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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Frederick Langford who wrote (91426)	4/4/2000 12:21:00 AM
From: Jenna	Read Replies (1) \| Respond to of 120523

Frederick, Excellent article..His VTSS just had a cup and handle chart formation.. But I would not have bought on that dip. He basically espouses the same theory that I do but more eloquently.. You only buy the dips on stocks that have the same FUNDAMENTALS as before (even better I'd like them to IMPROVE) so actually only the price of the stock has declined and the RISK remains the same. That's also why I'm not interested in stocks with no earnings because they have no real 'prospects' that are proven, only expected, estimated and one big 'maybe'... just when I thought I finished the article I noticed this at the bottom-------------------------------------------------------------------------------- Why 'buying on the dip' can be a dumb idea Then I backtracked to his idea of 'buying the dips' (funny he coins a 'modified buy on the dip' which I once did as well).. posted in October 1999 but still interesting today: ****** The trouble with focusing on price What are the problems with "buy on the dip" strategies focused solely on price? First, damaged goods often aren't cheap. They're just damaged. For example, IBM (IBM, news, msgs) goes down on genuinely bad news. So do you "buy on the dip" from $123 to $92 over the last month? Only if you think that next quarter the company won't announce surprisingly bad numbers again. And the odds that IBM really knows in late October how bad the December quarter will be are pretty small. [ed. comment that goes true for now as well as LGTO has shown us all today, so you don't buy the dips when the prospects of the stock has altered to the downside] Second, great stocks don't dip much or very often, so an investor can miss a major up trend while waiting for a cheap entry point. Investors who only "buy on the dips" wind up overlooking the Nokias (NOK, news, msgs) of the world and buying the Ericssons (ERICY, news, msgs). For example, last October was a great opportunity to buy shares of Cisco Systems (CSCO, news, msgs). Early that month, the stock dropped about 30%. And anybody who missed that chance hasn't seen another that good since. But if instead of worrying about buying on the next dip, you'd have just plunged in and bought at a truly lousy time -- say Feb. 1 when the stock completed its big leg up from the October lows -- you'd still be up 18% by now. That doesn't compare with the 160% return on Cisco if you had bought at the October bottom. But it sure beats a poke in the eye with a sharp stick. Focusing on declines in risk -- while not ignoring declines in price, of course -- avoids both of these problems. The ideal stock, according to this strategy, is one where, first, the potential gain remains high enough to meet your potential profit hurdle rate. (Because I think this market still carries a high overall level of risk, I've kept my hurdle high as well. To go into my portfolio, an individual stock that's already risky in its own right has to show me the potential for a 30% gain in a year. I require a potential 25% gain in moderate-risk stocks and 20% from low-risk equities. Mind you these are potential profits; I don't expect every stock I pick to deliver on expectations.) My second requirement to become a modified "buy on the dip" candidate is that the risk in the stock -- the odds that it won't deliver the potential profit I've calculated -- must have decreased since I last reviewed the situation.... That can happen in two ways. First, the risk in the stock can decrease because the price of the stock has fallen while the company's prospects have improved, or at least stayed the same. Second, the risk can decline because, while the stock's price hasn't fallen appreciably, the company's fundamentals have improved significantly. Group 1. Lower prices with improving fundamentals means lower risk** ....This combination may sound strikingly similar to a "buy on the dip" strategy, and often a dip in price will alert me to potential buy candidates. But there is one crucial difference between standard "buy on the dip" and my approach. While the price decline may bring me to a stock, the reason for buying the stock is that the company's fundamental story convinces me that it will be worth significantly more in the future than it is now. Notice that I'm not counting on the price dip itself to produce my gain. Many investors seem to "buy on the dip" on the assumption that the stock must return to its former price -- and relatively soon, too. They'll profit on the inevitable rebound, they believe. I don't agree with that assumption -- especially the inevitable part -- and I don't think it's a good enough reason to buy.