Picking the Right Stock is One Tough Job

Picking the Right Stock Is One Tough Job

 
Picking stocks is more an element of art (or luck) than it is a science.  As some sage once noted, it is extremely difficult to make predictions, especially when they involve the future.
 
I would like to share a personal experience I had a couple years ago.  At the beginning of 2004, I created an Auto-Trade portfolio for people who believed the market might crash.  I set out to find three or four companies that were hopelessly overvalued or otherwise expected to fall in value.  Once I found these companies, I planned to place option positions using puts that would escalate in value as the stock prices fell.  This way, the portfolio could be expected to make money in a general market crash, or when these individual companies fell to their "true" value.
 
I read dozens of articles looking for dogs.  I checked to see what the analysts were recommending to sell short.  I read a dozen investment newsletters looking for overvalued stocks. Two magazine articles were particularly noteworthy – each asked four top analysts to select the one stock they would sell short, and to give their reasons why this one stock was sure to plummet in price. These guys were real experts – they had to have outperformed the S & P 500 for the prior year even to be considered for the survey.
 
Two of the analysts picked RIMM (a Canadian company that makes the BlackBerry paging device), then selling at $40. "Hopelessly overvalued", one analyst noted – "true value about $15".  Eight months later, RIMM was selling for almost $160 and a 2-for-1 stock split took place.   Investors who had taken these analysts‚ advice would have lost almost 400% on their money.  (It is really hard to lose over 100% of your investment, but you can manage it if you sell short).
 
Anther popular pan was Dillards Department Stores (DDS). "They can't compete with K-Mart or Walmart on price, or get the margins of more upscale stores," one analyst opined.  While most analysts rank companies as "strong buy", "buy", or "hold" (which is generally a euphemism for "sell"), an amazing 70% of analysts rated DDS as "sell" or "strong sell".  I have never seen such a universal condemnation of a company like this. Over the next eight months, while the market fell 8% or so, DDS rose by 50%.  So much for these analysts.
 
Another company many "experts" disparaged was EBAY.  They pointed out that EBAY's (forward) price/earnings ratio of 120 was ridiculously high.  Some analysts calculated that if EBAY had expensed employee stock options as they should have, the company would never had shown a dollar of profit in its entire existence.  Over the next eight months, EBAY rose by over 25%.
 
I had selected all three of these companies proclaimed as "dogs" by the experts for my Cover Your Butt Strategy portfolio, and set up positions so that we would prosper if these companies fell in price and break even if they stayed flat. Only in the unlikely event that they went up in price would we lose money.  Of course, we lost money.
 
I am now convinced more than ever that it is pure folly to try to succeed in the stock market by picking the right individual stocks, especially if you are trying to find ones that will fall in value.

 
Selecting good stable stocks is so difficult that one alternative is not to pick a stock at all, but to use an index as the underlying.  Three of my favorites are the Dow Jones Industrial Average tracking stock (DIA),  the Russell 2000 Small Cap (IWM), and the ETF Oil Services (OIH).
 
Even though the option premiums are also very low in DIA, we have created our most conservation portfolio using DIA as the underlying - which is made up of 30 very large and established companies in a variety of industries, each paying a dividend. It tends to be more stable (less volatile than most individual stocks).  This portfolio has gained over 26% every single year for the nearly-three years we have conducted it, even in 2005 while DIA fell slightly for the year.  
 
In 2005 and 2006 we have had excellent success using an ETF, Oil Service Holders (OIH) as the underlying.  This index is made up of 18 companies serving the oil industry – drilling, exploring, repairing rigs, etc.  Our 10K Oil Services portfolios gained over 100% annualized in 2005, and a third OIH portfolio has made good gains in 2007 as well.
 
If you would like to learn about a great way to make 50% to 100% a year without picking the right stock, you only have 4 days left, until Monday, August 25 to take advantage of my special offer:
 
Become a Terry's Tips Insider, pay only $79.95, and receive my 72-page White Paper which explains my favorite option strategies in detail, including complete Trading Rules for each, including the 10K Strategy that earned over 200% with Fannie Mae in a single year, and get all these benefits absolutely free:
 
1)    My special report, "How the 2005 Apple Portfolio Doubled in 4 Months," with every trade itemized, and an explanation of how it was made in accordance with the Trading Rules for the 10K Strategy – 23 pages of valuable real-time option trading advice, a $50.00 value in itself.

 
2)   Two free months of my Stock Options Tutorial Program service (a $49.90 value).
 
3)   Weekly updates on several actual portfolio accounts with every trade ever made in each one.  Each account is a real-time unfolding of one of the basic strategies developed in the White Paper.  Different underlyings or investment amounts are used for each portfolio.
 
4)   If you would like, I will email you with every trade I make in each of these accounts, so you can make those same trades yourself if you wish, maybe at even better prices.

To take advantage of this Special Offer, you must order by midnight on Monday, August 25. Select Option #1 and enter Product Code 196.  Click on https://www.terrystips.com/secure/order.php to join.  
 
Why wait until the last minute to start your program for making extraordinary gains every year without even having to think about picking the right stock?  Do it today.  I‚m quite sure you will be glad you did.  Terry