Buy and sell timing – this is not as simple as buying low and selling high. This is actually not simple at all. Expecting success solely through market timing will lead to your financial ruin. Never try to pick a bottom. A successful short seller knows that momentum builds on itself, a further break to the downside can result in a very quickly-realizable and profitable gain when playing the short side of the market. When you like a company, and you want to own some shares, show a little restraint and wait until a proper buy point. This could be an advance and a hold past a recent high, a high volume breakout from a proper base, a confirmation of trend reversal, etc… A common mistake is to assume that since a stock has come down, it will go back up – using absolutely no analysis to support this move. Then yet another support level is broken, and often results in more losses in the stock.

Sell timing should have more to do with the analysis of your account than analysis of the stock’s technicals or fundamentals. If you see a number you like, protect that number, go to cash and then if you’d like, start building that position from scratch again. Guess what? You just made money. Pat yourself on the back, buy yourself something reasonable and make sure you don’t get foolish and give your gains right back to the market.

Time horizons – you need to be able to analyze a market and identify the trend from both 50,000 feet and a microscopic level. Working off of one without knowing where you stand in the other can be dangerous. That’s losing the forest for the trees, so to speak, and vice-versa. When you are buying for a desired holding period of more than one year, work primarily off of weekly charts and use daily charts for precision. When swing trading, identify the period you feel most comfortable trading, using everything from weekly all the down to 30 min charts, and then use 15 min charts for precision. Use 5 min charts only to search for signs of volume trends that would indicate a change in tide at potential tops and bottoms, don’t make buy/sell decisions off of them. You should only use short time-frame charts to decide with precision when and where you will execute the decision (that you’ve already made) to buy or sell. Take into account the bigger picture, and avoid attempting to trade around long term support and resistance levels. This leads to attempting to trade a very tightly bound stock, again, dead money. That stock is obviously consolidating, so wait for a break. And pay close attention because the break could come in five minutes, or five months, you never know.

Selection – the investor needs to understand that the “market” favors some stocks over others. It is not a stock market so as much as it is a market of stocks. So, this is where you identify the market’s most loved stocks and get behind them. When the market goes up, leaders go up more. When the market corrects, leaders have a tendency to hold stronger than stocks not held in favor by the market. Ex. AAPL or GOOG versus MSFT or DELL. New technology vs. old technology. Gains vs. losses. Selecting leaders, such as AAPL, as opposed to the average “value” or “cheap” stock, such as MSFT, gives you a slight edge in a game where everything matters. Keep an eye out for changing leadership as well.

Choose expensive companies over cheap companies. Avoid companies that trade under $5 like the plague. These stocks cannot be bought by much of the investment community. Many large mutual funds and endowment funds have it written in their prospectus or fund objectives that they are prohibited from buying stocks under $5. A stock under $5 is considered a penny stock. If you want amplified gains, buy call options at least six months out on strong stable stocks favored by the market in lieu of gambling on low-priced stocks. You will have more support from the market and better forecasting results on the stocks whose moves you are predicting. Full disclosure on options… they are risky, complicated, take lots of time to learn, and these lessons are often learned in the form of large realized losses by the amateur.

A very common mistake is when an investor doesn’t want to buy a stock that trades at $300 because he can own 10x more shares of a $30 company. Well, you get what you pay for. If a stock goes up 30%, your position goes up 30%. It doesn’t matter how many shares you own, your gain is 30%. Many large, quickly-growing companies do not split their stock; it is their attempt to keep the public from accumulating their stock. They would much rather have large institutional ownership. That is smart, strong money, and management wants their dollars because other large, smart investors follow institutional ownership. So what if you own 100 shares of a $300 stock vs. 1000 shares of a $30 stock. Simply put, you pay a dollar-per-share premium for owning better stocks, and if you have any brains, you will consider that premium a form of insurance against poor performance in the portfolio. Same principles with the fees or commissions paid for the account’s management. If you want good legal advice, you’d better be prepared to pay for it. Want good dental work? Pay up. If you get stuck in a gunfight and misfire because you tried to save a buck on the gun, it could mean your life. Same principle with money management, that is advice you can take or leave. And pay a guy a fee, NOT a commission. Preferably a fee-based on performance if you might the requirements.

…not to mention the questions that should be raised when faced with cheap money management. Are these people dumb? Don’t they know how much they could justify charging if they were any good at their asset management, at compounding money? Are they afraid to take ownership of the decisions made? Are they worried about staying in business, do they think they are only able to compete on price? Are they giving away deserved income earned because subconsciously they realize they don’t add all that much value as a manager? I think that most long term strategies employed by advisors could be duplicated and even beaten by the average non-professional, if they were inclined to put just a little bit of work in. Smart, wealthy people know when to be frugal, and when to pay a premium. It seems to me that someone who gives their business away for free is either stupid, insecure or has a hidden motive. If you are good at something, don’t make a career out of working for less than what your services are worth.

RM ~Feb 2011