Stock Market Wizards
Mark Minervini: Stock Around The Clock
Mark Minervini wanted to become a musician. However, in the early 1980’s he got interested in the stock market. He sold his studio and used the proceeds to trade. Initially, he lost everything and realized that depending on others for advice was his worst mistake. So, he began working on an intensive program of research and self-education. After almost a decade he succeeded in developing a well-defined trading process.
He achieved an average annual compounded return of 220% during that period. His worst performance during that span yielded a 128% gain which most of the traders will be delighted to have as their best performance.
Minervini believes that there is usually a reason for stocks trading low. He prefers buying stocks that are priced at $20 or higher. He never buys stocks that are priced under $12. His basic belief is to expose the portfolio to the best stocks available in the market and also cutting losses quickly when things go wrong.
He also suggests that if investors avoid certain stocks because of high P/E, they tend to miss out on the best market moves.
Minervini also believes in designing your strategy according to your personality.
On identifying the market leaders, he uses relative strength. He looks for stocks that hold up well during a market correction and they are the first ones to rebound when the market comes off a relative low. He has always believed that great trading opportunities are available every day. One has to work on identifying them.
He shares how losing money for a beginner is the best thing to happen. It teaches one to respect the market.
He suggests that beginners should trade with a small amount of money that they can afford to lose. However, the amount should be big enough to make them feel the pain if it is lost. Paper trading is one of the worst things they can consider doing. What is important is how much profit you earn on winning trades than how much you lose on losing trades. Minervini is profitable only about 50% times, but he profits more than the amount he loses.
While reading several books, he learnt that patience, money management and flexibility are very important for successful trading. Protecting your capital and also your profits should be equally important for you.
The key to good trading lies in managing the downside. Minervini suggests that if a person wants to be a trader, then he should learn to play poker. Poker provides a good similarity. In poker, previous hands mean nothing and the current hand determines the probability. Similarly, if Minervini gets stopped out of a trade five times, he would still put the same trade sixth time, if it meets his criteria.
He gives a 50-50 weightage to fundamentals and technicals. He never bets on his fundamental ideas without price confirmation. However, he might consider buying a stock with negative fundamentals if its price performance is in the top 2% of the market. The reason being, that the price action may reflect that the stock is discounting a potential change in fundamentals that is not yet evident. Such combinations of strong prices and weak fundamentals are found in companies that are demonstrating a turnaround in operations or which have new technologies which are not yet widely understood.
He prefers looking at a five-year, one-year, and intraday chart for his analysis. He spends a lot of time evaluating when the patterns have worked to figure out how the market can trick investors. After the majority have been fooled, he gets on with the smooth sailing.
For novice traders, he advises that mistakes are inevitable. However, to prevent mistakes from turning into disasters, they will have to accept losses when they are small.
There must be a plan for every contingency. The most important contingency plan is the one that will limit your loss if you are wrong. Beyond that, there has to be a plan to get back into the trade if you're stopped out.
There should also be a plan for getting out of winning trades.
He thinks that many amateur investors become careless after gains because they fall into the trap of thinking that they are winning “market’s money” and in no time the market takes it back. It is your money and you will have to protect it.