A correction experience 6/2013
Expecting a 10% correction, I placed
buy orders on certain stocks from my watch list with 5% to 10% discount from
the current prices. As of 6/2013, the market only corrected itself by +/- 6%. Overall,
I bought 8 stocks (with LCC bought twice) and all the purchase orders were
executed on 6/24/13 in my largest taxable account. Because the market did not
correct by the expected 10%, I had not executed more buy orders.
This demonstrates how to take
advantage of a correction even though it is not 100% correct. This method works
most of the time but not all of the time—as the market could decline further.
On the very rough average, we have two dips (good opportunity to buy stocks)
and two temporary yearly highs (good opportunity to sell stocks) each year.
After 1
month (7/24/13), the average return was 11% and the annualized return would be
131%.
The stocks bought and their performances
Stocks
|
Return
|
Annualized Return
|
ALK
|
21%
|
253%
|
BTU
|
7%
|
82%
|
CF
|
1%
|
18%
|
CRUS
|
16%
|
191%
|
LCC
|
18%
|
217%
|
MOS
|
-4%
|
-54%
|
OMX
|
12%
|
148%
|
LCC
|
16%
|
194%
|
Avg.
|
11%
|
131%
|
SPY
|
7%
|
89%
|
Beat SPY
|
47%
|
47%
|
As of today (7/24/13) I may start
to sell more soon (LCC sold already) and place buy orders expecting another
correction as the market has been too high. For tax efficiency, I usually do
not sell if I do not have short-term losses to offset the gains in taxable
accounts.
The average annualized return
demonstrates how fast the gain of profit for better comparison while SPY has
gained 16% YTD (vs. 11% gain in a month).
Conclusion
In order to take advantage of the dips, prepare by:
·
Accumulate cash before the dip. However, if the
market keeps on rising, you may lose the extra gains for selling too early. We
bet the market is at a temporary peak.
·
Preparing and updating a watch list for stocks
to buy. If you do not have time to maintain such a list, buy ETFs such as SPY
or any market ETFs that are commission-free from your broker.
·
Timing is everything. It is harder to detect
corrections than market plunges especially in light of the current excessive
printing of money. Hopefully we have more rights than wrongs.
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