stick with the plan.

BOTTOM FISHING WITH THE BEARS

A famous quote attributed to Baron Rothchilds encourages us that
“the time to buy is when there is blood in the streets.” It is somewhat
dramatic but it does get your attention. Reading and listening to the
latest financial news one would have to conclude that there is “blood
in the streets”, at least figuratively speaking.

Certain market sectors have been pummeled, primarily the Financials and
Auto industries. Each day brings more bad news and it seems that there
is no light at the end of the tunnel. Foreclosures, bankruptcies and
government bailouts dominate the financial headlines. You hear things
like no one is too big to fail. Yet our system is such that
periodically these events must occur and that the survivors end up much
stronger and more competitive when it’s all over.
It’s in times
like these that opportunities arise. For the brave souls who go against
the tide they become beneficiaries of great rewards. Others may see
them as reckless or in most cases simply “lucky”. However it’s more
than that. It’s the ability to act when others remain paralyzed. The
only question is how to prudently go against the tide? Problem with
bottom fishing is that no one really knows with certainty where the
bottom is and when will the turnaround occur.
The next few
paragraphs will attempt to outline a strategy to us for bottom fishing.
It has been my experience that having a plan gives you the courage to
act when the majority remain on the sidelines. Is this strategy
foolproof? Of course not! Nothing is, and if you are one of those who
believe otherwise, save yourself some time and stop reading the rest.
However what it will do is greatly increase the probability in your
favor. It will give you a blueprint as to how to proceed through the
everyday noise. I know you must have heard this saying hundreds of
times before, so one more time won’t hurt. “People don’t plan to fail,
they fail to plan.” Investing in the market isn’t any different, you
need a plan. Especially in a bad market! The strategy that is outlined
works on individual stocks as well as EFT’s (exchange traded funds).
You choose your own investment vehicle. As a suggestion it would be
wise to use quality stocks listed and or quoted on major markets such
as NYSE and NASDAQ as an example. And preferably purchase stocks that
compose the S&P 500 Index. Only you know your risk tolerance, this
is merely a suggestion.
Enough with the prelude, lets get down to
the Bottom Fishing Strategy or BFS for short. In the demonstration I
will use a fictional automaker listed on the NYSE trading at $10 per
share under the symbol DOG. That’s right DOG, and it’s fictional and
for illustration purposes only, so don’t go out and try to buy it or
worse say that I am recommending the stock. As with most of the auto
sector DOG has been hit hard. The price of the stock is down 60% from
its 52 week high. Could this be the bottom? Who knows? As you research
the company you feel that it may be a good long term investment and
this seems like a buying opportunity. You have $10,000 to invest, what
would be the best way to proceed?
Well, let’s put the BFS (bottom
fishing strategy-remember) to work. Follow the seven steps carefully.
They will apply equally to any investment decision you make.
1.
Divide your $10,000 allocated for investment into four groups of
$2,500. The procedure is the same whether investing $1,000 or $1
million. If you have under $1,000 than it would be best to consider
other options.
2. Immediately purchase 250 shares of DOG at the
current market price of $10 per share using your first $2,500
allocation and keeping the remainder in cash hopefully earning
interest. (NOTE: commissions are not included in our illustration
because they vary greatly between firms).
3. If and when the stock
drops by 7% or $.70 to $9.30 buy 268 shares of DOG using your second
$2,500 allocation. Now you are holding 518 shares of DOG at an average
cost of $9.68 per share and still have $5,000 to invest.
4. DOG
drops another 7% to $8.65, buy 289 shares suing your third allotment.
You are currently holding 807 shares of DOG at an average cost of $9.20
per share and still have $2,500 to invest.
5. Stock drops again by
another 7% to $8.04, buy 311 shares of DOG. Your total holdings of DOG
are 1,118 shares at an average cost of $8.94 per share and you are
fully invested.
6. This step is VERY IMPORTANT. Place a stop loss
order 15% below your last purchase price which in our fictional
illustration was $8.04. Therefore an open stop loss to sell 1,118
shares of DOG would be entered at $6.84. DO NOT CHANGE THIS!
7. If
stopped out of the trade, which would mean the stock traded at or below
$6.84, DO NOT BUY THIS STOCK AGAIN! UNDERSTAND! Go elsewhere. You have
lost $2,359.59 or approximately 23.5% of your investment but it could
have been worse. This is your worst case scenario and you know it
before you even place your first trade. Look elsewhere for
opportunities.

Follow this procedure for every investment you
are considering. BFS allows you to
plan out your purchases
systematically before you execute your first trade. Always keep in
mind, once you decide to use the BFS, stick with the plan.
Yes I
know, I can hear some of you already saying, “well that sounds good but
what if the price of the stock doesn’t drop after my initial purchase”?
Or “I purchased a couple of times and it stopped going down”!
Congratulations! You have managed to pick the bottom, now hold on for
the ride up and enjoy your profits. And yes I do have a strategy to
maximize your profits when your stock is rising. However that is being
saved for another article, maybe even a book. Now that you have a tool
the rest is up to you, put it into practice, plan wisely and trade with
confidence.



Article Tags:
Bottom Fishing