A lot of investors feel that buying right is the most important part of owning stocks. From my experience, selling right is more important than buying right.
One reason to learn to sell right is that you should get you out of a stock near the top of its price. “But I might get whipsawed” is the most common complaint when I mention selling near the top. Yes, that is true. But let’s face it, any stock that you or I own is not the only stock to own. If we sell out and the stock goes back up, we can buy it back or move on to another good stock.
I think the “might get whipsawed” argument held during the long-term bull market from 1982 until 2000. But lately, in the past few years, most stocks get rotated into and out of. Big money understands seasonality and ups and downs very well and will move into a stock slowly but get out quickly.
These past few years, selling when the daily price drops through the 10-day moving average would have worked eight or nine times out of 10. And maybe one whipsaw. That is pretty good odds.
The only stock that I own that would have whipsawed me is Disney. It has been so bullish since it got above $50 or so that the price has hugged the 10-day moving average. Stocks like CNR, CP, Pfizer and resource stocks kept going down after the price crossed the 10-day moving average going down, making selling a good move.
Another point I hear all the time is: Well, it will come back up. Yes good stocks often do. But not all of them do. Or they might stay down long enough to discourage us, tick us off, and provoke us into selling near the low. And I won’t even mention the static we might get from our friends and business partners.
Selling right has one more big point that few talk about. As a farmer, you are mostly a price taker. You cannot control the weather. You cannot usually control the price you pay for inputs or the price you get for your grain.
As stock owners we cannot control the prices, but we can control when we buy and sell and the prices we pay. Usually if I sell as the daily price crosses the 10-day moving average going down, I would be selling high. And usually, if I buy when the price has crossed the 20-day moving average going up, I would be buying low. These charts are free on www.stockcharts.com. This is not rocket science. All we have to do is look at the charts and believe them.
And if we don’t totally believe the charts we can always sell some at the high and buy some at the low. It’s caller layering in (buy) and out (sell).
I’ve done a few things correctly with BBD.B. First I started buying at $4.06 shortly after the company negotiated a $2 billion line of credit at a good rate. That happened in late 2012 and the shares were well under $3 per share at the time. I started buying and layered in, so I have 10,000 shares at an average cost of $4.52.
I could have sold some or all of these each of the three times the shares dropped through the 10-day moving average and put in a bid to buy 15 or 20 cents below the selling price — I’d have another $4,000 or $5,000 in my account.
But the company has been promising to test fly its new plane and I didn’t think I could guess when that would be. So I did not sell shares and I did not sell calls on the shares.
I collect a 2.5 per cent dividend every year, which matches most interest rates, so I decided I would just wait them out.
THOMPSON CREEK MINES (TCM)
I did several things correctly with this one. In the fall of 2012 the premium for selling puts for April 2013 was very generous, about $1.10 for the $4 strike price. So I sold puts on 5,000 shares and collected $5,500 and then bought 7,000 shares at an average cost of around $3 per share.
Come spring, the shares were over $4.20. I sold them at $4.20 when the price crossed the 10-day moving average going down, and bought the puts back for $0.30. I made $11,000 or $12,000 in half a year with about $16,000 of my own cash. I did collect $5,500 from selling the puts.
Then I jumped the gun and bought 3,000 shares at $4.06 and sold calls twice to bring my cost down to around $3.35. Recently, TCM released its Q2 report. Its new copper mine in B.C. is going to get going soon, the company has enough cash to pay its expenses until money starts coming in, the price of copper has moved up to over $3 a pound, and it looks like this could be a successful startup.
The price went from under $3, crossed the 20-day moving average going up and hit the 200-day moving average at around $3.35 which was around my cost of the other 3,000 shares, so I doubled up.
POTASH CORP (POT)
This stock dropped like a rock a few weeks ago from $38 to $28 per share. I had 700 shares.
Many think this drop was an unexpected shock. However, the daily price did drop through the 10-day moving average at around $42. All I had to do was believe it. I had sold calls on the shares and thought that $38 was a good support price. It was — until the Russian potash cartel broke up. I sold and moved on.
I have at least 10 spreads going, mostly for August expiry but a couple for September. They include Disney, Cat, Deere, Phillip Morris and Agrium. As prices stand on August 10 all of these will expire on August 17 and I will keep the money.
I’m using about $35,000 of buying power and my rough estimate shows I took in about $3,800 of cash by doing spreads for August and the couple for September.
The headline in the last issue of Grainews seemed to imply that doing spreads was my full time strategy. Actually it is not. I do spreads in my trading account because that is the only account we can do them in. I am paying about $34.95 for commissions and contract fees with BMO for each trade and when I do 20 a month that is around $700.
I’m looking into setting up an account with Interactive Brokers in the U.S. Interactive Brokers does not charge a brokerage fee when we do spreads. Their fee is $0.70 per contract (100 shares) so the 2,000 shares or 20 contracts would cost $14. The pair would cost $28 which is a lot less than $70 per pair.
I still have to iron out some details. In the meantime I do run a trading account at BMO and I make good money doing spreads. Interactive Brokers does not hold sheltered accounts like an RRSP of TFSA.
Gold and silver
As I write on August 10 the price of gold has jockeyed around from a low of $1,180 up and down and was just under $1,315 on August 9 at the close. I have no idea how much the price is going to go up or how quickly, but I am ready. Gold and silver are in season and if there was ever a time of year to hold this stuff it is now.
I own some Franco Nevada (FNV) shares and I might sell them and buy Silver Wheaton (SLW) shares. But I also have a venturesome Exchange Traded Fund called NUGT which moves three times as fast as the price of gold. NUGT is not for everyone — in fact some brokers won’t even sell it to a customer. It takes watching. I did sell calls on most of them and bought them back the other day when the price of gold and NUGT crossed the 20-day moving average going up.
My other choice is to own some shares in IMG, AUQ, FVI and FR. I think all are good quality stocks and have potential if and as the price of gold and silver move up during the in season.
One thing for sure: I plan to sell all of these things as soon as the price of gold and silver and these stocks drop through their 10-day moving average. I didn’t do that last fall when the daily price of gold dropped through the 10-day moving average at about $1,750 and now I have some catching up to do.
Dust and dog
These two creatures are for special conditions and might not be for every investor. DUST (Direxion Daily Gold Miners Bear 3X) goes up when the price of gold goes down and DOG (ProShares Short Dow30) goes up when the Dow index ($INDU) drops.
I likely will buy some DOG as the DOW normally slides during the summer and I will save DUST for a time when the price of gold is heading for out of season. It also moves three times as fast as the price of gold, like NUGT.
My other strategy will be to hold Disney shares. My cost is around $62 and I sold calls for January with a strike price of $67.50 and collected something over $3.50. Since some stocks might tend to drop I likely will do bear call spreads on some and be more careful about doing bull put spreads on other stocks. I find that if I aim to make five to nine per cent per trade, I’ll usually be far enough away from the price of the day that the option will expire worthless and I’ll keep the money. If I aim for a higher return I often find the shares move enough to put the spread in danger.
Input Capital (INP)
I wrote about INP months ago. This is a canola streamer. In June the company did a reverse takeover and now the shares trade on the Toronto exchange as INP. My starting price was $1 and the shares went public at $1.80 or so and are hanging around there. I plan to put them into my wife’s RRSP as a contribution-in-kind.
In the next issue I will discuss some high dividend paying stocks that might make up part of a portfolio. Hint: BMO has been paying a dividend since 1829.
I want to give you two quotes:
Brooke Thackray: “If I’m wrong (about a stock) I’m not wrong for long.” His sidekick, Don Vialoux, says: “Keep your losses small and let your profits run.” †