Why I Capture Short-Term Stock Gains.

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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.

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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.

Conclusion

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?

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15 Comments

  1. I guess this is one of my biggest challenge as I learn investing in stocks. I tend to get emotionally attached to the stock I am buying as I buy the stocks like an entrepreneur looking for a good company to own or part-own. How do I get over this emotional attachment so I can excel in trading? How do I become a trader instead of a long-term investor? Like you said, there are opportunities and money to be made in selling which can also mean letting go of the company I love. Do you have any advice on how to be tough emotionally so I can freely let go of a certain stock I own?

    • Sounds like I should write a post about how to remove or at least limit the emotional side of trading.  Start by approaching it as a business,  What do you want out of purchasing the stock?  Do you want the good feeling of supporting a company you love that ‘ownership feeling’?  Or do you want it to make you money?  Most people approach investing by trying to invest when those 2 things align?  For stocks where you want the ownership and want it to make you money you can start by having those stocks be part of your buy and hold portfolio.  If you want to try the short term try to remove any connection to the company and look at only the amounts.  See my upcoming Q1 results for more scenarios of why I chose the trades I did.   

  2. Great information. I am not versed in stocks, your graphs are very useful for visual stimulation. You were detailed in the information you are giving. Using your own experiences gives trust to what you are trying to convey to your audience. I think this page is well put together and your explanations are easy to follow.

    • Thanks, glad I can show from actual experience. I want to be open with real results and maybe can provide more recent results or share current trades and let you try them out in real-time.  Look for more to come soon.  

  3. I recently opened an on-line broker account to do my own investment but have so far invested mostly in tracker funds. I find it interesting that you mention you put a 2% selling limit on the stock as soon as you buy it. I had never heard of that and of course there is always the worry that the stock market will go down before you can capitalize on your gains, so this is an interesting concept.

    • I emphasize if you want to do more trades you need to eliminate the trade commission.  It’s ok for large sums of money invested for long-term but makes no sense if you’re trying to do smaller trades.  

      I add the limits to help remove any emotional side or hoping it goes up even more.  But once I realize most stocks are cyclical or trend then I feel I can find a stock at any time that has the potential to do the same thing.  At times I’ve put a stop limit so it would sell if the stock drops more than 10%, but more often than not I ride through any drops and pick up a few more shares at the lower price

  4. Hi Marc, 

    I have watched my rich uncles start out small and make it big with stock trading. I am interested it joining the stock trading business, but I don’t know if I have what it takes. 

    To be successful in stock trading, one has to apply alot of intuition and objective calculations, sometimes it all boils down to chance, that’s where you need to follow your gut. 

    If I become a stock trader, I that I will stick to short term stock gains, I don’t have the patience for the long term stock gains. 

    • Good luck to you.  Remove the emotion, make some limits for yourself and put it in auto-drive.  Then research and repeat.  

  5. Hi,

    thanks for this post! Being a beginner with investing, it is always nice to see someone more experienced than myself talking about their own experience. Your analysis of short-term vs. long-term investments is really interesting and it seems to make sense to rather go for the short-term gains now.

    II still have a question about the post. How do you include the risk of an investment in your evaluation? It seems to me like keeping a stock longer increases the risk of it losing value. Am I wrong and if I’m not, is there a trick to estimate the risk of an investment?

    • A great question and one that is never quite answered.  The current stock price is based on revenue and debt and earnings and how all that works together.  But basically, the simple way to look at it is what someone is willing to pay for it today given all of the information about the company.  If bad news comes out tomorrow or the company declares they are going Bankrupt then the price will drastically crash.  Or if the company ‘beat earning estimates’ then it’s doing better than expected and people will be willing to pay more for it.  It takes research on particular stocks (there are a number of free services that can quickly evaluate stocks for you as well. Check stock grader or stock report card).  For the individual user it’s too much to try to do it all on their own so I would recommend finding some brands or sectors that you like (Biotech, REIT, Energy, Tech) and then finding some stocks in that sector and watch them and check their charts, see why it spiked at certain times or why it was low at other times.  That will help you build a baseline value for it.  Lately, I’ve stayed away from overvalued tech companies since I got burned with some in the dot com bubble and can see similarities.  There are a few tech companies that are diversified enough for the future that I would consider them, for the right price.  

  6. Hi Marc. Your post is very nice and I support every bit of information on your post.

    I’ve been a constant trader of the stock market for some years now. Though I have made some unimaginable profits but I’ve also been on the losing end for most times due to the fact that I hold too long trades. It was later on that I got introduced to the act of capturing short term gains. Owing to the inconsistencies in the stock market, it is highly advisable to stay on the safe side by capturing gains early rather than waiting for later. This would enable constancy in gains and reduce tendencies to bigger losses.

    Your post is insightful.

    • Glad to hear you’ve come to realize this as well.  There’s another post that talks about unrealized gains and losses vs realized.  Is it better to have an unrealized gain that you keep hoping for more,  or is it better to realize it and capture those earnings and work from there.  Money in hand is always better than one on paper somewhere else.  I have a few private investments that haven’t paid out yet, they show great on the website but until I can receive it, it means practically nothing.  

  7. After reading your article, I found that you have discussed about trading in the stock market is a technical game being played with emotional human beings.You have an experience about why I capture short-term gains in stock marketing. Its really very helpful information to build up a career on stock marketing. Thank you so much for sharing this  information.

    • Glad I can help, just like anything else you start you should research well before you go all in.  And learn what you can.  It’s amazing the number of people who don’t spend the time learning about finances.  Just trying to break down ways to help no matter the current skill level.

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