Weekly Portfolios: Part 1
It has now been one month since I started the Weekly Portfolio, and I thought I would recap the basics and summarize where everything is at. What follows is a series of posts that describe the methods used. Hopefully this will be of some benefit. The total length of all the posts together is about 4-5 printed pages, so I apologize in advance for the length. Its also copyrighted to myself and MarketGems, so I would appreciate knowing if its reposted somewhere other than on SI. Initially I planned to close this account out after one month so as to make better use of the money. Since then, several acquaintances (offline and on) have started Weekly Portfolios from $10-$40k, and have asked me to continue. Also, with the impending correction looming this month, I have decided to continue an occasional post to test/demonstrate major risk management, unless the thread objects. These post may contain some seemingly rudimentary information, so bear with that, please.
Premise:
Most people don't have the time, tools or opportunity to trade equities intraday. Putting money into mutual funds is a fairly safe, low-effort means of obtaining a reasonable return, assuming they screen those adequately. If you want to learn about trading using limits and stops, managing risk and generate a decent return (at least 100%), then I suggest building what I called a Weekly Portfolio. I call it that because it can be managed simply by looking at it a couple of times a week. One sets limit entry orders and protect profits with stops based on basic chart reading skills. The real-life example for the month of March generated about 20% return ($7,000) on a $35,000 account. All of the methods listed below were posted and required no more attention than about 16 hours for the entire month. While day trading, or doing more research would have provided better stock picks, entries and exits, and generated a better return, the amount of time required would have increased tremendously.
Picking the Stocks:
Obviously, the basic task is to pick stocks that have the potential to appreciate well beyond their present price. Ther are several schools of thought about whether to picks tocks making new highs, or at all time lows, or in growth industries. However, my preference is to divrsify and pick stocks that meet some basic criteria. By 'potential' I mean that they are fundamentally solid companies that are at or below 40% of their 52 week high. I also prefer to select stocks that trade above 100,000 shares daily and are priced below $40. The average stock price on the initial list was about $12, and ranged between $0.75 and $37. I would note that price did not affect profitability. Last, the stock should have at least $200 million in capitalization. Although there are thousands of good stocks that don't meet all of these criteria, differentiating between those and ones that meet this criteria is better suited to one who has mastered the basics. On the fundamentally solid issue, we are looking at companies with earnings, earnings growth and debt ratios that are well above average. Although continuity of earnings growth is important, as well as several other criteria (P/E, Beta, etc.) the basic concern is whether the company you are looking at has been around for a few years, is in the top half of its sector in terms of size and performance, is making a product or providing a service that won't go out of fashion in a few months, and has a consistent stream of positive news - however inconsequential that news is to price fluctuation. I would caution against using only recent earnings news for the position trader, as without a full read of the quarterly statements, one could miss that earnings were inflated by acquisitions or deflated by one time charges. |
