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INDIVIDUAL STOCK BUY, HOLD AND SELL DISCIPLINES:


Before reading this section, please read (1) the section titled “ODDS-ON Investing™ Overview” (to understand the investment philosophy), and (2) the section titled “The 2nd Most Powerful Formula in Finance” (to understand Enterprise Value and the PEG ratio).

The terms Active Trader, Investor and Mutual Fund Investor are used as follows:

  • Active Trader: Someone who trades stocks with a time horizon as short as two months, BUT, not a day-trader, who trades stocks minute by minute. The Active Trader monitors stocks daily and tries to identify stocks where the stock price is well below Enterprise Value due to some aberration such as adverse reaction to an announcement. The Active Trader will buy and sell based on Market Buy and Sell Disciplines described above.
  • Investor: Someone who invests in individual stocks or ETFs with a time horizon of two years. This individual monitors stocks daily, but is focused on the relationship between stock price and Enterprise Value—both on the buy and sell side. If a stock runs up above the Enterprise Value as discussed below in a time period less than two years, s/he will take profits. The Investor will buy and sell based on Market Buy and Sell Disciplines described above.
  • Mutual Fund Investor:
    • Someone who does not want to invest the time or resources to invest in individual stocks; or,
    • Someone who invests part of his portfolio in stock mutual funds as well as individual stocks; or
    • Someone who invests using a 401k, 403b or similar fund which only has mutual funds as investment alternatives; or
    • Someone who is newer to stock investing and is still learning or deciding whether to begin investing in individual stocks.

The Mutual Fund Investor will likely NOT WANT TO buy and sell his mutual fund holdings based on Market Buy and Sell Disciplines described above, BUT s/he may want to stop putting cash into stock mutual funds when the market is signaling a “Sell”.

The market is a living organism. It is the sum of the actions of many individuals all of whom are constantly learning and changing behavior to different stimuli. As a result, over time, Buy and Sell Disciplines on individual stocks—and on the market—will evolve, i.e. continuous improvement of disciplines is a necessity. However, I expect that the best disciplines will always be primarily based on assessing (1) the price of a stock versus its Enterprise Value (Cash Value), and (2) the price action of a stock based upon market Supply & Demand. See The 2nd Most Powerful Formula in Finance page of this website.

Most of these disciplines can also be applied to sector Exchange Traded Funds (ETFs).

 

Individual Stock Buy and Sell Disciplines:

  1. Constantly remind yourself:
    • My goal is to put cash in my pocket,
      not to own a stock or stocks.
    • “PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET.”
      Common Sense, Warren Buffett and Benjamin Graham.
    • I will NOT get greedy. My benchmark is an 11 percent per annum return. My goal is to do better.

  2. Know the Market Direction and use it. See Market Buy and Sell Disciplines in the above section.
  3. Understand the source of Stock Price movement and the relationship of Stock Price to Enterprise Value and to Supply & Demand as explained by The 2nd Most Powerful Formula in Finance. See The 2nd Most Powerful Formula in Finance section of this website and my books, Rich Shareowner, Poor Shareowner™ (Revised) and Money Ain’t Free.
  4. Using your broker’s website and www.investors.com, screen for stocks that have a price/earnings to growth (PEG) ratio less than one AND a debt to capital ratio less than 25 percent. Also look for growth rates projected to be above 25%. These criteria are a proxy for determining that the current stock price is below the Enterprise Value. Create a Buy Watch List using these stocks.
  5. Look for stocks trading above $10-$15 and above 100,000 shares a day. Look for ETFs to trade above 200,000 shares a day. This provides sufficient liquidity for institutional investors to become buyers.
  6. Using Investor’s Business Daily technical analysis, buy stocks from the BUY Watch List when technical analysis indicates that institutional investors are buying.
  7. Diversify: Do not invest more than 5 to 10 percent of a portfolio in any one stock. Let profits run on an individual stock, consistent with the other buy and sell disciplines, but don’t let a stock take too large a share of the portfolio.
  8. Limit Individual Stock Losses: Sell when a stock declines 7-8 percent below your purchase price. (Remember that it takes a 100% gain to recover a 50% loss.). Be prepared to sell if market declines take your stocks through their 50-day moving average.
  9. Limit Losses due to the Market: Watch the market direction and reduce investments when the market trend is down. Investors Business Daily is an excellent source of overall market direction. Read Stock Trader’s Almanac for excellent insight on daily, monthly and seasonal patterns.
  10. Take Profits: While the market is constantly changing, take gains, or at least some gain, when a stock gets about 20 percent above the 50-day moving average and is hitting new highs on below average volume, or when it is getting to a PEG ratio of about 1.2 (20 percent above its Enterprise Value).
  11. Sell when:
    1. Technical data indicates that institutions are beginning to sell, or are not supporting them as they reach for new highs;
    2. The stock price declines to 7-8 percent below your purchase price; or
    3. The overall market trend is down and you stocks are falling through individual sell signals.
    4. Do not buy when the market has a sell signal on.

For me, the most accessible, cost effective data for technical analysis of individual stocks is Investors Business Daily (www.investors.com).


 
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