What Are Investment Tactics?
An investment tactic is an actual routine or practice that you follow, in order to make the "buy" decision. It differs from a strategy, which is a broader approach (buy stocks in booming markets, for example.) As an example in a previous Stock Brief, we gave the following:
"Before buying a large stake of 1,000 or more shares in any stock, buy 100 shares. Then follow the stock while researching it, or learning more. Having some money on the line forces you to pay attention."
A number of readers responded that they actually follow this practice, for investment premise purchases. For example, DB99 wrote:
"You are quite right. Have been playing with 500-800K. Used to hold 8-10 Stocks 500 - 1000 Shares / Position, with much Research, and many Watch Lists before buying, switching. Recently have been selecting Sectors and buying 100 Shares each, holding about 30 Stocks, - this is my Watch List - sell the Losers and increase positions on Winners. You have to be IN THE GAME to follow stocks."
But other readers took the opportunity to share their own tactics.
The Expected Rebound
One tactic, submitted by Howard Grunfeld, is to note when a stock hits a new high, then backs off. If it rebounds, which Mr. Grunfeld believes it usually does, it's a good short-term buying signal, as explained below:
"The following tactic has proved successful when the market has been up-trending. If a stock makes a push to a new high (significant move) of 3-4%, and the stocks tends to be volatile, patience has shown me that you can expect a backing of exactly 10% and then if the market is still with you, an immediate bounce off of that point to new highs if the stock is strong or at least 5% in a matter of hours."
Your own results may vary, of course, but this one is certainly "testable."
Combining Technicals with Fundamentals
Another tactic, submitted by MM8006, is based on finding a good stock, on fundamentals, but then waiting for a good technical event to actually make the purchase.
- Find stocks from articles on the Briefing.com site, newspaper, magazines, etc.
- If stock concept (fast growth, growing industry) makes sense, pull research report from [online broker].
- If current ratio, debt/equity, and growth in-line, add to a shopping list on the portfolio screen.
- If news/upgrades make sense, wait for good stochastic.
- When stochastic good (20% or less and rising), price decent, and overall environment OK (Fed not meeting next day), I will buy about $10,000 worth. If the story stays intact, will buy another 10 to 20K worth. I am up about 45% year to date, and 85% year over year. If I could figure out how to sell, I would probably be up almost double.
Buy Them When They're Down
Dan Kucera submitted a variation on the tactic above. He focuses on earnings per share from leading companies as criteria for potential purchases but then waits until the stock falls out of favor.
"I was the first subscriber to the Investor's Business Daily in the state of FL in 1987...They had to mail me the paper as opposed to a.m. delivery... I was a Merrill Lynch broker for 15 years ending in 1999 and now am the portfolio manager for a medium-sized private equity fund."
- Buy Leaders
- Buy the best EPS
- Buy coming out of bases, with volume increases
- Buy when other people don't want them/order imbalances
An order imbalance can be seen with Level II screens (for Nasdaq stocks) and is when sell orders vastly outnumber buy orders, driving the price down. It is roughly equivalent to the basic concept of "buy low."
Insurance
Another tactic, submitted by Tom Quindry, is based on choosing two stocks, then, over time, selling off part of the position in one in order to buy more shares in the other. This is done whenever the faster-rising stock gets far enough ahead to purchase more shares in the slower.
"After I have picked the companies that I will invest in, I pair off stocks that I will focus on. I will buy and sell between pairs of stocks (in IRAs) when I can get more shares of a previously held stock than I sold to get the stock I now have. My strategy is that I don't know which stock will do better, but I do know that both stocks are good. I can use this strategy even if both stocks go down in price."
"As long as I can buy more shares of the previous position without an additional outlay of cash, I sell and then buy the other. This seems to be better than just holding one position since I don't know which stock will gain more in the long run. I hold as long as it takes to get the advantage."
This rebalancing tactic forces the concept of "buy low, sell high" on an ongoing basis.
Know Yourself
Finally, a number of people wrote passionate descriptions on how they learned their particular tactic, and not as much on the tactic itself.
In fact, JSH submitted the following "code" he adopted, after losing nearly all his money in his first six months of trading:
"I wish you to publish this so that NO ONE has to go through the pain that I went through."
Past is experience, learn from it. Do not regret.
Future is mystery, anticipate it. Do not hope.
Present is opportunity, embrace it. Do not fear.
Opportunity is belief, believe it. Do not doubt.
Believe in Yourself. You are the Market.
If I want to be a trader, I must develop courage.
If I want to be a consistent trader, I must develop discipline.
If I change myself from inside to the Market, only then, I will become a great Trader!
Regardless of whether you agree with these particular principles, the important thing to note is that JSH came to grips with his own personal set of principles.
In the end, this is the strongest and best investing tactic of all: know yourself. Most investing mistakes come from taking positions you don't actually understand, or which make you extremely uncomfortable.
When you find a way to trust your own judgments, you have found the best tactic of all.
