Why I Capture Short-Term Gains.
If you could buy a stock low and watch it go up when do you sell? Do you capture your short-term gains? What if the stock goes back down? What if the stock plateaus (happens quite often)? What else could you be buying instead? Is it better to buy and hold forever or play the short-term gain?
Let’s Take a Look at My Own Experience in History, Shall We?
Growing up in the 90s all I noticed was the stock market went up. It was awesome you couldn’t miss (similar statements have been made recently). On paper I up and up a lot. One of the memorable trades I made was to get in on the hype of the Red Hat IPO (RHT).
It was said that this had the potential to compete with Microsoft and Windows with their modified Linux system. The hype for the IPO was crazy. I put in an order and bought it around $50 a share. The stock started around $43 it spiked around $55 and then went back down a month or two later. In November is climbed up past $100 and peaked at $136 in December 1999.
Riding High and Free Falling
It announced a share split already and people were talking about it going up to $400. But don’t believe the hype. In January it slowly continued to drop to around $20 and finally settling in the mid-single digits range months later. What happened!
I personally don’t know. Back then it was harder to get news updates on companies and get the full picture. I can’t even remember what I did with the stock (I may still own some of it on an old brokerage account), but I do always look at back the potential of it I would have sold the stock while it was high?
I could have waited and if I liked the stock I could have bought some up again. Currently, it’s finally higher than when it was first released, but should I have had to hold onto the stock for 20 years just to break even? But that’s another story.
Corning the Maker of Plates – and Now Fiber Optic Cables
My next experiment was buying value with Corning (GLW) after the crash of 2000. I had kept hearing about Corning and how they had become the largest supplier of fiber optic cable. And at a time when high-speed internet was still in its infancy it seemed like Corning could be the next great supplier, it climbed in 1999 announced a 3-way split peaking just over $100. But what happened next was it would get hammered and start cutting dividends which made it fall even more.
It would hover between $6-$10 for about a year before a scare of bankruptcy and restructuring from vast growth in new plants. The stock would drop the summer for 2002 from around $5 a share to just over $1 a share for a few months until it was realized that they would recover and continued to post improved financials year after year for the next few years.
However, even though they would continue to improve each year the stock would spike and plateau for a few years then jump up again and plateau for another few more years until about 2009 when the stock would do well for a few years and then drop and then build up a year later and drop and now it’s up in the thirties.
I did buy when it was less than $2 a share. I can’t remember exactly how much it was, but it was $1 something. Let’s say I bought 100 shares at $1.50 each at a total of $150. It wasn’t much to risk seeing how it would turn out. Total they would be worth over $3000 (almost 20 years later). However, I remember I did sell them after a few years of buying them for around $13. So, after 2 years they were worth $1300.
The choice of returns – 2 years or 20 years?
Here is a question if you invested $150 today and had 2 options.
Option 1 you would receive $3000 in 20 years.
Option 2 you would receive $1300 in 2 years
(Using the calculation from https://www.wikihow.com/Calculate-Annualized-Portfolio-Return)
Option 1 gives you a 16% return per year. Not bad considering the S&P average has been closer to half of that over that.
Option 2 gives you a 194% return per year. Much better as far as you capture those gain.
Hopefully, you chose Option 2. If you continue you hold on you earn 4.7% averaged per year after that. Those are not great returns compared to the average market return of 8%. If you sold you could have found another stock to hopefully ride for another year or two earning higher than 4.7%.
For my own curiosity if I sold after 2 years and moved that money into an index fund earning 8% I would end with just over $5000 instead of $3000 over that same period.
Capitalizing on Your Returns
Would you rather earn 1% a month or 8% over the year? Hopefully, you realized that 1*12 = 12 and 12% is greater than 8%. I’ve taken when I have an decided to start putting smaller gains into practice. If the stock goes up 2% within that month I sell it. Sometimes I do it for 1% as well. But I’m surprised how many times I can get to 1 or 2 % sometimes it only takes days. This can considerably increase your returns if you compound and reinvest multiple trades in a month.
I break out my account to have only a handful of stocks (typically 5-10) and I’ve watched them for weeks before or await bad new and see if it’s overreacted, but most I find have dividend returns that I would be fine holding on long-term and receiving the dividend.
Start small (can start as small as $50) and pick a few stocks at a time you can even purchase a single share to start. I use a non-commission trading platform such as Robinhood or Sofi and put selling limits in for 2% immediately after I buy the stock. This helps take away any emotion I may have if I see it spike up to 3% one day only to see it drop back to 1% the next. A 1-2% a month gain is a win seeing that the market considers 8% a win.
What I’ve briefly mentioned is what others do on a more consistent basis. However, because of the risk involved, it is worth discussing that most people who have identified these trends and high claims instead sell their ‘information’. Why? Because they can’t be blamed for bad trades if they promise high returns but make it all up to the user to make the buy trade and choose when to sell it.
Beware of Stock Tip Subscriptions
While there are a few respectable and full-service subscriptions out there, some others you should seek out with caution. These make these claims showing 3 and 4 digit returns and want you to subscribe and pay them for their advice, but most of the time the advice only goes so far.
In some scenarios they pitch certain penny stocks they’ve bought up before they recommended them, only to wait for their subscribers to purchase large sums of the stock and raise the price temporarily, as it rises they sell out and take their gains dropping the value of the stock again.
However, it can be done with practice and experience. We’ve shown it here with a theoretical scenario with Tesla Stock during 2018 and in the upcoming posts for the 2019 Quarter 1 results of short-term trades. It takes time and discipline, but you don’t have to be an expert. If you don’t want to research and make the trades, then play the safe long buy and hold game or invest in some alternative investments that pay double-digit returns with partial guarantees.
Just remember trading in the stock market is a technical game being played with emotional human beings. If you can limit your emotional response you can come out on top and win more times than not.
What have you learned from your trades over the years? Have you held onto some ‘too long’ where they plateau or have some regrets of missing out on a good time to sell?