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 SP 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.
http://www.articlebiz.com/article/1051305240-1-bottom-fishing-with-the-bears-by-ivan-cavric/
