Risk Control Yet Again – LULU GEOY EXLS PANL

By now I think you are realizing that risk control by way of money management is absolute key to successful investing. I wish to talk about risk control yet again this week. Last time we spoke about how you can develop a broad base of stocks with very little money at risk. Each one of those purchases is like planting seeds in your garden. Some seeds will die (stopped out of stocks at a small loss) and a few will grow into big acorn trees (stock winners). We need to discuss how to take advantage of those companies with massive price appreciation. Since we only made a small pilot investment in each of those “seeds” (as discussed in the past) we will make very little money from them even with tremendous price growth so read on.

As well as broadening out our base of stocks we need to be adding to the companies that are going to start moving up. Companies move up in spurts then consolidate only to break out of new consolidation bases and move up again. A stock will move up 10, 20 or 30% perhaps then you will see some profit taking followed by some sideways movement called “basing” before it breaks out on volume and starts moving up again. Imagine a stock is owned at $20 and starts moving up to perhaps $21. Now is the time to move the sell stop up to break even on the $20 purchase and buy more stock at $21. As it moves through $22 you buy more raising the sell stop on the $21 to $21. Once the $22 purchase starts moving up you can raise that protective sell stop up to $22 as you prepare to buy more. You should have many purchases on the way up with many sell stops in place at your purchase price except for the last one you purchased which you can only lose a little money on if the stock starts falling back. One point I would like to add here is only buy more of a stock if you see the upward movements are happening on increased volume.

At some point the expected sell off will materialize and a few of your recent purchases will get sold at “BREAK EVEN”. It is important to note you are NOT losing money since you are selling at the price you paid for that stock (remember you raised the stop on all purchases to sell at break even). A good company will stop selling off at some point as the sellers dry up and the stock will start its basing or consolidation before starting another move up. Once it breaks out again on volume you can continue your purchase program.

As your holding in a company becomes much larger from continuously adding to the position you can consider raising the quantity of stock you buy. Imagine buying one units of stock 10 times so you then own 10 stocks. There is not much point in continuing to add one more unit each time, why not change it to 2, 3 or even 4 units. You can see that the more stock you own then the more stock you can buy and still not increase the risk since you are using “house” money from all the gains you have made previously.

Ultimately a great stock will start falling on heavy volume and it may be time to sell. If you see a high volume sell off then sell half your holding. If it continues sell the other half.

Finally if you have a portfolio of stocks that you are adding to (the garden) then consider the following. You have strong stocks and weak stocks so start selling a little of the not so strong stocks and add to the stocks that are doing very well. If those super stocks go into a consolidation phase then sell some of that stock and add it to the stocks that are still moving up.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

LULU - $47.42

GEOY - $42.14

EXLS - $19.98

PANL - $25.60