Most Money Is Made By Waiting, Not Trading

Investor's Business Daily
Most Money Is Made By Waiting, Not Trading
Thursday September 14, 7:00 pm ET
Trang Ho

A common mistake for stock market investors is overtrading. Learning to sit and wait is one of the biggest challenges for many.

Jesse Livermore, one of the world's greatest investors, said: "It is never your thinking that makes big money. It's the sitting."

Stocks stair-step their way higher by breaking out of basing patterns, running up and then forming new bases from which they break out. Savvy investors learn how to hang on to leading stocks that go through normal pullbacks rather than sell them.

Beginning investors are often shaken out of winning stocks because they buy incorrectly. You can avoid that by buying a stock within 5% of its buy point in a sound base. Studies of past winners show that stocks breaking out of sound bases on heavy volume rarely retreat more than 8% from the proper buy point.

So buying right will let you sit longer with winners.

They don't all work, of course. So you should always sell if a stock falls 8% below your buy point. That saves your capital for stocks that do work.

After a substantial run-up, a correction of 8% to 12% from a peak is considered normal. If you buy a stock on a breakout and it goes up 20%, don't sell just because it pulls back from its high. Watch to see if it can resume its run or carve out a new base.

Just be careful not to let such gains turn into losses by holding on as a stock falls back below the original buy point.

And keep an eye out for stocks with extra oomph. One that shoots up 20% or more in only one to four weeks should be held for at least eight weeks unless it falls all the way back near your buy point.

Stocks that show this kind of strength often double or triple in short order. But they often correct sharply, shaking out those who don't follow the eight-week rule.

A stock's daily price and volume action compared with the major stock indexes can help in deciding whether to sell. One that goes sideways or falls as the market advances is weak.

You should hold on to CAN SLIM leaders unless they trigger key selling rules laid out in William O'Neil's book "How to Make Money in Stocks." Sell signals include stocks breaking down through their moving averages on heavy volume, showing signs of heavy distribution or entering a climax run.

University of Phoenix Online, which is no longer traded, formed a base-on-base pattern two years after its IPO.

The bases prior to these were wide and lose and would have bucked off investors following the 8% loss rule.

By November 2002 the stock had formed a six-month, cup-with-handle base with a 34.20 buy point (point 1). It ran up 17% and formed another base.

The second base corrected 22% (point 2 )and bottomed at an intraday low of 32.70. Although the correction from its peak of 40 was rather deep, it fell only 5% from the 34.20 buy point of the first base. So you could have held on without sitting on a big loss.

The stock resumed its run and broke past the 40.10 buy point of the second base.

University of Phoenix peaked 13 months later at 94. It had advanced 134% from the 40.10 buy point and 175% from the 34.20 buy point.

Along the way, the stock pulled back to or below its 10-week moving average many times (point 3 )and offered additional chances to buy. But it never fell below the buy points.