Don’t Chase Stocks or the Market

The concept of chasing stocks is one that has always been of interest to me. I believe investors chase markets as well. This is similar to the dog who chases the car barking… what will the dog do if it catches it? How does it hold on once it does catch it? The same may very well be true in chasing stocks and markets as they move higher and higher. All of my study has led to one conclusion… we chase things because we don’t to be left behind. We aren’t chasing because we planned or predetermined what course we wanted to take, we just fell or happened upon it and now we want to get on board. The same is true of the dog… happily playing in the yard, a car drives by, and thought, CAR! chase it. The dog thought process was that looks like a fun thing to do, and off the dog goes. What worse than the fact they failed to catch the car is they are now somewhere down the road far from where they were and wondering how they got there. Investing is about having a strategy, planning out your strategy, and implementing your strategy to achieve a predetermined goal or objective. Not chasing every car that drives by only to find yourself down the road attempting to determine what to do now.

I know you want to know why I went of that diatribe or tangent… For the simple reason my email box is full of questions about buying Apple. Is it too late to buy? Do you think it is overbought? Should I buy it on a pullback? My question: at what point did to you decide you wanted to own Apple? Why? What is the objective… and please don’t insult me with the answer of, “make money”. Buy stocks is a risk/reward proposition and understanding the why is equally as important as the how.

Let’s put this is a real life example… My wife last summer asked me if I would buy some Apple in her IRA account. When I asked her why, the reply was simple, I like the company and I believe they are going to do well over the long term. My response was, okay, when the chart sets up to give us a reasonable entry point I will add a 5% position in your account. On a test of the uptrend move in late June the stock dropped 5% and we established an entry point of $91  and added the shares. In September the stock again tested lower and held support again. This time I asked her if she would like to add to her Apple position as the test gave a good entry point if she wanted to do so. Her answer, yes. We added another 5% to the account at $100. And the story goes on as we added and sold share over the last five months to trade the volatility in the stock. When the stock broke above $120 I started getting emails asking about owning the stock. Having run up 30% from the purchase point last summer, I was looking at the chart and asking why would you chase it here? I am not in a position that I like to give blind advice first of all and second, when a stock runs vertical from $105 to $133 in five weeks you should be thinking about locking in profit not buying your initial position. The chart below shows the move in Apple off the January lows, but also the run higher since last April. Chasing stocks is not my idea of an investment strategy. Predetermining why, how much, time frame and risk management are planning and implementing a strategy. If I wanted to buy apple today… I would look at what strategy works best going forward, plan, execute and follow my discipline.

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If we look at a chart of the S&P 500 index we see a similar move in the index as we have seen in Apple. Some of that is related to the market capitalization of Apple within the index, but the move higher has been aggressive is a short period and the risk is elevated as well. I am not in the business of predicting where stocks or indexes go looking forward, but I am in the business of managing the risk associated with my money. Determine your exit points now should the market sell off, not when it sells off. Equally determine your entry point should the index test support and bounce giving your a reasonable risk/reward trade. It’s Your Money… Manage IT in accordance with your strategy and objectives.

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