Only the Best

You can only control so much in the markets. You can't control which way the market goes and you can't control if your next trade will be a winner or not. What can be controlled are how much risk to take and which stocks to pick. If this is all we can control then we need to make the best decisions possible.

Stock selection and risk management, this is as good as we can do. Since we can't control how the market moves, there is no reason to waste time worrying or predicting where it will be in 4 weeks, 4 months, 4 years, or whenever. We need to focus our attention and study on our preferred risk parameters as well as the stocks we choose to buy. If we use a consistent and quality buy/sell signal (based on what's actually happening now), while only risking a small percentage of our capital, we should do very well.

Investors that attempt to figure out where the market will be at the end of the year, or how successful this company's new product will be, they will not be focusing on the things they can control and will more often than not be wrong with no exit strategy. I will be wrong often as well, except i know exactly where I'm wrong and will act accordingly to protect my capital.

What I attempt to do in the market is find the best looking setups, the stocks that are being accumulated heavily and breaking to higher trend highs. Once I find those setups, I own the very best of the best. Once I own the best setups, I let them play out until my entry rationale is proven no longer valid by price.

The idea behind this simple (not easy) strategy is to own the strongest stocks for as long as they are strong. If we sell a stock that begins to lag, we find the next best setup available and we rotate our funds into that idea. What this amounts to is letting big winners run, creating large profits, cutting losing positions once they are invalidated for small losses, and then move those monies into the next best risk/reward opportunity. Wash, rinse, repeat.

We focus on the best. I want to see stocks making higher highs, higher lows and just generally moving higher over time. I do not try to figure out if a declining stock will be the next big comeback story. I don't buy stocks that are falling and "cheap". Cheap is a very relative term, cheap can always get cheaper. I want to see stocks challenging all-time highs, this tells me the underlying company is beating its competitors and is getting stronger. They are earning MORE money, they are growing their business and are successful. One way to improve your success is to do what successful people do. One way to improve your investment returns is to own successful stocks and companies.

Since we don't know where the market is going next (I really don't have a clue), lets focus on what we do know, and that's where our current positions sit in relation to the predetermined risk levels.

Weekly Bars 2-years

Disney (DIS)

Stop: $88.50

Nike (NKE)

Stop: $87.15

Treasury Bonds (TLT)

Stop: $118.50

United Healthcare (UNH)

Stop: $85.35

Berkshire Hathaway (BRKB)

Stop: $136

Starbucks (SBUX)

Stop: $73.50

Bristol Myers (BMY)

Stop: $50

Goldman Sachs (GS)

Stop: $176.90

PPG (PPG)

Stop: $203.90

Gilead Sciences (GILD)

Stop: $100

Bank of America (BAC)

Stop: $16.20

Hain Celestial (HAIN)

Stop: $98.70

United Parcel Service (UPS)

Stop: $95.75

PG&E Corp (PCG)

Stop: $44.30

International Paper (IP)

Stop: $46


The markets saw some profit taking this week after the torrid run since mid-October. The longer-term charts are still very far from trouble and our stops are well out of the way. Hopefully we will see some orderly consolidation that will allow us to move our trailing stops higher. For now we want to let our strong positions work and try to not be emotional or force any trades.

After a big run like we have had its normal to want to harvest some of the gains for fear of giving them back. But that is what "feels" right and is simply an emotional crutch, actions like that will hurt long-term performance over time. The common investment maxim "nobody ever got hurt taking a profit" is an emotional excuse to appease our senses of fear and greed. The correct winning strategy is to let winning positions run until they are invalidated and cut losing trades quickly. As legendary investor Peter Lynch once said regarding taking profits on winning positions, "selling winners and holding losers is like cutting the flowers and watering the weeds." Instead we should be much more willing to let what's working work and replace what is not quickly with something that might work better.  

Chart of the Week

Why We Sell

Freeport McMoran (FCX)

Do you remember this chart? I posted this exit signal in early September. Selling stung a bit at the time; the setup had looked quite promising initially and yet it just rolled right over, stopping us out for a small loss. The decline was steady and relentless. By the time I sold I had watched the stock fall for 7 out of 8 weeks since my entry. This was clearly "oversold" and getting "cheap" after the 12% decline in only two months. However, my signal said to sell, so I sold...

Here is FCX 14 weeks later:

Wowsers! Not only has this continued lower, falling 12 out of the last 14 weeks, but the stock declined another 16% just this week! That's now 38% below our exit point. Sure the 12% drop wasn't the preferred outcome, but it had a relatively minor impact, while a 50% decline can cost you a year's worth of gains.

This is why "oversold" and "cheap" are relative terms and not an investment strategy. They can and will go further than you think is reasonable. Most importantly, this is why you ALWAYS take your exit signals when they trigger. By taking quick, small losses, you never get into a situation where a small loss becomes a BIG loss.