Profiting from Dividends

I know I know investing in dividend companies aren't the sexiest investments, but trust me those dividends add up over time. Plus there are actually quite a few benefits when investing in quality dividend paying companies.

1. They're usually stable (i.e. utilities or telecommunications)
2. Dividends are taxed less than capital gains.
3. A DRIP (dividend reinvestment plan) will have a compounding effect.

It's also easier to manage because your objective is to collect the dividend stream and not worry too much about share price fluctuations. If the business is thriving, the company will raise their dividends. One of the best dividend stocks out there is McDonald, since the year 2000, they have raise their dividends by 28.2% annually, which means the payout doubles every two and a half years!

One more thing, invest in quality stocks (google dividend aristocrats for some examples). I learned my lesson when I invested in RBS pre-recession, at that time the dividend yield was 17%, however the dividend collapsed along with the dividend. So here a few tips to keep in mind when doing your DD.

1. don't chase high dividend yields - 5% should be the maximum, any higher is too risky
2. look at the dividend payout ratio (div./ net income) - make sure it's less than 55% or else the company can't grow
3. make sure the div. are consistent, preferably with increases at regular intervals

- The Hawk

Payout Ratio Checker:  http://dividendinvestor.ca/?symbol=t&submit=GO

Dividend Aristocrats:  http://www.thepassiveincomeearner.com/2011/01/dividend-aristocrats-canadian-tsx.html

Profiting from Operating Cash Flow

This may come as a surprise, but not all companies make money. There are tons of small cap stocks out there that look like the next Microsoft, but chances are they're bankrupt within 5 years. So what the hell happens?!?! Well companies need cash to survive, and if they're not getting it from operating activities they'll have to sell more shares or issue corporate debt to fund operations. Eventually, the business will collapse under the weight of the debt, as operating activities aren't making enough money.

First what is operating cash flow (OCF)? In simple terms, it is the cash flow that comes from operating activities, i.e. the main business, minus the costs of running the business i.e. paying the suppliers. In my opinion, OCF is a more accurate measure of a company's profitable and subsequently its growth. A successful company will have a strong profitable business model that generates money.

For a manufacturer or any company for that matter, the first thing to check should be always be operating cash flows. IF it's negative, do a little more digging, and chances are you'll something fundamentally wrong. For example, customers are leaving. Remember, just looking at the net income won''t be enough, because it is possible to use sneaky accounting techniques to fudge the depreciation, interest expenses, and taxes to alter a company's net profit.

-The Hawk

Profiting from Supports and Resistances Part 2 (Breakouts)

So here's the second part, I'm pretty sure I alluded to this in one of my previous posts, but here it is again. When a stock busts through its resistance on higher than average volume, the former resistance becomes the new support. Vice versa. This is also known as a breakout.

In my experience it's best to wait for a confirmation, as I've been suckered more than once, thinking it's a real breakout, and it falls flat in my face. Please check my post on profiting from pullbacks. An option would be to fade in to your position, but I'll leave it for another posts.

-The Hawk

Breakout:  http://www.investopedia.com/terms/b/breakout.asp#axzz1Za23weZb

Profiting from Supports and Resistances Part 1

There are two parts to this section because there are two ways to play supports and resistances. Picking the correct method will require you to study the behavior and personality of the stock. This first strategy will treat the stock as range bound.

First what is a support and what is a resistance?

A support is a price where demand is equal or greater than supply. In other words, it is the "bottom", and the stock price will usually rebound until it meets resistance. On the other hand, resistance is a key price level in which stocks lose their upward momentum and drops due to short sellers and profit takers.

Looking at the chart, it's easy to spot the strategy, buy low and sell high. Well in real life emotions get in the way and the average trader will buy high and sell low. Here's an illustration. The average Joe will buy the stock after it rebounds from support level. It might go up a 3-4% after they buy into it, and that's when they start getting cocky. They continue to hold on the stock even as it approaches the overbought or resistance territory. The Pros that bought early will start locking in their profits and the short sellers will realize that the stock is overvalued, and the stock starts tanking. The cockiness kicks into overdrive and persuades them to hold on, as "it's just a small correction, nothing to worry about". When the selling continues and the stock drops another 10%, they are in the red. To preserve their capital, they sell near the support, and then the Pros come in again taking the stock to new highs. The moral is, buy when people are scared and sell when people get greedy. BUFFET style.

-The Hawk

Support and Resistance:  http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:support_and_resistan

Profiting from Relative Strength

When I say buy the industry leaders I don't mean buy the stock with the highest market capitalization. No No, BUY stocks that show relative strength in a strong industry (do the opposite if you're short selling). 

For example, if the uranium sector is hot take five stocks from that sector and compare them with each other. The one with the best return has relative strength, and will most likely rebound faster than its peers (assuming you're buying at a dip). In addition, you can compare the chosen stock with a broad index like the S&P 500 to double check.

For me, I like to look at a 6 month to 1 year chart. If the stock is consistently outperforming an index then I know I’ve made the right choice, because stocks don’t just move upward for any reason. There must be a fundamental reason!

WARNING: 

1.     Stocks that have relative strength may not outperform the index in an intraday basis, medium to long term would be best.

2.     Relative strength is NOT the RSI index. The RSI index is an overbought/oversold indicator.

3.     Past performance is not an indicator of future performance. If a stock is super overbought then it is not a good entry point.

Profiting from Short Sellers

To start, short selling is the act of borrowing someone else's stock, selling it on the open market and buying it back at a lower price, therefore making money on the difference.  However, the plan may backfire, and the share price may skyrocket. Then they're in trouble because they HAVE TO buy it back no matter what the price is. The short seller will only make money if the share price falls, while the amount of money they can lose is limitless.

Q: Well if shorters have unlimited liability why do they short in the first place?

1. they know something is fundamentally wrong with the company.
2. the company is in a weak industry or the market in general is weak.
3. other people are shorting it and they're just following the leader.

In my experience, if there's a high short interest in a stock I would definitely do extra DD before touching it. Shorters are resilient and will not go down without fighting. In some really orchestrated short attacks I've seen whole reports (i.e. Alfred Little) written, stock bashers badmouthing in forums, level 2 scare tactics (big walls), and online defamatory articles. So if there's a crap load of shorters, the stock price may be depressed for some time.

Q:  How do I make money if they're constantly shorting the stock?

First make sure there's nothing wrong with the company (i.e. no fraud, healthy business), no external problems (i.e. political unrest), strong industry, etc....Then calculate the short ratio, by dividing the outstanding shares shorted by the average daily volume. A ratio of 2 means it'll take about 2 days to cover all the shorted shares. In addition, the company's attitude towards its share price is important as well. Some may not care and others will counterattack via dividends or buybacks, and that's when the fun starts. The stock will rise 5% or so with a strong news release. The professional shorters that began the short attack will most likely cover and buy back the stock sending it even higher. As the share price increases, shorters will panic or get margin calls forcing them to buy the stock as well. How fast and how big the movement is will depend on the float and volume.

- The Hawk

short squeeze article:
http://alphatrends.blogspot.com/2006/09/short-squeeze-article.html

Profiting from Hammers

Basically this is a what a hammer looks like -------->

It occurs at the end of a downtrend, and it's one of the candlestick patterns technical analysts look for.

The validity of the candlestick depends on three factors:

1. A long shadow/tail
2. A volume spike
3. Preferably a bounce off of a standard moving average like 20/50/200.

Even if you don't believe in technical analysis this pattern makes intuitive sense. At the hammer, short sellers and panic sellers are exhausted which means the people that wanted to sell have sold already. Meanwhile, value investors and technical investors notice and start buying, driving the price up. That's what creates the tail. The shorters that sold short earlier will cover (i.e. buy) to lock in profits. In addition, the people that got stopped out or missed the low will chase the stock, sending it even higher. 

In the past, whenever I saw a stock on my watch list tank 10-15%, I would immediately buy it thinking it's a really good deal, however, it just continued to fall. I know this is cliche, but DON'T catch a falling knife. Do some research to make sure there's nothing fundamentally wrong. Have a little patience and wait for the hammer.

-The Hawk

How to trade the hammer:

http://www.swing-trade-stocks.com/t30-chart-pattern.html

Other candlestick patterns:

http://www.vss2000.com/support/iChartPROc.asp

Profiting from Pullbacks

It's always tempting to chase a stock as it soars 10%, 20%, 30% in a day, and once you buy it, it more often then not, it pulls back, triggering your stop loss. I thought I learned my lesson when I fell for a pump and dump scheme, and would never make a silly mistake like that again, unfortunately I bought at the peak of a different stock....There's just something irresistible about a stock rising. Perhaps it's the greed; whatever it is, it's damn hard to control.

When a stock breaks through a major resistance point it'll attract shorter sellers and profit takers, causing the stock price to fall. However, if the stock is in an uptrend in addition to a strong macro-economy, the stock will continue it's upward path.

So when should one enter the trade? Well if you believe in technical analysis, wait for a reversal pattern like the hammer or else monitor the stock closely and pounce when the selling pressure subsides (i.e. when the stock stops dropping and makes a slight gain). If it doesn't subside, then stay away it was probably a pump and dump. Buying the pullback is the least risky trade and should probably be your favorite swing trade.

"Sell into strength and buy into weakness"

-The Hawk

Good link on swing trading and buying the pullback:
http://www.swing-trade-stocks.com/pullbacks.html

Support and Resistance:
http://www.stockscores.com/basics.asp?essayid=4

Profiting from Sleep

Normally, I prefer swing trading, as day trading is just too mentally draining for my taste. You have to wake up early, follow the market minute by minute, follow your stock minute by minute, keep on top of rumors and current events. But I decided to give it a shot anyway, since I was pretty much free this summer. So for the next two weeks I woke up at 6am (9am eastern time) to analyze the news to determine whether I should hold for longer periods or take small scalps.

The results weren't encouraging from Aug 18th to Sept. 6th I made $983.15 after commissions. I definitely would've made more via a full time job. On average I would make 200-300 dollars per day, but would lose $500-$600 on bad days. Well it turns out I lost most of my money on days in which I didn't get enough sleep. When I was groggy, I couldn't react to the news (i.e. bought HGU when gold prices crashed); I would forget to set up my stop losses (usually triggered around -$150); I didn't react fast enough when my stock du jour hit pivot points (surged past resistances). 

In addition, I became burned out and depressed after the first week which further compounded my losses. At one point I had six back to back losses, and was not very happy. Making losing trades actually coerced me into taking unnecessary risk to break even. As you're all aware, not planning the trade is a recipe for disaster. 

All in all, day trading should be treated seriously like a 9-5 job. If you're not feeling 100% or you hate trading then STOP. There's no point in continuing as you'll most likely lose money. I learned the hard way, not trading and relaxing for one or two days can actually be more productive than grinding at the computer day in and day out.

-The Hawk

Burnout: 

http://stress.about.com/od/burnout/a/stressn_burnout.htm

Day Trading and Burnout:

http://davidsadams.articlesbase.com/day-trading-articles/5-tips-for-fighting-day-trading-burnout-1629809.html

Profiting from Seasonality

In simple terms, seasonality refers to times when prices of a particular commodity like natural gas or grains are strongest relative to other times of the year. This may be due to excess consumption or reduced supply. For example, during extremely hot summers, people use more air conditioning and that drives demand for electricity and that in turn drives up the demand for fuel like natural gas. Another is example is, during hurricane season in the US, natural gas facilities have to be shut down thus squeezing supplies and jacking up prices.

As you can see seasonality is nothing more than common sense that can both be applied to fundamental and technical analysis. Fundamental because strong commodities prices will boost earnings of the underlying companies and technical because it occurs annually in a pattern.

After investing for three years without any regards for seasonal strength, I've decided to test the theory out and invest in Silver during its seasonal strength of September 16th to April 11th. With gold prices climbing to $1800 +, its sister metal, silver should follow closely behind. Plus, according to the Globe and Mail, silver has been profitable in the last 11 out of 14 years with average returns of 31.5%. Pretty good odds if I do say so myself. My choice of investment are big to medium silver sized firms like Silver Wheaton, First Majestic Silver, and the more speculative Silvercorp (who has been accused of fraud but isn't proven guilty....yet). If you're feeling particularly ballsy, try the horizon beta pro silver bull ETF (x2).

-The Hawk

More info on seasonality:
http://www.equityclock.com/seasonality/

Globe and Mail article on seasonality of silver:
http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/don-vialoux/silvers-season-of-strength-approaches/article2154664/

Profiting from Taking Partial Profits

With so much uncertainty in the market these days, many investors have switched from a "buy-and-hold" approach to a short term approach. Big named companies such as RIM and Nortel’s share price have been decimated over the years taking the hard earned profits of passive investors. A personal example, in April 2011, I had profits in excess of 100k but greed stopped me taking money off the table, and by August 2011, I was left with 20k in profits. Looking back, I should’ve used a trailing stop loss or sell 50% of my investment off once it doubled. Any method would've increased my overall profits. 

That's not to say take everything off the table if you're up $100. Take profits at predetermined intervals until you reclaim your principle investment then let your profits ride. The fact that you left 50% on the table means you believed there's upside potential otherwise you would've sold everything. If it happens you're right and the stock price explodes, fantastic! If you happen to hold a loser like Sino-Forest, that's ok too because your principle is safe. Minimizing risk and maximizing returns is the whole point of investing. If gambling is your thing go to a casino.

- The Hawk

Profit taking links:

http://trading-stocks.netfirms.com/profit-taking.htm

http://www.stocktradingtogo.com/2008/08/22/stock-tip-1-take-profits-by-selling-half-your-position/