Page 298 - How to Make Money in Stocks Trilogy

176 A WINNING SYSTEM

Based on our research, a stock on Investor’s Business Daily’s “new price
low” list tends to be a pretty poor prospect and should be avoided. In fact,
decisive investors should sell such stocks long before they ever get near the
new-low list. A stock making the new-high list—especially one making the
list for the first time while trading on big volume during a bull market—
might be a prospect with big potential.

How Does a Stock Go from $50 to $100?

If you can’t bring yourself to buy a stock at a level it has never before
achieved, ask yourself: What does a stock that has traded between $40 and
$50 a share over many months, and is now selling at $50, have to do to dou-
ble in price? Doesn’t it first have to go through $51, then $52, $53, $54, $55,
and so on—all new price highs—before it can reach $100?
As a smart investor, your job is to buy when a stock looks too high to the
majority of conventional investors and sell after it moves substantially higher
and finally begins to look attractive to some of those same investors. If you had
bought Cisco in November of 1990 at the highest price it had ever sold for,
when it had just made a new high and looked scary, you would have enjoyed a
nearly 75,000% increase from that point forward to its peak in the year 2000.

The Correct Time to Begin Buying a Stock
Just because a stock is making a new price high doesn’t necessarily mean
that this is the right time to buy. Using stock charts is an important piece of
the stock selection process. A stock’s historical price movement should be
reviewed carefully, and you should look for stocks that are making new price
highs as they break out of proper, correct bases. (Refer back to Chapter 2 for
more detail on reading charts and identifying chart patterns.) The 100 great
full-page examples in Chapter 1 should have given you a real head start.
These correctly created breakouts are the points at which most really big
price advances begin and the possibility of a significant price move is the
greatest. A sound consolidation, or base-building, period could last from
seven or eight weeks up to 15 months.
As noted in Chapter 2, the perfect time to buy is during a bull market just
as a stock is starting to break out of its price base. (See the America Online
chart on page 178.) If the stock is more than 5% or 10% above the exact buy
point off the base, it should be avoided. Buying it at this level greatly
increases the chance of getting shaken out in the next normal correction or
sharp pullback in price. You can’t just buy the best stocks any old time.
There’s a right time, and then there are all the other times.