Monday, April 28, 2008
A lot of my subscribers and students still just don't get it when it comes to my perspective on how to uncover the buried treasure. And I know why... it's because they're hit from all angles with different philosophies and points of view. So I thought what I'd do for this Rapscallion Report would be -- once and for all -- to present to you what I call "the Pirate's Code".
These are the rules and guidelines I live by.
They guide every decision I make in the market. You'd do well to "keep to the code" yourself.
The Pirate's Code For The Sea-Going Crew
27
Declarations for Smooth Sailing,
Dry Powder
and Hauling in
Loads of Shiny Treasure
1. 3 out of 4 stocks move with the general market trend.
The action/cycles of the stock market take 3 out of 4 stocks with it. You need to be aware of this! Work with these cycles instead of against them. In just a few minutes each day, IBD's Accumulation and Distribution grades for the major market indices points out the trend.
2. When the stock market swings up, it's natural for a new crop of names to emerge as leaders.
When a new upswing cycle emerges, very often it is a different crop of stocks emerging as the new leaders. If you haven't heard of a company before, yet its leading and begging you to get involved - get involved! It will likely be "known" in a few more months by all the talking-head pundits and "experts"! (remembering the set-up opportunities I show you of course!)
3. The upside is more predictable and profitable than the downside.
Generally…you're going to have more success taking advantage of stocks moving to the upside than you will trying to profit on the downside.
4. Personality change.
The best trading opportunities are on stocks undergoing a change in personality. This "Jekyl and Hyde" change in personality shows up in the price action and volume.
5. A stock's price is…
Stocks exist for their earnings potential, not to humiliate you into submission! Stocks are priced today based on everything currently known about the earnings potential in its future.
Never forget: stocks are priced today based on anticipation of FUTURE things. Individual stocks and the stock market look FORWARD!
6. Pundits, opinion makers, and the news media endlessly report and repeat what's happening today as well as what's happened in the past!
7. Beware of amateur hour.
Don't get involved in the market during the first 60 minutes after the open - this is known as "amateur hour" - you'll often get the best "fill" price of the day in the half-hour after amateur hour.
8. Warning signs to help you decide when to sell.
If in doubt whether to sell or not…remember these warning signs:
If the CFO suddenly resigns (usually the reason given is to enjoy more time with the family), if the company changes accounting firms (this is usually noted in a newswire story), if the company beats earnings yet provides cloudy guidance, or if the stock simply covered too much ground on the way up, inviting profit-taking.
These are some important warning signs that should not go unheeded…your "lookout to sell-out."
Remember also the 30-Day low rule. If you are wondering whether or not to get out of a stock, you should get out if it starts to trade below the low of its prior 30 days. If you remember no other "code" than this - this will serve you VERY WELL.
9. Stocks often move to extremes
For bullish situations: If you notice a stock price that is 100% over its 200 day moving average line, that's usually a sign of an over-extended stock.
For bearish situations: An extreme here is a stock already in a downtrend for months…then it has a one day plunge to a new 52-week low with a volume bar as tall as a redwood tree (perhaps 10, 20 or even 30 times the normal daily volume).
Chances are it's an overdone move.
10. "The trend is your friend"…until YOU get in!
The longer you notice a compelling uptrend - the CLOSER that trend is to stopping dead in its tracks.
Also remember, nowadays millions of other eyes are peeled on the same charts you're looking at! Bottom line is you have to get involved in trends MUCH SOONER!
You want to get involved in strong stocks that are making new highs…but remember: all 52-week highs are NOT created equal! (I like a stock that's made a new high - where it's been a few months since its been able to do so!)
11. The question "how much?" is as important as the trade set-up itself!
Winners should be added to - making the winners bigger. Losers should never be added to (keeping them small) and losers need to be cut-off before they get too big. If you develop the skill of being a professional loss-taker, it will be one of the best "skills" you can develop.
12. Many of the "conventional wisdoms" and "industry standards" of the stock market ARE WRONG.
What you've come to know as conventional wisdom is all wrong.
In fact, with every industry there are "industry standards"…that are by definition WRONG.
The proof?
Almost every mega-success story you hear about in the business world comes about by smashing the "industry standard" to pieces! Fred Smith (Federal Express), Michael Dell (Dell Computer), and Steve Jobs (Apple Computer) are just a few examples.
13. Asking the wrong questions.
Most investors straddle the fence of frustration - mainly because they ask the wrong questions about why they should get involved in this stock or that. The most important question to ask before ever buying a stock is:
"What's going to make this
stock go up after I
buy it?"
14. "Fundamental Analysis" are the two most expensive words in the English language.
Memorize this kernel of gold: "A stock can remain undervalued far longer than you can remain solvent!"
15. Newer companies have more growth potential.
Newer publicly traded companies (less than 7 years old) can do a lot of moving compared to older rivals. In choosing between two bullish set-ups, I almost always go with the younger of the two!
16. Never been a better time to be a stock market investor - NEVER forget this!
There's NEVER been a better time to be an online investor from home.
Commissions have never been lower.
Computers have never been cheaper.
Ease of executions (and things like canceling orders and replacing them with new orders) have never been faster or smoother! And the new wireless world we live in gives you more freedom to be anywhere - than ever before!
17. Understanding the "stock split timeline" can be very lucrative.
18. Strong stocks are strong for a reason. Stocks stuck in the gutter are stuck in the gutter for a reason.
19. You never know how high they can go and you never know how low they can go.
20. I almost exclusively use options when taking advantage of Buried Treasure set-up opportunities in the market!
With options you risk a fraction compared to going with the plain stock.
Yet the upside is the same…UNLIMITED UPSIDE!!
It's time to become more familiar with options if you aren't. The stories of gore like "98% of options expire worthless" is pure horse-puckey and urban legend (like most 'conventional wisdom' is).
21. Wall Street Analyst Cartel Danger
Years ago I coined the term "analyst cartel". I've said for years that Wall Street analysts, through the media, control a substance FAR more powerful than the oil or illegal drug cartels. This powerful substance is INFORMATION.
In any given day, billions of dollars of wealth are either created or wiped away with so much as an utterance from the "cartel".
These analysts are powerful creatures and they are dead-set on separating as much money from the individual investor with their 'upgrade/downgrade' shenanigans as possible.
There are legit analysts, but they get hired away into the private hedge fund world.
The analyst cartel is a beast you will encounter numerous times in the stock market investing jungle. The smart investor recognizes this danger and doesn't get sucked in.
22. "House money" is a false belief.
Doing wild, risky and plain dumb trades and telling yourself it's the "market's money" is amateur…you need to commit to change this.
Usually this happens when you've recently scored some great profits. For some reason too many people get loosey-goosey and slap-happy telling themselves it's "house money".
The thinking, I guess, is the money was somehow never theirs!
You instead need to have a "smuggler's hold" mentality as you bank gains.
Your gains are YOURS NOT THE MARKETS! I've seen this subtle change get adopted by many good people and the results they enjoy seem to multiply many fold!
23. "Buying low and selling high" has been bastardized…it's done all wrong!
Strong stocks are likely to get stronger while weak stocks are likely to continue on in the gutter. Most people buy crappy stocks telling themselves they are buying "low". Yet these stocks might not ever move again. In fact, they will often go lower! Why do people do this? Because of bloody charts!
Get this and get it good: Buying in on the right stocks (that are strong and moving higher) will always seem "high"…yet after you've kicked ass with it over a few months, in hindsight your buy-in price will look "low"!
Go figure!
24. Opportunity Lost Cost is by far your most expensive cost.
What's the most expensive thing that could happen to you? Some people say commissions, others will say the most expensive thing would be your stock "Enrons" and blows up, meaning you lose it all.
But both of these answers are WRONG-O.
In fact they're not even close to being the most expensive thing that could happen.
The most expensive thing that can happen in any one given trade is the "opportunity lost cost" -that is- when you tie up money in one trade versus NOT tying it up with another opportunity.
It's Deciding NOT To Use That Money For
THOUSANDS
of Other Trading Opportunities!
Get it?
That means a $10,000 trade could cost you $20,000, $40,000 or $60,000 in LOST OPPORTUNITY. Think about THAT the next time you contemplate a trading opportunity.
25. Each stock has its own "rhythm" - the only way to really FEEL this is by buying in and owning some.
26. I've generally not liked restaurant, airline, trendy retail, grocery store or semiconductor stocks.
There's no bigger fan of awesome restaurants like PF Chang's than me.
And no bigger fan of the miracle of flight with today's safe and mostly reliable air travel, than me.
Yet, they make for lousy stocks.
These stocks hardly ever trend and the news cycle seems to beat them around unpredictably. Even if the set-up opportunity begs me to look and get involved with them, I will almost never get involved with these kinds of companies.
27. The dynamic economy.
What most pundits miss and what you should never forget is how dynamic the economy/stock market is.
What does "dynamic" mean?
The dictionary says: "force related to motion", "resilient energy" and "effective action".
All I know is our capitalism system is the envy of the world
and is
a ceaseless WEALTH CREATION MACHINE
(notice the word "creation"…our
economy IS NOT a zero-sum game with a finite pie!).
America's freedom has instilled in us a spirit of adventure and sparkle for
experimentation.
It has instilled our "can do spirit" and "American ingenuity".
This makes our stock market the ENVY of the world.
With new technologies and ingenuities at a non-stop pace… entire new industries, categories and sub-categories of products and services spring up almost overnight!
The profit motive along with "creative destruction" benefits the customer with better and better quality with lower and lower prices!
New companies "IPO" into the stock market every single year with their new and unique ways of serving and producing a bottom line.
Never in history has there been better economic possibilities!
Never has there been a better time to be a stock market investor which directly plugs into this miracle system. You already know this because you've been attracted to it…after all, as an American, this is hard-wired in your DNA!
So there you have it. My "Pirates Code" to live or die by when it comes to the stock market.
This code forms the basis of all my thinking and philosophy about the stock market.
It keeps me safe -- and it keeps me making money.
So print these out -- put them next to your trading area -- and whatever you do -- make sure you...
Keep To The Code!
Yours for Bigger Winners, More Often,
Preston "Pirate" James
P.S. If you haven't signed-up for the "Options Mini-Course", you might want to do it. Even if all you need is a brush-up... it will really help. And if you're brand new to options -- it's a great place to start! Look for the opt-in form on the upper-right of this website.
P.P.S. I've gone to the trouble to put this Rapscallion Report into PDF
format. Right-click on this icon:
and
choose "save target as..." or "save link as... " OR... if you have Adobe PDF
installed, just double-click on the icon and it will open in a new window so you
can print it out!
