- Wealth PMS (50L+)
In the recent market run up, I’ve bought a few stocks that looked very much like they were “peaking”. I want to throw a few charts at you and ask you if you would buy?
This is an interesting stock that had just hit an all time high in end April 2013, after a long consolidating below 325. Note that I don’t plot fundamentals and stuff like that. These are momentum picks. You do check to see if there is potential fraud (too low a market cap, promoter borrowing, heavy losses or lack of profit growth etc. – the company qualified as ok on all fronts)
At this breakout, would you buy? I did, largely because of the power of the move up earlier, and the relatively easy stop at 300. That one did wonders in a month:
The stop has now moved to 340, with a fresh purchase recently around the 350 level (about 70% of what I bought first, in a pyramiding strategy). Stock: Supreme Industries, up 10% from initial purchase.
And then, what about this guy?
The stock had hit a high – a 52 week, not an all time high. Yet, the breakout from the 72 level was awesome (and I’d missed it). The stock again qualified as a low risk of fraud case, and had just made a powerful move up to the 120 levels. Would you buy?
My answer: Why the heck not, but I had to cut my position size down. Why? The only reasonable stop was around the 98 levels, and that is way too wide for me for comfort. So where I would invest 5% of my portfolio on this stock, I put just 2.5%, to deal with a 20% stop on the downside. It’s been ok.
Finolex, too, did well, moving into the 130s, forming another breakout for my pyramiding buy-in. I have moved stops up substantially as a congestion zone has formed, but I will only be getting rid of half my quantity then – the rest at 108. (Theres’s a dividend of Rs. 5.5 due which this stock might have to get adjusted for)
The profits on this stock have been about 10% in a month.
There were others – Berger Paints at 207 – now 242 in two months, for a 12% profit The stock went back to 189 – my stop was below 186 at the time.
Of the losers – I got into Asian Paints at 4950 and was out at 4600 on a trailing stop, losing 8%. Another was Lupin labs, in at 800, and out at 754 on a stop, for a 6% loss.
The trades are interesting only because it embodies two important principles:
1) Let you winners ride, cut your losses short. It’s been a mantra of sorts now.
2) The reasons for a move aren’t evident when the price moves – so it’s useful to follow the price.
If you asked me a few years ago, I would always hesitate to buy into lesser understood momentum. But now, I buy and then ask questions.
With the market at all time highs, I asked on twitter if people would buy – and there were equal yes and no answers – 20 each out of 40.
The fear of buying highs persists and hurts us. But you could take 10 losses of 10% each, and still make out like a bandit in this stock that was at an all time high when I had first bought:
(That’s TTK Prestige – that went from the 300 levels when I had bought to more than 3,000! In just three years)
A 10x return trumps a lot of small losses. These are lessons for me, and I hope to learn from what you think, too.