My Strategy
My strategy is this: I'm holding great companies I ain't selling. In fact, I'm just buying more. I'm buying only good companies — high-quality stocks (Wide Economic Moat, Consistent Sales, Earnings & Cash Flow, Conservative debt, Undervalued)
These are companies that will always go higher eventually, and a correction is a great time to accumulate shares of these stocks.
But again I'm always buying within my planned allocation.
I teach my students that in a portfolio, each stock should not have more than a 5% allocation. That's me being conservative, so the moment it hits 5% allocation, that's it. I don't buy anymore.
The key to buying is to never buy all at once.
For example— I really want to buy Apple. I sold Apple in the past, I made a lot of money, and I'm waiting to get back in but I'm not buying yet because it's not cheap enough yet. So eventually I would like to buy up to 5% of Apple in my portfolio.
Am I going to buy 5% at one go? No, I'm gonna buy 1% first and then another 1%. I always average in my positions.
One way to average in is to buy the moment the price hits support levels that you can identify, and I tend to use moving averages. If you look at Apple's long-term chart, you can see the very strong support level at the blue line — the 50 moving average.
That strong support is definitely a buy level for Apple. It also finds support at the 40 ema at times so that's another buy level. You can see it also find support at the 20 ema, that's the red dotted line. So you can see that for Apple I've got 3 buy levels — $142, $115, and $93.
So for every stock, I have at least 3 to 4 buy levels. Why?
Because when Apple hits a buy level, I will start to buy some shares. I always average in my position with dollar-cost averaging, and so by doing that, I always ensure I never get in near the highs — always getting in near the lows as much as possible.
A Simple Technique That You Can Use
For those of you who are not sure how to use moving averages, I can share with you a very simple technique.
For example, if you are buying into the S&P 500, here's a simple rule of thumb:
Buy your 1st tranche when the price drops 8% from the high. If it continues going down to 15% below the high, then you buy the 2nd tranche. If it drops 21% below the high, you buy the 3rd tranche, and if it drops to 35%, you buy your final tranche of stocks.
Why these numbers?
Why 15%? Because I've shown you that the average correction drop is 15%, and roughly what's half of 15% is about 7.5%, so I rounded off to 8% where you can begin your first buy level.
Why 21%? Because if you take the average of all the bear markets and all the corrections, the average drop is 21% across all declines. If you take the average drop across all bear markets, it's 35%.
You always want to have that last ammo to buy during a bear market, and if it doesn't hit that bear market, it's fine. You just go in 3 quarters of your planned allocation to a stock or investment. By doing so, you always ensure that you always have enough ammo to keep adding as the market keeps going down.
Profit From Short Term Fall In Price Using Options
So while I'm buying stocks as investments for the long run, at the same time when I see the market coming down in the short term, I'm shorting the market using put option spreads.
For example, last week when I saw that the S&P 500 was not able to break its resistance and began to close below the 50 moving average, I thought "Hey, chances are it's going to go down again in the short term to probably test this support level over there," so I have been shorting the markets, and I've been sharing this in my options trading group.
I've been shorting the QQQ as well, as early as the 11th of April. I entered a bear put spread on QQQ buying the 342 put and selling the 320 put for a risk-reward ratio of 1:2 and I explained the trade there.
I explained that "Hey you know what, it hit the 50 moving average, it's now coming back down so QQQ can't seem to break the resistance," so I entered more QQQ bear spreads.
I've also been shorting Alibaba. I've been shorting it in the short term, getting some profits, while still holding Alibaba in my long-term investment.
So that's always a way to have an investment and trade around that investment. So you also benefit during the short-term downtrends.
I also added some SPY bear put spreads as you can see last Friday as I expected the SPY to go down as well.
The bottom line in the short term, I do see the SPX going lower to re-test the lows there and it may even go down to 17.1%, which I highlighted earlier this year because the period during the U.S. midterm election has had a 17% decline on average.
But in the long run, the markets will go up, and good companies will always go up, so I'm buying good companies as well when they hit support levels.
The Bottom Line
Corrections don't last forever. Even bear markets don't last forever.
Corrections will end, and once it ends, the market will then take off again to new all-time highs. So never be afraid of corrections.
If you're holding great companies continue holding them, and I personally continue to add more and more shares to these great companies at lower prices, because once the market bottoms and the market makes new all-time highs, that's when you'll be richly rewarded.
Remember, the market transfers wealth from the impatient person to the patient
person, from the emotional person to the rational & logical person, and from the pessimist to the optimist.
You can choose to be patient, to be optimistic, and to be rational, and you will build your wealth over time. I guarantee that.
May the markets be with you always, and hang in there for the ride, because it will only get a lot better!
If you want to check out my investing & trading courses, go to PiranhaProfits.com
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