A New Way To Invest For Big Profits…
Billions of dollars are made every year by investors bucking convention. All investors are human, and far too often we’re influenced by our emotions. Preconceived ideas influence the way we think… and act… and invest. By throwing off the stale ways of thinking, new investment ideas emerge.
And that’s when big money can be made!
Let me give you a perfect example. Just look at Warren Buffet. He is a very traditional value investor. He looks to buy stocks on the cheap. His mantra is “buy low sell high.” And sometimes he never sells… but that’s a story for another time.
Buying low and selling high takes discipline and experience.
You have to have an iron will to advocate buying stocks when everyone else is fearful and selling. You have to have extreme discipline to sell when everyone else is buying and acting greedy.
It’s a hard skill to master. And it takes an incredible amount of emotional control.
The Baron Rothschild made a career out of buying low and selling high. And he did it with flair. His fortune was cemented during Napoleon’s defeat at Waterloo. Initial reports of the battle indicated the British were losing.
The market was falling.
Relying on his superior market intelligence, Rothschild knew better. He bought when everyone was fearful. He bought when prices were plummeting. He bought low.
When the truth of the battle emerged… and Napoleon had been defeated… the market rallied. Rothschild made a mint, and forever tied his fortune to “buying low and selling high”.
Rothschild is famously quoted “The time to buy is when there’s blood in the streets!”
You too might be using the “buy low sell high” investment strategy. Any investor who’s spent any time at all studying the market has seen success with the strategy.
You hunt for undervalued investments… and swoop in to pick them up on the cheap. Once the investment turns higher, you ring the cash register and whistle all the way to the bank. There’s nothing wrong with this strategy…
However, many investors don’t have the patience needed to be super successful.
Many times investors identify great investments and pick up the shares on the cheap… then it takes a depressingly long time for the returns to materialize. It can take months or years for an investment to be fully valued.
Unfortunately, there’s no guarantee the market will realize the true value of your investment any time soon.
And that’s where most investors crumble.
Now, there’s a new and different way to invest in the markets, and it turns the buy low sell high idea on its head. Put simply, you “Buy high and sell HIGHER!”
Don’t shut me down just yet. I realize this new way of thinking goes against everything you’ve been taught over your investing life. It certainly flies in the face of every “buy and hold” investor out there.
But this investing strategy can be very effective.
The strategy is known by a number of different names, but the one I like the best is momentum investing. The idea is simple. You look for a trend in the market and you ride it for all it’s worth. Regardless of price, valuation, fundamental, and technical outlooks, you follow the trend.
If you catch it just right, the profits can be huge!
Here’s a perfect example… Just look at the chart of Apple (AAPL) stock…
Chart courtesy of StockCharts.com
Apple needs no introduction. You probably have one of their products within arm’s reach… maybe an iPod, the iPad, or the iPhone. Their technology is found everywhere. And it’s a company with serious momentum.
Anyone investing in Apple stock would have a hard time NOT making money. Just buying a few shares in the first half of 2009 and you would have DOUBLED your money in less than 12 months.
But many people have avoided buying this stock for any number of reasons. They didn’t like its price… or chart action… or even valuation. And when you’re looking at momentum investing, that’s a big mistake.
Right now many investors argue Apple is overvalued. Their P/E ratio is 18.6x… and the rest of the S&P 500 is trading for a P/E of 14x. Remember the lower the P/E the more undervalued a stock is. So investors have the misconception of Apple being overvalued.
But here’s the flaw… over a year ago, Apple’s P/E ratio was 22.6x…. by that logic, it was even more overvalued than it is now. Look what the stock has done. It’s gone straight up. If you didn’t invest because of the P/E ratio a year ago, you missed out on a chance to earn more than 34% on your money.
By following the trend you would have made money.
Remember the famous market saying… “The trend is your friend!”
Here’s another great example… check out Baidu (BIDU)
Chart courtesy of StockCharts.com
This company is the Google of China. They make money hand over fist. And their P/E ratio is even more ridiculous… they have a P/E of 91.8x right now. Seriously… that’s not a typo. Remember the average for all the stocks in the S&P 500 is a P/E of 14x…
BIDU has a P/E ratio of 91.8x!
And a year ago it was even higher. A year ago, Baidu was trading for a crazy 100.4x P/E. Many investors avoided the trend. They didn’t want to invest in a company with such an aggressive valuation. Too bad… because they missed out on a big opportunity to profit.
Almost a year ago BIDU was trading for $64.90 a share… today is goes for over $143. That’s a return of just over 120%
I realize momentum investing is tough to wrap your mind around. It’s contrary to what many investors have learned over years and years of study… but it’s hard to argue with returns like these. The key is to have a strategy and stick with it.
If you’re going to try your hand at momentum investing, spend a bit of time studying the market. Look for what works, and what doesn’t. Develop a strategy about when to get into a stock, and more importantly, when to get out.
And that brings me to a word of warning.
Momentum investing can be very exciting… and profitable. But this style of investing is a bit like riding a bucking bull. You’re in for the ride of your life, but a graceful exit can be difficult.
You must watch the trends closely.
When the momentum dies, everyone rushes for the exit. You need to be one of the first to exit. If you aren’t quick to pull the trigger, your profits might disappear literally overnight! Remember a new way of investing can generate huge profits… but always have one eye on the exit.