Stupid advice, right?
Yes is the correct answer. So don’t make any decisions because of this post. Better yet, never make any decisions based on information from anyone but yourself. No one is smart. Nobody knows what which way the market will go. No one knows which way any stock will go. Make your own decisions. Take responsibility for mistakes and study them. Or plan to lose all your money.
The market is dog shit right now and I just bought a small cap, high growth stock with a PE of 430. Why? Glad you asked…
1) I have a personal strategy/style that I understand well and it doesn’t involve PE analysis (but I did read that catchy titles gets you more reads… suckers!)
2) I study market history and this stock has characteristics of many strong performing stocks from the past
3) I put a huge emphasis on risk management (as should you)
4) I know that I know nothing about the future of the markets. It could jump 10% tomorrow or drop 40%. You don’t know either.
5) I know that to make money one must take risks
So let’s look at the $QLYS purchase a little closer.
My strategy is to find huge winners and ride those trends (I’m still trying to figure out how to do it..). For those that share a similar style you know by now that relative strength (RS) in a specific stock during market pullbacks is often correlated with positive future performance. This post by @ivanhoff from the summer of ’12 introduced me to this concept and I have tried to learn from it since. However, there really haven’t been many serious pullbacks since then, until now. I’m not saying the market is in shambles right now. These pullbacks are historically normal. But many, many individual names are broken so that is enough for me to raise cash and search for major RS. $QLYS has it. Charts explain it best.
QQQ year to date. Doesn’t take a market wizard to know which way things have been going recently.
QLYS compared to QQQ – year to date. Up 30% compared to down about 1%
QLYS compared to QQQ since the beginning of September. This one tells the real story. Since the market has started to really struggle this stock has performed very well.
So let’s move to the next points – risk management and the overall market. The stock looks good, but why buy it today?
I put a lot of emphasis on the strategy of letting specific stocks guide me in and out of the market. I know I just used the QQQ as a reason to get into this stock, but in reality I would buy this stock in any overall market situation. It would just be easier to pull the trigger if we were in a bull market. I know that the stock matches up with a setup I am familiar with and like so why make it more complicated and get scared by the overall market? In an emotionless world, this decision would be exactly the same in a raging bull market or a massive selloff. The market could rip tomorrow and move up for years. Or it could sell off and start another great depression. Nobody knows. So don’t waste too much worrying about it. Now to the entry, just like any entry, in any market.
I use a simple spreadsheet:
Tells you everything you need to know. Buy price was the price right around 2:30pm today (I like to make buy/sell decisions only in the last 1/2 hour of the day). Stop price is determined off a shorter term chart (stop is where I think the current uptrend is invalidated – depends on personal timeframe):
The main thing I can play with is the amount risked. I usually risk 0.5 – 1% and it’s really just a feel thing. Right now I am more comfortable with less risk so I am at the low end of my risk tolerance. If this trade starts off well I can always add to it.
So I pulled the trigger. But I always have a plan. I know that 4/5 stocks move with the general market. I know that the market is moving down. I am prepared to lose 0.50% of my portfolio. I almost expect to. But I also know that if things stabilize or turn up I have a great entry in a stock that has showed zero distribution while many stocks have been slaughtered. I’ll take that risk. I’ll also take that delicious segue to my final point.
You have to take risk if you want to make real money. If you don’t like taking risks the market is not the place for you. But you must understand risk and, more importantly, be able to define it and stick to your loss cutting rules. I am prepared to take a 0.50% loss on my portfolio. Is there a possibility that QLYS could gap down 50% tomorrow? Yes. That would suck. But there’s also a chance it triples in the next 2 years and I want to be a part of that.