If you’ve read our other post, “Investing is Not Trading,” then you understand that picking stocks that are tradeable is the most important factor to making a successful trade.
Stocks have their own personalities, just like people. Some companies are young and adventurous; their stock reflects that personality and grow fast in a very short timeframe. Some companies are in their senior years – they move slow but are very wise because they’ve been through everything. They have the reliability of a sunrise. You may be bullish both these companies, but only one may make a good trade.
A bullish stock that takes twenty years to move 20% is not a good trade. But it may make a great long-term investment stock, especially if it’s paying a dividend that gets increased every year that’s 4x what you could get at a bank savings account.
Stocks that make good trades have a good amount of volume (e.g. an average daily volume over 100K) and a good amount of volatility. You’re looking for big price moves (e.g. minimum 5% so you can get in and out relatively quickly).
Even once a stock meets these most basic criteria of being considered “tradeable,” it does not mean that you should immediately place a trade that same day. While this sounds obvious, many traders make the mistake of getting overly excited about a new stock they found because it shows up on their screener, thinking it’s time to enter a trade immediately. This could not be further from the truth – fundamentals, where the price is located relative to its long and short-term patterns are all considerations that must be reviewed before placing that trade.
Don’t try to force a stock to be something it’s not. The market dictates its natural flow; your job is to identify that flow and use it to your advantage.
You’ve probably heard the truism, “The market can stay irrational longer than you can stay solvent.” Markets by nature are subject to human opinion, more specifically an opinion on what might happen in the future – a good future means more buying, a not-so-good one leads to more selling.
When it comes to money, people make irrational decisions. A good company with good fundamentals can trade down with the market or get caught up in the bad perception at an industry level even when it may have a standout business model.
Price action is the flow of buy and sell orders represented by the price movements for that ticker. A company can have blow-out earnings and jump 10% after hours, then suddenly tank 15% the very next minute for no good reason. Price action is the pulse of the stock. Sometimes it can just lazily move throughout the day with little volume until one breaking story doubles the trade volume in a matter of minutes.
A stock with a very high average daily volume (tens of millions of shares) is a stock that has a lot of opinions from the market. These opinions impact price action. This chaos can cause a stock to move with no logic whatsoever and your 10, 100, or even 1000 shares is not going to change price movement in your favor.
This is why stop losses and other mechanisms to protect your basis (or minimize your losses) are critical when it comes to trading. New traders buy a stock and hope for the best – when the stock turns they just lose all their capital. Good traders know they can’t fight price action, and when the stock turns against them, they just need to take their minimal loss on the chin and move to the next trade.
Emotions and desperation lead people to believe they can influence price action, but unless you’re Warren Buffett, your trade is just along for the ride.
While we say, never say never, these stocks should be held for a lifetime. But just in case another pandemic or ELE happens on earth, we think these companies should still be around in the next two decades and still have positive price momentum.
This list will constantly be updated throughout the year so check back often to see what gets added (or in rare cases, removed).
Note: This list does not include ETFs which we’ll cover in a separate post.
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The ebb and flow of value, whether in real estate or stock prices, is a human construct based on time and other environmental factors. Value will always be relative to the “haves” and “have nots.”
A stock (or property) with enough demand AND enough people with the means to buy it, will drive the price up until one of those two conditions are not met – either there’s no more demand, or the people left with the demand do not have the means to afford it. A person can have a high demand for a nice luxury vehicle, but if BMW, Mercedes, and Lexus are waiting for that same person, who may only earn minimum wage, to come through their doors, all three of those auto manufacturers would go out of business. Luckily (for them), they have enough demand AND enough consumers with the means to keep their doors open.
A stock’s price that gets too expensive will eventually stall when there are no more buyers willing and able to purchase the stock at the given price. Sellers will need to offer a lower “Ask” price if they want to sell their assets. The same works for housing. Pullbacks are natural and should be welcomed.
If a stock’s share price was a like a ratchet that could not fall back once it notched another peg higher, only the richest people in the world would be able to afford to be in the market.
In May 2022, when Walmart released earnings that didn’t please the market, the stock price slide 11%, then another 7% the following day. This wiped out over $30 billion dollars in two days from the Walton Family – the majority owners of the company founded by Sam Walton. Certainly, there probably wasn’t a single member of that family who thought the loss in value was warranted, but the market decided the value needed to be cut by that much over the course of two days. Ironically, even with a drop like that, not a single person would argue that these people are now broke – the value of their net worth is considered very high by almost every measure.
Value will always be at the whim of the people, understanding and accepting this will prevent a lot of heartache later. Stocks can’t go up forever and it’s for that reason to never be too greedy, especially when trading. A 10-bagger (a stock that’s risen 10x from your buy price) is really nice, but sometimes you’re better off taking an 8 or 9.
Rising prices require energy and markets must recharge to get enough energy to move higher. Take advantage of those pullbacks to add to your high conviction stocks.
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