend to go up when oil/materials prices rise.
Auto: Ford Motor (F).
Reasons: Ford is the only American automaker left after the fall of GM and Chrysler. It also benefits from increasing US market share.
Now you see that my shortlist covers 5 industries and 10 companies at the present time. This shortlist will change as things develop. The objective is to focus on the hot industries and affordable companies.
www.stockfessor.com
December 2009
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