As always I never seem to have enough time to really think hard and focus on a Blog and I have one formulating in my mind about the Evolution of an Investor which should cover how we mature as Investors (and Traders to some extent) as the Years go by and what this means in terms of how we behave and how we deal with the Markets from a psychological and practical viewpoint. Hopefully in the Blog I eventually produce there should be a lot more to it than that but as things stand I am just not in the mood to start on that one so I am jumping into what I think will be a much more straightforward one and I can bash it out with little (if any !!) preparation.
This is one I have had in mind for years but only now am I finally getting round to it - silly really cos in truth it isn’t all that complicated although it is a hugely important Subject and I suspect Readers (especially Peeps early in their Investing Evolutionary Journey) will find it a really valuable and insightful concept.
Many times over the years I have alluded to the differences I see between ‘Long Term Investment’ and ‘Short Term Trading’ and I have also written a specific Blog on the subject which I will put a link to in the now customary ‘Related Blogs’ bit at the end of this one. This Blog is very much a practical example of why it is so important to understand these differences and one of the first things I suggest anybody who is new to the Markets should do is to understand and decide what kind of Participant in the Markets that they want to be (or think their Personality / Skillset / Lifestyle is best suited to).
For the purposes of this Blog I will just simply define them as follows:
In addition to these Categories of People, we also can simplistically define 2 types of Stocks as follows:
Right, now we have done those Definitions, now you need to concentrate as we are going to do some clever Venn Diagrams like you used to at School.
Only joking, of course we are not going to do that - I wouldn’t remember how to anyway (and don’t go asking me to do any Pythagoras or Pies !!). But what we are going to do is cross-breed the Type of Market Participant with the Type of Stock. The whole point of this Blog is that the Category of AIM Junk Stocks does not match with Long Term Investors.
This is where so many people get it wrong and they lose money as a result. You cannot buy AIM Junk Stocks and hold them long term - what will happen is that your Money will just slowly be munched away as the Share Price falls and it is made worse by odd bits of hope where the Share Price jumps up (the Spikes !!) and you are then convinced that you will become a Milliionaire but it might take a few Months rather than achieving it by the Weekend !!
When you have a Company that makes no money it doesn’t take a Rocket Scientist to figure out that as the Company spends money on Wages and ‘Investments’ and all the usual stuff, any Cash Pile that the Company has is steadily (and often speedily) being eroded - so at some point the Company will need to raise more Money by issuing Debt (but more often than not such Junky Businesses are unable to get anyone to Lend to them) or in most cases by issuing more Shares via a Placing which means that existing Shareholders get diluted and the Value of their Shares drops - along with the Share Price.
After several rounds of such Cash Raising via Placings, the Company finally runs out of Fools to part with their Money and the Company goes into Administration (goes Bust !!), and you lose what little Money you had left in the Stock. Believe me, it hurts - I have learnt from painful experience.
Such nasty Placings often (usually) come with a lot of Hype around the Stock as well and it soon becomes the Hottest Stock around - this means it gets featured on all the usual Websites and in various Interviews etc. etc. - just look for PR Hype and realise what is going on. When you sense such a ramp up in PR, that is the signal that you need to be thinking about Selling. That is exactly what the ‘Smart Money’ is doing.
Remember, good, Quality Stocks rarely have busy and exciting Bulletin Boards. The quieter the better.
It is not easy in practice especially if you are naturally a Long Term Investor but the only sensible (and profitable) way to interact with Junky AIM Stocks (if you must !!) is to approach them as a Short Term Trader. You need to realise that the things are just ‘Gambling Chips’ and that the game is to buy the Stocks before they rise (you can do this via Technical Analysis means or by learning a lot about the Company and understanding when certain Events are likely to happen which the Market will like - for example, if holding an Oil Exploration Stock it is likely that the Share Price will rise in the Weeks leading up to the Announcement of Drilling Results - and very often the Well is dry anyway and the Share Price falls back - so you have to time your Sell well).
So now we get back to the Title of this Blog and what you need to do is to Buy the Stock when the Shares are low and then you ‘Sell the Spike’ when the Share Price jumps up. When all the inexperienced Punters are buying the Stock like crazy and getting all excited (you can tell this by the level of excitement the Bulls are demonstrating on the Bulletin Boards etc.) and the Share Price is Spiking higher - you need to be Selling.
It is possible to use Technical Analysis methods to help time your Selling - for example, you might find that a really high RSI reading up around 90 or something on the Daily is a good Signal to Sell. Or perhaps you can use 4 Hour Candlesticks to help you identify the Peaks - whatever, it makes sense to investigate several Technical Indicators to get a good handle on what tends to work for a given Stock.
One way to capture some of the Gains when a Junky Share you hold Jumps up is to have a pre-set Percentage where you decide you will sell - for example you could have a Rule for a particular Stock where you will sell once you are up 30% or something. You could set a Price Target where you will Sell - perhaps 50% up on your Buy Price or something. Whatever, the simple point is I cannot stress enough how you need to think and act like a Trader if you are going to make Money on such Stocks.
As usual, all my Charts come from the brilliant ShareScope Software that I use and if you click on them they should become a lot bigger on your Screen so you can see some details.
First off let’s start with 88E - this was a Hot Stock over much of the last 2 years - but look how it Spiked up and this was where you should have been selling. People who have held through all the pain (and worse still actually BOUGHT on a Spike) will be nursing some severe Losses and it is highly likely they will eventually lose all their Money.
The next one is a Stock that I had many discussions on Twitter about with People telling me how fantastic it was. Yeah, Right. My Red Arrows are pointing to smaller Spikes which were probably opportunities to sell as well - on the Scale I am using it is hard to see them but I suspect there were some decent Percentage Jumps here.
Another Hot Favourite of the Bulletin Boards etc in recent Years - look at the Downtrend UKOG is in now and this will be another one where Holders lose most or all of their Money I suspect.
This is one which could be the Hype Stock of the moment (maybe it isn’t, but look at the Director Sells where my 2 Red Arrows are at the Top of the Screen - these amounted to over £500k so they are not insubstantial), but again it is clear that Selling the Spikes has been the thing to do.
Here’s an idea. If you are convinced that VRS is going to be stunning and you will be a Millionaire in near future and all that, then why not have a Chunk of your Money that you keep in VRS as a Long Term thing and then have perhaps an equivalent amount that you use to Trade in and out of the Stock - after all, you know the Stock so well and you should be an expert at timing its Price moves !!
An Important and Useful Nuance
Things are entirely different when we get on to Quality Stocks and often the best thing you can do is to ‘Buy the Spike’. Whereas with AIM Junk Stocks the ‘Smart Money’ is using a Spike up in the Share Price to be able to exit their Position and get out fast, with a Quality Stock such a Spike up is usually a sign of Momentum and more often than not the Share Price continues to gain for a long time after the Spike higher.
OK, in the very Short Term, perhaps for a few days after a big Jump up, a Share Price might ease back a bit but this is often the start of a ‘Bull Flag’ formation (this is where a Share Price jumps up for perhaps 8% or something and then goes Sideways in a Range of maybe 3% or so for a few Days and then starts to move up again), and therefore it creates an opportunity to Buy in after the Spike higher.
If you look in the ‘Related Blogs’ bit below, there is a Blog specifically dedicated to Bull Flags.
This Blog could have been called ‘Don’t Believe the Hype’ - and that would really sum up the problem with these sort of Junky AIM Stocks.
As I have outlined the crucial thing is to approach them with a Trader Mindset not as a Long Term Investor - and the trick is to avoid Buying on a Spike up and to use the Spikes to sell.
To be fair this is not easy to do and it is exactly why you need to have a Trader Mindset and you need to know what you are doing - but the most simple Takeaway for Readers is that these kinds of Junkie Stocks do not make good Long Term Investments - if you at least realise that you will hugely boost your chances of ever making Money in the Stockmarket.
If you would like someone to follow on Twitter who does this really well I would recommend my mate Mike @vilage_idoit - he has it down to a fine art !!
Be careful out there !!
Related (and Unrelated !!) Blogs
The ‘Trader or Investor’ one:
And another one I found on the same sort of subject:
A Blog about how Quality Stocks can keep rising after a move up:
I was gonna put in some examples of Bull Flags in the Blog but then I remembered I wrote this one ages ago:
And this one has nothing to do with this Blog whatsoever, but recently I did a Blog called ‘Compare at your Peril’ and I should have included this one with it as the concepts are very relevant:
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