Investing--IBD: "Focus On Your Best Stocks For Big Returns"
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>>>Investor's Corner
Wednesday, November 1, 2000
Focus On Your Best Stocks For Big Returns
By Jonah Keri
Investor's Business Daily
A fisherman starts his day casting lines in all directions to see where the fish are biting. When he finds the sweet spots, he’ll focus his attention on those prime areas.
Investors should think along those lines when trolling for great stocks. When a bull market begins, prudent investors will sink their cash into a few promising issues. As the weeks go by, you’ll want to cut bait on your laggards and focus on leaders.
"I call it the force-feeding method," said IBD founder and chairman William O’Neil. "You look for the one or two names that are really working out well. Then you look for chances to add to them."
Say you buy five stocks at the start of a new rally. Four weeks later, two of them are up more than 15%. One is breaking even. One is down 3%. The last one is off 8%.
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Image: Concentrate On Your Winners
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Your first step is easy. Always sell a stock when it falls 7%-8% from your buy point. No excuses.
Next, work from the bottom up. The market has taken off. New leaders are breaking out daily. Your stock down 3% isn’t working as well. Consider selling a few shares to free up some capital.
Now you have a healthy supply of funds on hand. Your next move is to find chances to average up on your best stocks.
Many issues will shed a few points on light trade following a breakout. You might use those dips to add a few shares of your leaders.
Also look to add shares when a stock pulls back to a key support level, such as the 50-day moving average. A breakout from the next base could make a good entry point too.
As the weeks go by, you may want to further concentrate your holdings. Look for more chances to add to leaders that dominate their industries. Your laggards may not look too bad, down a couple of percentage points. But if the market’s flying, it may be time to drop those sardines and load up on your bigger fish.
"Given time, the market will sort through stocks and show you which ones have made the most progress," O’Neil said.
Funneling cash into leaders can be an effective strategy in a bull market. But be cautious.
Make sure your second and third buys are lighter than your first. You want to keep your average cost down so you can ride out a normal correction.
Keep a close eye on the market too. If leaders start to break down, something may be wrong. If the major indexes start to fall on higher volume, institutions may be exiting the market.
If a rally starts to look shaky, consider easing off margin. If the sell-off continues, you may want to start raising cash.
Remember: Don’t try to fight the market. You want to catch the big fish. NOT SWIM WITH THEM.<<< |
