Saturday, April 03, 1999
Keeping your shirt, and sanity
Rules to sell by as mini-mania grips speculators
William Hanley
We are told by an acquaintance that a friend of hers, a professor, has taken just about all his life savings, $180,000, and bought Bid.Com International Inc. shares at $6 each. And now, she says, they're about $14.
We wonder if he's taken any profits? Not yet, she says. The stock could go much higher still because it's a takeover target. Indeed.
Down at our health club, some of the guys have bought in to Dejour Mines Ltd., an unlikely Internet play, at around 20¢ and they're hanging in as it reaches $1 because, as one confides, it could go to $100. Indeed.
Evidence that a fair number of Canadians are creating a modest mini-mania in our very own Net stocks is not purely anecdotal. Witness pyrotechnical performance of Bid.Com (bii/tse), Dejour (dej/tse), Dion Entertainment Corp. (dio/tse), and Cybersurf Corp. (cy/ase) over the past 10 days.
While this has been terrific fun for most of the people involved -- and, incidentally, great copy for FP Investing -- we're left wondering whether our Bid.Com professor is in the process of perhaps gaining a very expensive education.
And while we're at it, we also wonder whether members of a generation of buy-and-hold investors will have any kind of game plan in trading these Net stocks or other highly speculative issues.
Yes, we know the next Microsoft, the next Dell, the next America Online is out there and may already be nestling in portfolios to be held and cherished, the rich pension plan in waiting.
But all Net stocks, whether domestic or whooshing around Nasdaq, are trading plays. And to trade, you must have a plan.
As Mervyn Burak, editor of the Technically Speaking With Wil-Arm newsletter and no fan of buy and hold, says: "When you buy a stock, you must have [a plan] that gets you out, either at a profit or at a small loss when the initial purchase is quickly determined to be a mistake. If you have no criteria for the end game, you are destined to have serious problems."
While buying the right stock is essential to success in the stock market, Song Hua Huang, writing in Technical Market Trends, newsletter of the Canadian Society of Technical Analysts, outlines eight rules of selling that traders will find useful.
1Let profits run and cut losses short. It's essential to set a loss limit in each trade and stick to it
2Never let a profit turn into a loss. Sometimes it's prudent to take a quick profit rather than let it turn into a loss when the price moves against the position.
3Cash in when you have a windfall profit. This is especially true when there's mass euphoria in the market. Market Eye believes half a position should be sold in a speculative stock once it doubles. That way, you're playing with the market's money.
4Sell when the price doesn't move as expected. Mr. Huang, a private trader, says a trader should always enter a position with a reason. Obviously, this excludes the guy who buys a stock because his sister-in-law's hairdresser has a customer who knows someone who overheard people at the next table at lunch talking about a stock that could go somewhere.
5When in doubt, get out. It's usually better to take a profit and get out for the moment.
6Sell some of your position if the initial size was big and the price doesn't move favourably right away.
7Sell when the time is up. Before buying a stock, a trader should not only have an exit price limit for the position, but also have a reasonable time limit in which the price is expected to move.
8Buy on rumour; sell on news (or sell on fact). This is a widely quoted market axiom and mass psychology makes it a self-fulfilling one. Just look at what happened this week to Toronto-Dominion Bank stock, which climbed steadily on rumours that it was to spin off part of its discount brokerage operations only to retreat modestly on Wednesday when the actual announcement was made.
What all this adds up to is self-discipline. If you don't have it as a trader, the market will punish you. Although the market is said to run on fear and greed, it's essential that you not be greedy in trading stocks. You can be a bull. You can be bear. Don't be a pig.
Having a plan based on realistic goals means you have to know yourself. As a trader once said: "If you don't know who you are, the stock market is an expensive place to find out."
Financial Post
nationalpost.com
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