Trading Strategy

By | June 3, 2005

When it comes to buying stocks I know most people would recommend holding it for the long term, or a year’s period to save on taxes. But I think in my case, with the stocks I trade and the strategies for them, I can justify the short term trades. I worked the numbers and it comes out to my favor. See chart for details. Even after taxes of 25% to 30%, the net gains are higher than the long term gains.


Chart

Of course there are risks involve to this style of trading. If the stock explodes upward after I sell then I will miss the boat. That’s why I have developed a strategy that consists of both holding and trading. I would hold half the number of shares, for example, and let that half sit and ride the wave up. And with the other half, I would swing-trade with the waves. The psychology behind that is… with the small amount I have, it will take forever to earn money, so I must be aggressive and cash in on the volatility. For a guy with little money to make lots of money in the market, he must play smart and take calculated risks.

But I am very careful with the companies I pick along with this strategy or else it will be ineffective. I primarily look for companies that have high potential growth and have not been price in yet. I like companies with very strong fundamentals and a low P/E. I look at the market cap, profitable margins, debt ratio, float, insider holdings, cash flow, and earnings growth. Then I look at the companies’ sector and make sure it’s a growing sector. A good company in a declining sector is not going to help. So I make sure that sector is has money coming in and the company has a good chance to make money.
For example, take a look at Cisco:

  • $128 Billion Market Cap (actually this is an exception, I normally looked at companies less than $100MM market cap)
  • 23.11% Profit Margin
  • Forward P/E 18.93
  • ZERO Debt (A big plus)
  • $5 Billion Cash
  • 1.37% Insider Holding (high % matters more in small companies)
  • Earnings Growth 16% Year Over Year
  • Sector: Technology (Very hot right now)

Industry: Networking & Communication Devices (hot and growing). Networking is becoming increasingly more important in areas ranging from small businesses to large business and in government and educational facilities.

I mentioned Cisco a while ago (check on my earlier posts) when it was only 17.xx. I bought at the low and mid 17’s and sold it at high $18’s. Now the stock is at almost $20. I sold all my shares and the stock continued to take off without me, but that was the risk and I was okay with that, because the stock was too expensive for me to have a large holding. Most of the companies I look at are very small, less than 100MM market cap.

For a majority of the people, I would still recommend a buy-and-hold stategy, especially when you don’t want to deal with all the fuss. For my trading style, there is a lot of research involve and I monitor the stocks very closely. I don’t guarantee 100% wins. Nobody can. I’ll do my best and I’ll see how much money I can make. I’ll keep those who are interested in my performance up to date. I’ll post my gains and losses. I don’t mind talking about my losses, because it is part of growing up money-wise.

I will continue to learn and tweak my strategies as necessary. I welcome you all to give constructive criticisms and your strategies for investing.

One thought on “Trading Strategy

  1. Jose Anes

    If I don’t think a stock will keep climbing as fast as it was, I sell it.

    Long term capital gain taxes are better than short term ones. But that doesn’t dictate my investment strategy.

    However, since most of the stocks I buy are from solid companies, I tend to hold them for at least a year. But that is almost a coincidence.

    Money and Investing

    Reply

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