Editor's Note: Sitting on the sidelines during record highs only means you're missing opportunities. Playing markets proactively with D.R.'s loss-limiting strategy – just as relevant today as when he first introduced it in 2015 – can help insure your portfolio against any sudden drops. Here's D.R…
One phenomenon I find holds true in trading and investing is that some things that diehards think should not go together just work.
It's a lesson I learned early. It came from my love of eating, which led to my love of cooking. Specifically, it was a batch of hot, gooey brownies followed by a swig of beer – and, believe it or not, how delicious that odd combination turned out to be – that taught me to explore what the unexpected could do…
In this case, the unexpected combination that makes this strategy work so well pairs value investing with technical trading. This open-minded approach made my investing immensely more profitable because it turned me on to a "trick" that got me 70% fewer losing trades…
And I'm sure anyone who tries this trick – even dyed-in-the-wool value investors – is going to be delighted with their returns, too…
Improving on the Work of Graham and Buffett
Two of the most important names for value investors are Benjamin Graham and Warren Buffett.
Benjamin Graham is considered the "father of value investing." When he passed away in 1976, after a long and wildly successful investing career, his protégé Warren Buffett continued in his footsteps, digging deep into the data to find undervalued stocks – as all value investors do.
D.R.'s radical "hook" strategy has given his readers the chance for 50 triple-digit winners this year, including gains like 241% and 219%. Details here…
Graham and Buffett both laid out many ways for value investors to find those companies that are great values.
For instance, they can use the "margin of safety," or the amount a company trades below its intrinsic value.
And then there's "Graham's Number," which is the concept of subtracting a company's total liabilities from their current assets and then dividing that number by the shares outstanding. Graham himself looked for stocks where the price was 66% of the Graham's Number – a deep value.
Later on, Buffett put his own spin on Graham's teaching. He looked only at the raw balance sheet and income statement numbers and had a good feel for less easily measured characteristics like competitive advantage and management strength.
Following in these giants' footsteps, today's value investors in general look for either distressed companies at fire-sale prices or strong companies that are trading at a significant discount. And many a great stock or opportunity is found.
The problem is that value investors are notoriously early.
Wall Street is practically paved with sayings about buying stocks too soon during a down move. "Don't catch a falling knife" or "don't catch a falling piano" are similar phrases that remind us that buying too early can be painful.
So what is the well-informed value investor to do?
Well, they can do what technical traders – like me – do when they're looking for good prices on great stocks at the right time…
Join the conversation. Click here to jump to comments…
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.
Please advise on recommended stop loss strategies; how low to allow options values to drop before bailing (percentage below entry price; or time before expiration date if value is headed down). Also, is always trying for a double (100%) the best approach? — or is settling for a lower % gain, a better strategy, as many times I’ve had trades fail to double, but even a 30% gain is nice.
Thanks for your excellent advice,
Paul Cooper