Today I want to share with you a classic investment strategy that's perfect to use when market volatility is high.
I've even given it a brand-new nickname to reflect our focus on the "New West" of Silicon Valley tech stocks.
I call it the "Cowboy Split."
And I'm going to show you that when employed properly, the Cowboy Split will protect you from volatile markets.
But that's not all.
If your stocks go down, on the recovery, you make more money...
An Investment Strategy Perfect for Today's Market
Back on June 27, I told you I believe we are still in the early stages of a generational bull market. That's one that could run for up to two decades.
The U.S. economy continues to gain momentum.
Cars and light trucks are selling at an annual run rate of 16.3 million units. We've had the best five-month stretch of job gains in several years. And we just learned gross domestic product (GDP) expanded at a 4.0% annual rate in the second quarter.
Tech is again leading the way with high corporate profits, strong cash flow, and great operating margins.
However, in that report, I also said that we would see setbacks along the way. No bull market advances without occasional corrections and sell-offs.
Indeed, the markets recently become more news-driven than usual.
U.S. Federal Reserve Chairwoman Janet Yellen's remarks about "stretched" small-cap, biotech, and social media stocks spooked the market for a couple of days. And investors are also concerned about Argentina's second bond default in 13 years, Israel's offensive in Gaza, and Russia's connection to the downing of a Malaysia Airlines passenger jet in Ukraine.
On top of all that, I've spotted a depressing trend this second-quarter earnings season - companies with the slightest hint of trouble see their stocks quickly sell off.
But I'm not worried. This is a great time to take a defensive approach to investing in tech stocks.
Today I'm going to show you an easy-to-use investment strategy that will help you maximize your gains on some of the great tech stocks that could be offered at a discount soon amid volatility and a panicky, over-reactive market.
In fact, I'm getting quite a reputation for my defensive splits.
I have regular late-night strategy sessions with my good friend Money Morning Executive Editor Bill Patalon.
When I phoned the other night to discuss market conditions, Bill came on the line and said, "Hello, Mr. Cowboy Split."
If that sounds a bit silly, that's because my defensive strategy - the Cowboy Split - is hardly academic. However, it is a very effective approach. And my readers through Nova-X Report and Radical Technology Profitshave used it to make some good money in recent months.
Let me explain how the Cowboy Split investment strategy works. In a nutshell, you make "split entries" when you acquire shares of a great tech stock.
With this process, we buy a one-half or one-third entry at market and then put in a lowball limit order to pick up the rest should the market or the stock itself retreat.
To help you better understand the Cowboy Split, I'm going to mosey through two examples... and then we'll watch together as your profits rise.
Cowboy Split Play No. 1
Let's say you have your eyes on our most recent recommendation, Hewlett-Packard Co. (NYSE: HPQ). It's selling at $36 a share. The company is in the midst of a successful turnaround, and developers there are hard at work on a blockbuster piece of tech hardware known as "The Machine."
Let's further assume you want to own HPQ stock for the long haul. You can use the Cowboy Split to buy on the dips and increase your overall stock profits.
Here's how you do that. You start by investing half of your standard stock purchase at market, in this case $36 a share. As soon the market order fills, you enter what's called a "lowball limit order."
You tell your broker that you want to buy a second tranche of HP at a much lower price. I usually use a 20% discount for filling the second half of a Cowboy Split.
You would then enter a "limit order" for the second round of HP at a price of $28.80 or lower. If the stock falls to that price, your order automatically fills, and you now have an average purchase price of $32.40.
Once the stock resumes its climb, you have baked in extra profits. For instance, when HP hits $43.10 a share, your cumulative gains are now 33%. ($43.10 minus $32.40 divided by $32.40 equals 33%.)
Had you bought all the stock at once and held, your returns would have been 20%. ($43.10 minus $36 divided by $36 equals 20%.)
So, the Cowboy Split increased your profits by more than 50%.
But what if the stock doesn't correct and your lowball limit order doesn't fill?
No, you didn't increase your overall gains. But you did get portfolio insurance for free.
Cowboy Split Play No. 2
There's a variation on the Cowboy Split that many pro traders employ. This entails cutting your entries into thirds. Traders do this when they want to pick up more shares at a discount but don't expect a reversal of more than 10% or so.
You put in an order, at $58, for a one-third position and then put in two lowball limit orders. The standard amounts with this approach are a 10% discount on the second tranche ($52.20) and a 20% discount on the third ($46.40).
If the second two orders fill, and you get an average price of $52.30, then you once again would build in extra profits when the stock resumes its climb.
If the stock climbs to $69.60, your gains are again 33%. ($69.60 minus $52.30 divided by $52.30 equals 33%.)
If you had bought and held, knock that gain down to 20%.
As you can see, the Cowboy Split is a powerful investment strategy. It's a great way to play defense when a bull market turns choppy, as it has in recent weeks.
And with this approach you won't get left on the sidelines once the uptrend resumes.
By making staggered entries, we turn market setbacks or declines in individual shares to our strong financial advantage.
So, if Mr. Dow has an anxiety attack, then Mr. Cowboy Split has a plan: Buy great tech stocks at a discount... and make even more money in the long run.
More from Michael Robinson: Hewlett-Packard's technological innovation known as "The Machine" will be a game-changer for the company and its stock. In fact, HP holds the keys to the future of computing...
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.