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Rule Number Two: Remove emotions from your buying decisions with a disciplined strategy. Ok, so lets assume that youve done your homework now and discovered a company that you believe will run up at least 60% or higher over the next year. Decide on a predetermined buying price and do not waver from this price. Period. End of discussion. Why? Ok, lets take a look at hypothetical stock YYY. Company YYY is the industrys leading innovator in a huge growth industry that has seen the biggest growth spurts in history for the last three trailing quarters, yet the general public still does not know about them. In addition, they have patented technology that lets them protect their first mover advantage and high entry costs into the industry gives them nice barriers to entry. On top of all of this, Company YYY is trading at a ridiculously low P/E and a ridiculously low price of $3. In fact, its price would have to appreciate 200% just to equal the P/Es of the giants in the field. You study YYYs historical price chart and see some volatility, so you decide you will wait until the price drops to $2.80 to get in. But in the two days you wait for company YYYs stock to drop in price, it unexpectedly shoots up to $5.50. Or perhaps it plummets way below your $2.80 buy in price to $2.00. On no new significant news. Depending on what scenario happens, you may be thinking Im so dumb not to have bought at $3. I guess Im just going to have to bite the bullet and dive in at $5.50, or This is so great. I wanted to get in at $2.80. Now its so much cheaper at $2.00 that Im definitely going to buy now. Right? Wrong. Stick to your original plan. If you throw your buying strategy in the trash and decide to get in at $5.50, youre letting emotions drive your decisions instead of logic. If you were only willing to pay $3, why would you possibly be willing to pay 83% more for the same stock just 48 hours later? And if we consider the second scenario where the stock plummets to $2 a share, dont you think that this merits more caution instead of haste? Remember, in both hypothetical situations, we are assuming there is no new significant news surrounding stock YYY to justify these huge price movements. Under these assumptions, the volatility of the stock is probably occurring because of jumpy day traders taking profits off the board or dumping shares. But lets take a closer look at why letting emotions creep into your decisions is a bad idea. Lets look at the situation again where stock YYY blew through your designated buy in price of $2.80 and went to $5.00 in two days. Lets assume you stick to your guns, wait two weeks, and buy-in when YYY stock finally dips to $2.80. Now employing a stop loss of 15% against your buy-in price, your sell-out price of the stock is $2.38 versus $4.68 if you had bought the stock when it spiked up to $5.50. This huge gap in stop-loss price points may very well be the difference between holding on to the stock and earning 80% gains versus selling out 48 hours later and feeling confused as to whether or not you should buy back in. To summarize, never throw out a pre-designated buying price for a risky stock due to unexpected price spikes. If this happens, stick to your original buying strategy if you still believe in the stock and wait until volatility decreases before you buy at your pre-designated buy-in price. Remember, there are literally hundreds of stocks every year that make rapid double or triple digit gains. If it turns out that you missed out on one opportunity because the stock soared right through your buy in price and kept soaring higher or the stocks price took a sudden plunge, know that there are hundreds of other opportunities waiting to be discovered. If the stock you loved so much never returns to your buy-in price, move on. Youll find a better stock to buy soon enough. © 2006 Global Market Opportunities
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