Never Fall In Love - No Matter How Exciting It Is
Remember peak oil back in 2007/2008? The world was going to run out of oil. I know a man who was worth billions riding that wave and fell in love. Rode it all the way back down. Now the world is awash with oil and nothing to show for all those paper profits.
A 1st world problem of a tragic tale of falling in love with a trade, a view and a stock.
Remember graphite back in 2014? When Tesla was becoming the rage of new premium car ownership in the US, graphite stocks surged. I traded these aggressively but after learning my lesson once before of falling in love with a stock, I took profits near the peak and haven’t returned since.
Stocks like Triton Minerals (TON) surged from 10c to 90c in a matter of weeks. It’s now in receivership. Many other small and micro-cap companies doubled and tripled in price over a small timeframe of just months if not weeks that are now lucky to be in existence. And how many people made great profits out of that graphite flurry? Very few, because many investors struggle to determine the difference between a great investment and a great story.
Let me use the example of Ventracor. For those more seasoned investors they may remember this artificial heart manufacturer. They produced artificial hearts that would help those with heart conditions to live a longer, better life. Always a great idea. However, as the share price below shows not always a great idea as the stock no longer exists. Following a run to a record high just above $3.60 and a market cap of over $600 million the company failed to deliver on its market promises and technology, sending the company into bankruptcy.
Investors need to determine the value of a company and whether the current value is really what the opportunity is worth. Too often investors also forget to add on company debt levels to market cap. I see on hot copper and other retail forums that a company is only worth X but they have earnings and their price/earnings multiple is low. They forget to add on debt levels to the market cap to determine the true value of the business – the enterprise value. This value is what I use when determining whether an idea is a great investment or just an idea. It also helps when determining whether the market value of the company is expensive and if so then the momentum in the underlying share price is unlikely to persist for much longer.
This all leads me to the current flavour of the month – lithium. Lithium stocks are running hot on the back of the expansion in electric car usage. Be careful. When tin pot nano-cap stocks are acquiring options over tenements that are prospective for lithium, rally 300 to 400% in a day, it is a recipe to be caught out. Yes the sector is hot, but money is not made until its cashed-in. Remember that. Take your profits.
Missing out on future paper profits is not as bad as missing out on a real profit. I see professional traders make these mistakes every day. A profit should never ever under any circumstance turn into a loss.
Run with the momentum, but when stocks lose their momentum – sell. And do so quickly. Strategies like selling your original investment after a stocks has doubled is a good one to ensure that you never lose money on the trade even if it goes to zero. You already took your original investment out.
I prefer to chip some shares as it rallies after having preset technical targets. I already know how the trade will unfold before I have entered into it.
Another great technical technique on rampaging stocks is to sell when the price moves back under the 30 day exponential moving average across daily or weekly timeframes – depending on your investing timeframe. Look back to the chart of TON after entering at 10c you were out at 55c. Not 90c but still a solid profit and better than zero.
Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.