Permagnus.com

This is the third part of my commentaries. You may want to read the first part and the second part in order to understand this part better. So here we go:

• Limiting the downside by focusing on undervalued stock. This is actually the credo of value investors, not necessarily vital (because you can limit your downside using technical analysis) but will help the performance of novice traders alike. Me my self is a hybrid of value investors, growth investors, and also technical traders. I pick stocks that I deemed undervalued, but I buy it using technical analysis to enhance my timing. Remember, cheap stock is not always an undervalued stock. Look at the P/E ratio. The lower the better.
• Value alone is not enough. This corresponds to my previous statement above. Picking stocks based on their values alone is not enough. Why? Read my next commentary
• The Important of catalyst. Indeed! So now you found a very undervalued stock and you already buy some shares and preparing your self into position. Then you wait. And wait. And wait but nothing happened. To beat the market (and improve your ROI) you have to search for the catalyst, what makes that particular stocks move. If you have a good stock, deeply undervalued, but can’t see a good catalyst, it’s better to wait on the sideline. Jump in only AFTER you’ve found the catalyst. This way, your investment ROI will soar in less time.
• Most Novice Traders Focus on when to get in and forget about when to get out. This statement of course doesn’t undermine the importance of a good entry point, both are important (entry and exit points). On the contrary, I believe that novice got confused by both entry points and exit points. You can read my post about entry point. And as for exit point, I will write the post AFTER I learn the correct way to sell my stock (I’m still a novice after all :P).
• If market behaviour doesn’t conform to expectations, get out. I once had this kind of experience. Several months back a certain mining company announce that they will issue devidend up to 20% of their stock price. This is by far, the most generous devidend I have ever encountered. Of course, the market expectations where high and the stock price soar more than 10% a day (it’s an Indonesian stock, BUMI, look it from Yahoo Finance). But after several days, I become suspicious that the company won’t be able to deliver what they promised (and also proven by rumours circulating around it). Without waiting further, I sell my holdings at a loss but I’m very grateful. Now the stock is floating further down the flunk.
• The Virtue of Patience. Now Schwager might say that patience is virtue (even 7th century monk will also say something like that), but for me, it’s a double-edged sword. If you are too patient, the train might have left and another great trading ideas might take off while you are still on the sideline. My take on this is, if you are really really sure with what you are doing, don’t hesitate to act. My friend and I are eye-ing ADBE for quite some time when we decide that the company’s stock is a good buy. He’s trying to get a bargain buy bidding under the market price while I’m very certain that the stock will take off soon (and therefore bid at the market price). My certainty proven correct, the stock take off by more than $3 and my friend’s bid below the market price is not touched. I get out by $3/share profit while my friend get out with nothing. On another example, I bid an Indonesian mining company at market price (because I’m not ver patient and afraid that the stock will take off without me on board), and since then the stock flunked. Patience is a double-edged sword, use it carefully.
• The question of when to liquidate depends not only on the stock but also on whether a better investment can be identified. This corresponds to cut-loss (cut-loss: getting out of your position in order to prevent further loss). Schwager says that in order to do cut-loss you must be able to identify other promising investing alternatives. My answer? Nah… you don’t need to justify your reasoning to cut-loss other than to prevent further loss. You might disagree with me on this (and that’s why there’s a comment box on the end of each post ;) ).