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How We Made 450% in This Market
By Dr. Steve Sjuggerud
March 5, 2007
Less than two years ago, I recommended shares of Seabridge Gold to subscribers of my newsletter, Sjuggerud Confidential. When I wrote my story, shares of Seabridge were at $2.64. Today, they're above $14 a share – for a gain of over 450%.
How did I do it? And why didn't I sell somewhere along the way?
I'll tell you today... not to toot my own horn... but to share with you, what I believe are the secrets to making incredible returns in stocks. While there was some luck to picking the right stock, we used some skill as well. Let's take a look at what we did right:
First off, when we bought, Seabridge was tiny... like a penny stock. Its market value was less than $100 million. While your risks are undoubtedly higher in a small stock like this, versus a Microsoft or G.E., your chances of making hundreds of percent returns are higher, too. What could Microsoft or G.E. do to quintuple their stock market values in less than two years?
Secondly, no brokerage firms cover Seabridge. The downside, of course, is that we have to do all our own homework. Finding the diamond in the rough takes time. But what we found here were...
Great assets. In doing our own homework, what we discovered is that we had an incredible margin of safety. We were able to pay $8.60 per ounce of gold that Seabridge had in the ground. At the time, it was the cheapest gold stock in the world.
Then, the hard part comes – which is staying in the trade.
It took me many years to get it right, but this has now become the easy part of investing for me. I now approach it systematically. Here's how I learned to stay in my good trades...
In the late 1980s, I read the book Market Wizards: Interviews With Top Traders by Jack Schwager. It changed the way I invest. These "top traders" all had made fortunes from the stock markets. And all but one of the traders in the book followed the rule: "Cut your losses and let your winners ride."
The rule of cutting your losses and letting your winners ride does some amazing things...
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You can be right less than 50% of the time and still make money. For example, let's say you buy three stocks. You lose 10% on two and cut your loss. You make 25% on the third, and you're still in the black! |
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Second, chances are, you'll never have a "catastrophic" loss again. If a stock falls by 20% (from $10 to $8), then it has to rise by 25% for you to break even. That's possible. But if a stock falls by 80% (from $10 to $2), then that stock has to rise by 400% for you to break even – a fairly tall order – especially for a "dud" stock. I don't want to be in that position. |
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You put yourself in the position for 450%-type gains. Most investors I know sell as soon as they see a gain of 25% or 50%. You only get a handful of big winners in your investing lifetime. And they really make up the bulk of your lifetime investment returns. So whatever you do, don't cut 'em off at 25% profit! |
It's simple math for me... I try to invest with a 3-to-1 reward to risk ratio. So if I think I can make 75% in a stock, then I'm willing to "risk" 25% on the downside, by using a trailing stop.
As an example of a 25% trailing stop, if I buy a stock at $10, and it goes to $20 and then starts to fall, I'd be willing to cut my loss at $15. I'd pocket a 50% gain, from $10 to $15.
You can vary your trailing stops based on the potential rewards. Generally, a good starting point is a 25% trailing stop.
Tracking your stops can be a pain to follow. But I have two excellent recommendations for how you can keep track of them – TradeStops and XLQ.
www.Tradestops.com was actually started by a True Wealth subscriber with a Ph.D. in math, Richard Smith. It's a simple, web-based way to track your stops. It sends you an e-mail when one of your stops is hit. Couldn't get much easier. You ought to give it a try.
XLQ is a full-blown Excel interface that automatically brings stock quotes and company data into an Excel spreadsheet for you. With XLQCompanion, you can easily track your stops. It is free to try for 45 days. Visit www.qmatix.com for details. Leo, the creator of QMatix, is great – very helpful. Both Richard and Leo do a great job.
So how do you make 450% on a stock? You find a small stock, with no analyst coverage, with fantastic assets at a very cheap price. Then – most importantly – you let your winner run!
As I mentioned, Market Wizards a great read... easily in my top five investment books. It's required reading if you want to become a better investor. You can order a copy from Amazon here.
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
Sign up today to read more investment ideas from Steve Sjuggerud.
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