Page 313 - How to Make Money in Stocks Trilogy

190 A WINNING SYSTEM

When you buy a stock, make absolutely sure that it’s coming out of a
sound base or price consolidation area. Also make sure that you buy it at its
exact buy, or pivot, point. As mentioned before, avoid buying stocks that are
extended more than 5% or 10% above the precise initial buy point. This will
keep you from chasing stocks that race up in price too rapidly and makes it
less likely that you will be shaken out during sharp market sell-offs.
The unwillingness of investors to set and follow minimum standards for
stock selection reminds me of doctors years ago who were ignorant of the
need to sterilize their instruments before each operation. They kept killing
off patients until surgeons finally and begrudgingly accepted studies by
researchers Louis Pasteur and Joseph Lister. Ignorance rarely pays off in
any walk of life, and it’s no different in the stock market.

Finding New Leaders during Market Corrections
Corrections, or price declines, in the general market can help you recognize
new leaders—if you know what to look for. The more desirable growth
stocks normally correct 1½ to 2½ times the general market averages. In
other words, if the overall market comes down 10%, the better growth
stocks will correct 15% to 25%. However, in a correction during a bull, or
upward-trending, market, the growth stocks that decline the least (percent-
agewise) are usually your best selections. Those that drop the most are nor-
mally the weakest.
Say the general market average suffers an intermediate-term correction
of 10%, and three of your successful growth stocks come off 15%, 25%, and
35%. The two that are off only 15% or 25% are likely to be your best invest-
ments after they recover. A stock that slides 35% to 40% in a general market
decline of 10% could be flashing a warning signal. In most cases, you should
heed it.
Once a general market decline is definitely over, the first stocks that
bounce back to new price highs are almost always your authentic leaders.
These chart breakouts continue week by week for about 13 weeks. The best
ones usually come out in the first three or four weeks. This is the ideal period
to buy stocks . . . you absolutely don’t want to miss it. Be sure to read the
chapter on general market direction carefully to learn how you determine it.

Pros Make Many Mistakes Too

Many professional investment managers make the serious mistake of buying
stocks that have just suffered unusually large price drops. Our studies indi-
cate that this is a surefire way to get yourself in trouble.