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Concepts & Tutorials

The Fear of Buying Into Highs

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?

 

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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:

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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?

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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.

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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:

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(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.

  • Deepak says:

    Deepak,
    Interesting pick – I have been buying into supreme from 270 levels and while I try to set an exit based on my so called fundamental research, with a move like this, it becomes tough – incidentally I did the same with TTK prestige – got in at 200 + and ended up exiting at 950 or so….in a short span. So agree with you, the trouble is the discipline on cutting the losses and also the exit on the profitable ones. But then a wise man told me once, I made all my money selling early, so I dont dwell on the early sale in TTK and such.

  • Murty says:

    That’s the power of gut feeling about a stock of your high conviction. All the stocks you mentioned are quality stocks , just to remind.
    I have another case to follow:
    After a long gap, I have entered market with a few of Glenmark Pharma shares, riding high at 216 a piece and never looked behind. It went on and on until stagnating at 508 for a long time, came down to 476 but look at the price now, around 560, the general target is around 600……..quite an achievement in two and half years! Cool man! Know your stock first , give it time to grow….

  • Ngm says:

    Deepak, do you look into volume at these junctures in the chart, I can see that volume has surged up generally but do you use any specific volume indicators to confirm the breakouts?