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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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With the shares this low, I bought call options that would make money when the stock moved back upLook for Good and Bad News Concerning Specific Companies Explosive opportunities can often be found when specific companies are the subject of extremely good or bad news. There is tremendous financial loss for millions of shareholders when stocks drop like a rock. When such a stock dropped to around $4 per share overnight from $12 (not to mention a previous high of $35 about nine months earlier), this signaled a buying opportunity. With the shares this low, I bought call options that would make money when the stock moved back up. They cost only $25 apiece, and they doubled in value in a day. I sold my position a few days later for a profit of over 400 percent. You can find extreme examples almost daily and super investment opportunities at least twice a week. If you wait for these opportunities, you can become much more successful. For example, keep an eye out for bad earnings reports or news from a company that the earnings will not be as had been expected. As mentioned earlier, the value of a companys shares is determined by many factors. However, the most significant factor is expected future earnings as forecast by brokerage company analysts. If a company begins to give these analysts any information that is viewed as hurting a companys next earnings release, then they will quickly downgrade their forecasts. This turn of events can trigger a major selling frenzy. Back in August of 1996, the Medaphis Corporation, a leading provider of management services to physicians and hospitals, let out that there was a significant underperformance of the quarterly results compared to analysts expectations. The share price, which had been steadily advancing over the previous year and was trading at around $36 the day before, dropped overnight to around $12. That was a $24 droprepresenting twothirds of the valuelost overnight. If you owned the shares, how would you feel? Devastated. I would feel the same way. If I had invested $1,000 in this supposedly safe stock, I would have only $333 the next day. I would jump ship just like the other owners that day. However, after a fast move down like this there is usually a bounce back in price (which happened) for a short period of time. Then the shares usually continue down until a new support level is reached. After many years of trading, you learn that reactions are very similar in extreme situations. A good trader and investor will immediately react to this situation and place a trade that will benefit from this situation. What would I do? Id buy out-of-the-money (OTM) calls and OTM putsa spreadat a cheap enough price so that I would risk very little, with enough time for me to be proven right (three months or so). Watch for New Product Developments There can be numerous investment opportunities when pharmaceutical companies and biotech research and development companies announce successful trials of new drugs and approvals from the Food and Drug Administration (FDA). If you ask your broker to notify you of these types of situations, this alone can present tremendous opportunities. Bet on Smart People This is an easy one that many people overlook. Why not invest your money with smart, successful people? My theory is that someone who has been successful in the past will be successful in the future. There are many examples of this around you. Why not let a billionaire invest your money for you? Billionaires do not become billionaires without investing their money very wisely. Jump on the bandwagon and join them. Let Bill Gates of Microsoft invest for you. How do you do this? Just invest money in Microsoft shares. Many of you may not know his name yet, but let me tell you, he can make you wealthy. I am referring to Wayne Huzienga. Perhaps you have heard of two companiesWaste Management and Blockbusterhe built and sold successfully. I am sure you have spent a few nights in front of a television set after visiting one of his stores. There are a number of other individuals you might want to follow. Guess where I put my longer-term investment dollars? I just ride the wave with other successful people. Look for Low-Priced Shares I define low-priced shares as those trading at $20 or less. Its a lot easier to make a high return on low-priced shares than high-priced shares. If I buy a stock that is trading at $100 per share, how long will it take to double my money? Although anything can happen in this business, most likely highpriced shares like this could take years to double in value. In addition, there is a greater chance of losing a lot of money. If I take a stock that is $10 per share, how long might it take for this stock to double in value? Many times I have seen it happen in a day. Also, if the shares become worthless, I lose only $10. Bottom line: Placing a low-priced stock trade gives you the following benefits: You can make a high return faster. You have less money invested to lose. You can play more stocks with $100 (10 different stocks if they aver age $10 each). This last point is very important. If I have $100 to invest, I willin many casespick a few stocks that allow me to average my risk. This is referred to as a portfolio. A broad portfolio is the basis of a mutual fund. The basic theory is that a larger group of stocks will even out the chances of winning in the long run. This, in turn, reduces your risk. If I put my $100 into one stock, there is a 50 percent chance of these shares losing money (50 percent up, 50 percent down). If I buy 10 stocks (average price of $10), then if one stock loses 100 percent of its value, I have nine stocks to carry the portfolio and can still make money. A mutual fund may have hundreds of stocks. Some may be terrible investments, but overall the fund may still do very well as it diversifies its risk. Lets take another example: If I feel that a particular $100 stock may make a large move up in price, instead of buying the stock, I would buy a $4 OTM call option giving me control of 100 shares for $400. If the shares now move up from $100 to $105 (a 5 percent price increase), these options may go up 50 percent in price to $600, because a move in the price of a stock will typically have a magnified effect on the price of the options. This magnification is due to a number of factors, including the leverage the options provide you. Therefore, its a lot easier to make a 100 percent return on your money using options on stocks (as well as options on futures). However, I have to caution you: It is also easier to lose 100 percent of your investment with options. If you want to trade options, never underestimate how important it is to keep learning as much as you can about them. Look for Price Increases or Decreases of More Than 20 Percent in the Past 60 Days Momentum creates opportunities for both buying and selling. Momentum investors are very widespread; however, they are a very fickle group. When a stock (or future) gains momentum and then starts to lose momentum, there is usually a flurry of activity to take the market in the other direction. I like to invest when the momentum is strengthening or weakening, because these are the best short-term opportunities and they often create longer-term opportunities. Momentum investors are much shorter-term-oriented than mutual fund investors or money managers. A momentum investor may be looking for momentum over the next few seconds, minutes, days, weeks, or even months. This creates many different time frames in which investors and traders are viewing the markets. When a market starts to move quickly, then all these players may jump aboard. The momentum may last, but usually, on a short-term basis, prices will reverse as investors become disappointed when the market dies. How do I measure momentum? I look for a change in the price of the stock over the previous 60 or 90 days. I use this as my long-term indicator. If I am building a longer-term portfolio of stocks, I want stocks that are showing a minimum of 60-day strength. As previously mentioned, many technical analysts use momentum indicators. These indicators are very specific. They might show the change in stock price relative to a set prior period (i.e., five minutes, one day, etc.). Perhaps they use a moving average to locate a change in momentum. When the current price moves below the moving average, they sell; when it moves above, they buy. |
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