So how do I actually make trades and investments? What are my plans? I’m no expert, so I’m still tweaking it, but I’ll certainly give you the details on how I intend to make a million dollars. Spoiler alert… it might take awhile…
I usually have about 15 companies that I follow closely. They fall loosely into three categories.
- Companies whose stock is falling, or is significantly off its high. Here I’m looking at companies that are getting beat up for little reason, or ones that I think can turn things around. I’m a sucker for a good turn-around story. Some of these are easily categorized as ‘falling knives’. They say you should buy when others are fearful. Well, I’ve gotten that taken care of with this category.
- Companies that I like, but are not currently trading at much of a discount. Being a value investor at heart, it’s tough to buy something trading near its high. With these I’ve set a level that I’d like to get into on a pullback, hoping weakness in the overall market or industry pushes it down to me. That won’t always happen, of course, but it’s good to have a list of companies that you’re ready to buy when the market decides to have a fit.
- Smaller cap companies that I believe are undervalued.
Of course these are nebulous categories. A stock could be in one today, and another tomorrow.
So how do I actually try to buy a stock?
I try to build a position over time, averaging down as a stock goes lower. Let’s start with a dollar amount, say $500. I’ll set a limit order below where a stock is trading, at a level I’m comfortable to start buying. (Limit orders are great!) Ok, say the stock hits my price. BOOM! I’m part owner of a company. If the stock continues to go down and I still believe in it, I buy more, increasing my dollar amount by 10% each time. So with the $500 example, the second buy would be $550, the third $605, and the forth, $665.50. I only buy at a LOWER price, each time, so if the stock skyrockets up, I don’t continue buying, I simply watch it and smile. Since the stock price is lower each time I buy, AND the amount I’m willing to put into it is slightly higher, I buy MORE shares when the prices are better, trying to get a good average price.
This seems better than buying roughly $2320.5 worth of a stock right out of the gate. Of course none of this really matters a whole lot if I make my final buy and the stock continues to go down and go down and go down. I also realize that making that fourth buy might be pretty gut-wrenching. If it gets to that point, I’ll certainly be in the red on the position. Who said this was going help me sleep at night? If I’m right about the future prospects though, I’ll be sitting pretty with a full position in the good times to come.
I also rank my potential stocks by risk level. I know that ALL stocks involve risk, and the ones I’m picking are probably riskier than average. For those that seem particularly risky, I intend to make a maximum of three buys, rather than four. So with my $500 example, I’d end up investing a maximum of around $1655 if I got three buys in. Most of the small cap companies I’m interested in are going to be in the ‘ultra-risky’ category. Also, with only three buys instead of four, I’ll probably be using wider scales averaging down into the position.
I should note that a couple of my early buys may not fully represent this plan, as I was still messing with the exact amount I wanted to start with. How much I’m willing to invest in any one company starting out necessitates an amount a bit lower than my $2320.5 example. I’m a small-fry in the financial world, and while I’m willing to take risk, I don’t want to bet the farm on any one investment. I’m more comfortable with around $1700 in one position starting out.
I should take a moment to talk about timeframe and eventually selling a position. I’ll admit that as I start out I’m way more focused on buying into a good position, but I don’t want to hold anything forever. I also don’t consider myself anything close to a day-trader. I foresee myself holding most positions for at least four or five months, maybe even a year or two for some. I’d certainly be willing to take profits earlier if it made sense. It seems to me that if I get a good company at a good price, I can sort the rest out as I go.
I should also mention the importance of keeping on top of my positions once I have them. I wouldn’t buy stock in a company and then forget about it. When the management holds a quarterly conference call, rest assured I’ll be listening. When someone upgrades or downgrades my stock, I’ll want to know why. I believe managing my money will be fun, but it’s also serious business that will require my time and attention.
Michael, the Stock Picking Bartender