By David Popper
These are times that try a trader's soul. Many positions are underwater. People are leveraged and anxiously await every economic number that comes down the pike. Do I buy before the next report or do I sell? Is the market ready to collapse or do I buy the dip? How can I make sense of this crazy market and how can I profit? Welcome to the world of trading. You see, long term investors do not have any of these worries. They figure that holding for 20 years will sort out the short term mess. And do you know what- they are for the most part correct. Am I advocating a buy and hold strategy? Of course not. There are some things that long term investors do that are worth emulating. If we can take the good things that they do and use short term techniques to maximize returns, we may be able to make trading less time consuming, more profitable and more enjoyable. Again, if you have hours to spend on trading, there are endless strategies which would be more profitable. I need techniques that fit into an otherwise full schedule.
1. Successful long term investors only buy stocks which should be viable over the long term. If the stocks that you trade are leaders in a fast growing segment of the economy, they should survive short term downturns. As stated before, I limit my purchases to stocks with an EPS of 80 and an RS of 80.
2. Successful long term investors only invest money that they do not need for at least a year or longer. Stocks go up and stocks go down. There will be months where things just do not work out as planned. You do not want to be in the position of being required to liquidate positions that are down merely because you do not have enough reserve.
3. Successful long term investors do not allow any one position to grow to the extent that its demise will capsize the portfolio. Any one position can suffer horrendous short term losses even if it is a quality stock. Remember QCOM? Too much QCOM would have been great in 1999, but not so good in 2000.
I believe that if the above long term paradigm were employed combined with short term techniques of understanding basic chart patterns, support/resistance, and basic options techniques like covered calls, naked puts, and LEAPs, much of the pressure that short term traders face would be relieved. The short term techniques would enhance the return, while the long term perspective would only allow the trader to trade solid issues, which normally survive downturns. When trading solid issues, dips become buyable and the next economic number is not as critical.
Speaking of dips, it appears that opportunity is beginning to knock. Some stocks are beginning to show some signs of basing. Many great stocks are on sale. Remember last November and December when you read that a particular issue had run 50% since it bottomed? Remember thinking that it would have been nice to have the opportunity to buy in at those levels? We may be getting near that time. Yes, stocks could still go down, you can't guess the bottom. We may even have a wash out, but it is not too early to have a buy list ready to go. Don't worry if you buy too early. If you are buying quality, it will rise and maybe to some excellent gains. As Winter gives way to Spring, so will a seasonal downturn give way to a decent rally. I'm not saying to purchase tomorrow. I am saying that opportunity for a great purchase in market leaders may be quickly approaching. A purchase of quality on sale can lead to magnificent gains. These times are the whole reason that I keep cash in reserve. Welcome a significant downturn as a buying opportunity. This will keep you in sync with the market.