Don't Just Buy What You Know
As a disciplined trader, you should buy a stock only when you feel that adequate factors have come together into an optimal setup for a near eruption in share price. An essential factor in Mark’s entry setups is youth.
Every bull market is characterized by a few leadership stocks that were recent IPOs.
To attract Mark’s interest, a new issue must prove its strength in the market for at least a couple of months. Evidence comes in the form of a primary base which is the first buyable base after a company has gone public.
The primary base refers to the apparent future direction of a stock from its price and volume history. However, the primary base has deep roots in corporate fundamentals as well as the stock’s market action. The biggest portion of a company’s growth generally arises in the first 5 to 10 years after the company goes public.
This critical period is when management is at its entrepreneurial best. As sales expand and economies of scale improve, margins are stimulated and profit growth speeds up.
Before buying a recent new issue, a stock must have a primary base. Some IPOs take a year or more to form a reasonable base.
Every stock that makes a new high from a primary base does not turn out to be a big winner. Although a proper primary base has some of the best odds to join in during the majority of a big move, there is no guarantee of catching a stock as it begins a large-scale increase. Hence, you must always be ready with an exit plan to cut your losses if a primary base turns against you.
Beware of well-known companies that are considered as “official growth stocks”. At some point they are so over-owned that a material problem can create a huge amount of supply that can bring down the house. Rather, buy the new market leaders. Don't be worried about unfamiliar companies. You can work and get familiar with the stocks that are creating a primary base. This is where most of the upcoming big winners will be found.