Finding Trends
You can’t handle the truth!
—A FEW GOOD MEN
The All-Time-High List: Embrace It
My secret formula is hereby revealed.
I know you want more and I would be happy to give it to you, but that’s how I start and end my search for stocks. All the great stocks show up here, so why look anywhere else? The truth is, you would have participated in RailroadMania, NiftyFifty-mania, Micro-softMania, YahooMania, OilMania, and GoogleMania if only you had been watching the all-time-high lists. With the proliferation of inverse ETFs, you would have also participated in CreditCrunchMania as financial and real estate stocks plummeted in 2007 and 2008.
I remember when we profiled Google on Wallstrip in October 2006, after the infamous YouTube acquisition of $1.6 billion. The “man on the street” was aghast at GoogleMania. People couldn’t believe how overvalued Google was at $400. They preferred Yahoo and Microsoft because they were cheaper! Google continued on to $700—not a home run, but a great one-year return and long-term capital gain for those willing to follow price and all-time highs. I wrote this following our show back in October 2006:
It’s happening. Watch the Wallstrip Google video again. The “man on the street” does not believe. The “man on the street” does not own Google. They own Yahoo and Microsoft. They own 500 shares, 100 shares, 10 shares of that crap.
Don’t worry—Google paper will be crap as well—just not yet.
It is the same f@#cking game played over and over by Wall Street. IT IS CALLED DISTRIBUTION. It takes time. When Wall Street gets hold of a beauty like Google, they take their sweet time distributing it one share at a time to every last believer in the story. See—Intel, Microsoft, Dell and Ya-hoo. Could take 15 years or three. The Google stock distribution game has just begun.
It is the normal complaints I am hearing again—stock is too high, market cap is ridiculous, shares are too expensive, too many acquisitions, I should have bought at $162, should have bought on the pullback to $320 . . .
In the meantime, everyone owns Yahoo and Micro-soft—stock is too low, market cap and PE are reasonable, it’s cheap relative to Google, I can always double down cheaper because it’s already so low. OY!
In summary, if you want to make money trend following, you need to stop hating the manias and learn to embrace them. There are always trends at work in the stock market. If you watch the all-time-high list, you will be looking at opportunities from a database of companies into which money is flowing today.
Invest in Healthy Markets for Healthy Returns
If the stock market is strong and you have many stocks to choose from on the all-time-high list, your probability of success rises. Don’t just look at the Dow Industrials. The Dow is based on thirty stocks and is price weighted. The highest-priced stock has the most influence on the Dow. You did not hear it from me first, but the Dow can go wherever the big money wants it to go for a good period of time—long enough to fool you. Use the broader-based indexes like the S&P 500 or the Wilshire 5000.
My most trusted method to gauge the health of the market is by monitoring the all-time-high lists over a period of time. Price is the greatest predictor, but you need some context. How many all-time highs are there today versus last month, for example? The more the merrier. And with some practice, you won’t need to see the indexes. You will just know whether cash is king.
In February of 2008, just a handful of stocks were hitting all-time highs, mainly in biotech, gold, oil, and basic materials. I owned many of them, but my overall positions were light because I do not consider these sectors to be growth areas. Their suc-cess implies problems for the real growth stocks. One year earlier there were hundreds of stocks to choose from. We want to be hunting for winners when the leaders are plentiful.
As noted, Investor’s Business Daily has a great one-page daily summary of the overall markets. I check it at least once a week. Watching the all-time-high list over a period of three to six months will give you a great additional feel as to the overall health of the financial markets. One huge advantage of trend following is the reduced overall workload. It’s less taxing on the mind. We all want to make better returns while doing less, so in bad markets, fewer stocks will show up on the new-high list and you will inevitably be doing less. Trust me, it works.
Sideways Is Good!
From my own trading experiences and my reading of the missives of successful traders, timing your entries is not as important as managing your exits. I want to own stocks at all-time highs, but buying stocks as they emerge to all-time highs from longer periods of sideways action is something I try to do. It is more art than science, so managing the position is really the secret sauce.
From monitoring the all-time high list you not only get a feel for the overall market, but you also see the new names emerging over time. As you start seeing the long-term charts of the best stock gainers throughout the book, you will notice the long sideways actions that frequently occur before big gains.
Sharks? Pilot Fish?
I like to use a simple analogy to explain trending stocks at or near all-time highs. Sharks move water and they cannot hide. The pilot fish swim underneath the shark. That’s their job, and they are genetically coded to do that. If they venture too far away from the shark, they run the risk of getting lost or eaten. Not a bad life, and I imagine the pilot fish can do some serious trash talking.
Individual investors can learn much from the pilot fish. The financial world is made up of giant institutions, and they are moving money the way sharks move water. Once they start moving money, they can’t hide it, so if you are an investor and you are smart, you swim with the giant institutions. You follow them. Closely.
Following the giant institutions as they move money is akin to hiring the best minds in the financial world. Some would argue the term best, but in the real world of money and finance, big and best often go hand in hand. The main reason companies are at all-time highs is that they are performing better than the rest, and influential people, people with knowledge and power, have been buying them. Those people are doing the research for you, and they have the resources and skill to do it better than you possibly could, even if you did have the time. The sharks usually know where a stock is going, and you cannot compete with them over time. Let those smart people work for you and go with the flow.
Finding Trends: An Example
My experience in buying and selling Crocs is a perfect example of how I approach finding, riding, and getting off trends. In October 2006, I noticed that Crocs’ stock had hit an all-time high. I found it the same way I am telling you to find stocks, by monitoring the daily list of all-time highs. Lots of stocks were breaking out. Crocs are those ugly rubber shoes with holes in them, the ones that look like a hollowed-out football for your feet.
Here is what I wrote in October 2006:
I wear the Crocs knockoffs that my friends at Lifestyle Brands in To-ronto manufacture and sell like crazy. This is the most comfortable shoe to ever grace my feet. Since I buy new highs . . . I am intrigued. Crocs is a BILLION dol-lar company already—HOW? Does it have legs (feet for that matter)? What is the catalyst for this relative start-up already on fire?
First off, they have been smart about dealing with knock-offs—SETTLE. Focus on the road and business ahead. Want real proof how well they are executing—go visit their bad ass website. Go check out Flickr and search CROX. Check out the Google term “Crocs.” Actually, Googling “Crocs” got me thinking. Private Label shoes. Nike has done it on their website and my nephew sleeps with his self-designed shoe (Nobody innovates better than Nike). I expect CROX to blow up this area with their easy to manufacture shoe.
Long story short—CROX is for real.
Suppose you noticed your friends and neighbors, as well as people at the mall, and maybe even your grandmother, wearing Crocs.
Suppose that you then went to Wallstrip.com, the Internet show and blog that I founded, and read what I wrote about Crocs. Suppose that you had taken my advice and visited Flickr (www.flickr.com), the Web site where people share their photos online. There you would have found thousands of pictures of people and their Crocs. A Google search for “Crocs” would have uncovered testimonials from all kinds of people: doctors and chefs, hikers and sailors, hairstylists and seniors just like Granny. Your search would have pointed you to YouTube, a video-sharing site, where you would have seen videos about Crocs. That’s right: people making videos about their shoes!
You might also have gone to Google Finance or Yahoo Finance and read about the people who make Crocs, seen their financial statements, visited that bad-ass Web site, and been amazed by the list of thousands of stores that carry Crocs. You might have typed in your zip code, found the store nearest your home, gone there, and asked a few pertinent questions, such as “How are people reacting to Crocs?” and “How fast are they moving off the shelves?”
You might have become convinced that Crocs were a true cultural phenomenon and not just a flash-in-the-pan product. You might have bought a pair of Crocs and loved them. Then you might have bought Crocs (CROX) stock (like I did) at that all-time high. Your friends would have called you crazy. It’s an ugly shoe. Your broker might have tried to talk you out of it ticking off the short interest or the high price-earnings ratio. But if you had bought it after our first show, you would have watched it gain close to 300 percent in the next year. If you had followed my blog you would have also captured a big gain as we sold on the way up.
No gain is really a gain until booked. Managing positions so that big winners do not ultimately become losers is extremely important. I will drill down into the mechanics of managing positions—losses and gains—in Chapter 5.
A Trend That Found Me
Some trends really do just hit you on the head. I was taking my kids to McDonald’s and we were walking past a restaurant I had never heard about—Chipotle—and people were lined up outside the door. I don’t like Mexican food but my daughter does, so she changed her mind about McDonald’s and wanted to go to Chipotle instead. We waited in line about ten minutes and I got myself a burrito.
I had never seen a restaurant like that. I got everything the way I wanted it, everything tasted great, and it was quick. My son didn’t like it, but my daughter loved it, and I asked the guy at the cash register, “Who owns Chipotle?” He said, “McDonald’s,” and I thought, Rats. When I got home I looked at McDonald’s stock and saw that it was in the twenties, so it was not near an all-time high. I found out Chipotle had only seventy restaurants and McDonald’s had thousands, so Chipotle was not going to make a difference to McDonald’s stock. But I wrote on my blog that “someone at McDon-ald’s should get a raise for buying that company.” (In hindsight, buying McDonald’s stock would have been a great decision as well.)
Six or eight months later, after I had been eating at Chipotle once a week with my daughter, I heard that they were doing an IPO. I wrote about it, saying, “It doesn’t matter what happens with this IPO. Whatever price it comes out at, it’s a buy.” I was confident after eating there all that time and seeing how they ran the restaurant, how four people could run an operation like that, and how simple the menu was: burritos, tacos, chips, and salsa. They also did the little things that made eating there a great experience, such as using free-range chicken and keeping the place clean. It was not like a usual fast-food restaurant, but the prices were pretty much the same. Every time I talked to the management they said that the restaurants were doing well, and no matter where I went to a Chipotle, they were busy.
What excited me most was that they were in only a few southwestern states, so they had a lot of opportunity in front of them. America has 300 million people. When you find a chain that is run the way Chipotle is run, and then you see that it is in only a few states, you feel like you really have something. The really nice thing is that Chipotle is a cookie-cutter operation, meaning that they figured out how to run it, so it was just a matter of duplicating the formula. I believed it was a trend I could jump on. When your kid likes it and you like it too, it’s an easy decision. You just know that you are going to make money with something like that. When you have that confidence, you can tune out a lot of the noise. When Chipotle came public, I closed my eyes and bought it. The stock nearly tripled in eight months.
If you missed out on Chipotle, be alert for the next Chipotle and, as I always say, Chipotle may still be “the next” Chipotle. Your opportunities are endless. Do not get bogged down in the ones you missed or the ones where you screwed up. Just keep your eyes open for the next one. If you can be profitable just 50 percent of the time finding stock trends, and if you manage your losses, then you can make money. If you are profitable 60 percent of the time, you will make a lot of money.
Touching the Product: The “Experience”
I must believe that a company and its products fit my style—both my lifestyle and my investing style. Buying and holding stocks is like buying and wearing clothes. Jeans are just pieces of denim, and stocks are just pieces of paper. Learn to look at investing in that way and stay true to your own style. I have too many pairs of jeans that don’t fit. I might have bought them because of a great salesperson, the branding, or the fact that I was in a great mood and/or in a rush. I have a closet full of clothes, but only six pairs of pants that I like. So what do I need? I need pants that fit. Buy only green stocks if that fits your style, or only vice stocks, or neither of those. Both stocks and clothes have to fit and make you comfortable. Not all clothes or stocks will work for you, so you have to experi-ment, maybe try some things on until you find a style that fits your risk profile.
When you have spotted a company on the list of all-time highs that resonates with you and you can understand it, you need to take it further. If you have no experience with the product, you then need to interact with it. If it is Crocs, go to the store that sells them, ask questions, buy a pair and wear them for a while. If it is Chipotle, go eat a burrito. Talk to the employees.
Apple
My encounter with the iPod in 2005 is another good example of how I did some groundwork and experienced the product—and I’m not even a technology person. I have never been comfortable with gadgets, but the iPod reso-nated with me the first time I picked one up. Then when I went to work out at the health club I would see a few people wearing those white iPod ear buds and I knew in my heart of hearts that within a year or two, nine out of ten people would have those ear buds. I wouldn’t buy the stock because it wasn’t even close to being at an all-time-high; buying it then would have violated my boundaries.
But I did buy an iPod and was using it, and it just so happened that an Apple Store stood across the street from my office. I found myself in that store all the time, and I noticed how busy it was and how much activity there was around the product. Eventually the stock started moving up and the stronger it got the more confident I became. I did not buy it at twelve dollars a share, the approximate price at the time. I waited until the stock tripled (still not an all-time high), and by then it had already risen to about forty dollars (pre-splits). I could not resist. I felt it in my bones. It seemed like the craziest time to buy the stock, but it proved to be a really good buy.
Sure enough, the white ear buds were all over the health club and the stock went up over 400 percent in the next two years. The iPod was a product I used and liked. It came from a place where I shop and was part of the lifestyle that I have adopted. The people around me also used it and liked it. All of those things gave me comfort in the catalyst for the stock. I could shut out the naysayers. I was actually em-boldened by them, as they would be fuel for the fire when they finally purchased an Apple product. My investing standpoint was not all that different from my consumer standpoint: I was part of the trend. I was not the first person to buy an iPod or Apple stock, but that didn’t mean I couldn’t make money.
Try to look at the products you use, enjoy, and promote every day in a different light. You are spending your money on them, but they may also put money back in your pocket. Also, get in the habit of being in tune with which companies are performing best. Over time, the picture will start becoming clearer to you. It is not an overnight revelation, but a process. To begin, you may just grab a piece of paper and list the products you use every day. Then you have to do a little research (Chapter 4). This is not free. People do not just put money out in the street for you. There is some work involved.
I like to be able to touch and feel the products or services of the companies I invest in. It helps me form an opinion. That is why Chipotle, Crocs, and Apple were important for me. I used them and they made my life better, so I figured that they had to be helping other people as well. When you touch a product and it makes you feel like that, then you are more involved and can develop the confidence in a catalyst that allows you to buy the stock and hold it long enough for it to make a difference to your investment returns.
An employee at the Apple Store in Phoenix bought Apple stock, quit his job as a banker, and went to work for Apple so that he could keep in touch with their thinking, strategy, and products. He made several million dollars because he was excited about Apple’s products and wanted to stay close to his investment. He had a vision where the company was going and wanted to be a deeper part of it. You don’t have to quit your job and go to work for another company; this is an extreme but true example.
For me, the BlackBerry is another product like Crocs, the iPod, and Chipotle. I used my “CrackBerry” sixteen hours a day. If you get your hands around a product like that and it makes your life better, then you’re on to some-thing. You have to examine the stock price and market conditions, but that kind of experience is a great starting point.
In February 2008, Apple dropped from $200 to $119. My stop was at $140, so I gave back approximately 30 percent of my gains at the end of this trend. I stuck to my sell discipline (Chapter 5). It hurt to sell my favorite stock and company of three years, but if I was not trend following I would never have caught the gain in the first place. With the stock trading at $119 I can always buy it back or can wait until it takes out $200 (its all-time high).
Setting Boundaries
We all need boundaries. They are the limits that you set for what you will and won’t do, and what you will and won’t accept in your life. Boundaries are like invisible fences that help you deal with matters of life such as raising your kids, dealing with your relationships, keeping yourself from burning out at work, and generally staying safe in the world. We should set boundaries to manage the quality of our lives. You also have to establish boundaries when buying and selling stocks. They should provide you with starting and stopping points that alert you about when to get on and when to get off a trend.
You need boundaries to limit the universe of ideas you are even going to consider. I want to keep that universe simple so I can spend my life doing things other than a lot of research while also improving my chances of catching a trend. If a stock shows up on the list of all-time highs, I’ll consider it. If I have a good experience with the company’s product or service, I’ll consider it. My hope is that they both coincide. I will explore whether a catalyst really exists. Other than that, I am not interested. If you stick to those two sources of information, you won’t have to go searching for the next great trend. It will find you.
Boundaries versus Rules
Rules suck because they make you feel bad when you break them, but it is okay to stretch boundaries. I might have stretched my boundaries and bought Apple around twelve dollars instead of waiting for it to triple and more than confirm my belief. If you practice discipline, you can stretch your entry boundaries for ideas in which you have strong conviction.
I also stretched my boundaries to buy Chipotle when I heard they were doing an IPO. I was going to be out of town, but I put in an order to buy the stock at the market price. The price was much higher than I expected it to be. I was very upset with myself because I never expected to pay that price. I had been so confident after eating there all that time, and seeing how they ran that store, seeing how four people could run an operation like that, and how simple the menu was, and the management told me how well they were doing. Chipotle turned out to be a great stock. The point is to make your decisions easier and to force you to make a really careful, conscious decision before you stretch them. It also helps to have a strong market. Buying the best stocks in bad markets is like swimming upstream—extra risk.
There is a second reason why my search for trends relies on a list of all-time highs. When a stock hits an all-time high, everybody who has held that stock has made a profit and the last person to buy is at the break-even point. The psychology around the stock changes when it reaches an all-time high; there is a new ownership attitude because all of the people who want to sell in order to break even have sold. Furthermore, every person who has sold short (betting against the stock) is now at a loss. Those betting against the stock are losing more and more money with each tick upward. Their psychology adds upside buying fuel to an all-time high.
I think of the list of all-time highs as a database of potential big winners. When I check the new highs, I immediately eliminate ones about which I have no understanding or that I can’t relate to. For example, I might find that oil is doing well, but I don’t understand what all those oil companies do. It just is not in my knowledge base. I don’t understand the intricacies of who drills, and who ships, and what is involved in pipelines.
Theoretically, from what I have outlined so far, every stock on a list of all-time highs is okay, but unless you have lots of money, a computer brain, and the ability to manage hundreds of positions, you have to cherry-pick. As I scan a list of all-time highs, eliminating those I don’t understand or these from industries I have little faith in, I also take note of companies that I can relate to in some way. I have then narrowed down the stocks that have hit all-time highs to the few I’ve encountered and can understand, or maybe my sister or my kids use the product. Now those companies are planted in my consciousness.
Smith & Wesson
Smith & Wesson showed up on the all-time high list in August 2006. It was a leading brand name I could understand and one that interested me. I don’t know much about guns and artillery, but I knew that Smith & Wesson was an old and established brand. When I looked at the price I thought, Wow, that’s attractive. The stock had been going sideways for years, and now had peaked into new territory it had never been in before. So it was in uncharted waters. I love a stock in uncharted waters, and the longer it has been in charted waters, when it finally moves to uncharted waters, the stronger it has broken out. Lots of positive things can happen when a stock breaks out from a very long base.
I bought shares of Smith & Wesson in June of 2006 and was very bullish on my blog. It tripled over the next year. I don’t expect lightning to strike every time I check a list of all-time highs, but it does happen. I was selling the stock all the way up because it was not a company I wanted to follow. I was willing to part with the stock and give up further gains because I had little context for it. This turned out to be the right thing to do, as Smith & Wesson cratered. Sometimes you get lucky and find them, ride them, and get off just in time.
When I experience good things or hear a lot of positive chatter about a particu-lar product or company, it is almost guaranteed that if I look at the new all-time-high list, I am going to see that company on the list. Spend five minutes a day with Wall-strip.com or with Investor’s Business Daily(investors.com), checking stocks that are hitting all-time highs. Look for new names on the list. For the best investment results, wait for a growing list of names.
Being Too Early
While paying attention to my experience and my experience with a product are important to me, price is the most important part in catching a trend. If you catch it too early, you could miss a lot of other things that are going on. If you catch it too late, the rest of the world may be on their way to something else as you arrive.
I was too early on Federal Express. In 1998 and 1999, I believed shipping would catch fire. Oil was a mere ten dollars a barrel. I was convinced the Internet was not a fad. Wall Street was in love with Amazon, eBay, Yahoo, and shopping on the Web, so I assumed that the shipping companies would become the most important companies of the Web. I had a “eureka moment.” I felt like a genius. This was before I set my boundaries about all-time highs. It turned out that I was right, but it didn’t matter, because the money was flowing into Amazon, eBay, Ya-hoo, and the brands that sold the products. Although it made sense that FedEx, Air-borne, and UPS would be big beneficiaries of Internet shopping, none were near an all-time high. Although I was right, I was wasting time, energy, and money by fighting price. I didn’t have enough money—and neither does the average investor—to be early.
I was stubborn, so my money was tied up in shipping. It was bugging me and I was getting mad at Amazon, the stock, and all the people who were in love with it, thinking, They’ll never make money, but FedEx has to ship all these books. I was not thinking clearly. I wasted over two years of opportunity trying to prove I was right. In a sense, I was right to be big-game hunting, but it is much better to hunt where the big game are roaming.
A few years later all the Internet retailers were struggling, their stock prices were going straight down, oil prices were rising, and the prices of shipping and other logistics companies began to defy gravity on the upside. You would have found those stocks trading at all-time highs, and you would have said, “Eureka! Now I get it. My story is right. That is where the money is now flowing. Now I’ll ride the trend.”
In the stock market there are some bragging rights but not much else for being early. Save your bravery for the real battlefield. Don’t let stocks and the stock market become your way of proving how smart you are—to yourself or your friends. Park your ego somewhere where it won’t cost you anything. It also doesn’t matter that you care about something. It only matters if the masses and the institutional money managers care, and that is reflected in the price of the stock. Smart and the stock market are not intertwined. The less attached you are to being right about a product or service, the more serenity you will have, and the better your judgment will become.
Being Late Sucks
By September of 2007, it was too late for Crocs. I remember Bill Maher was doing his “New Rules” bit at the end of his cable TV show. He flashed a picture of Crocs on the screen and talked about how Americans had become so fat, lazy, and casual that they had resorted to wearing plastic on their feet in silly shoe colors like orange and turquoise. At the time, I continued to love my Crocs and still saw Crocs as an incredibly comfortable product. But Bill and I were looking at it from two different perspectives. Maher and his writers knew there was a large enough audience of actual Crocs customers, so the joke would resonate. The joke was on investors.
Crocs was an old story; the jig was up. CROX at fifty-nine dollars is not the same as CROX at fourteen, twenty-four, or thirty dollars. It may be a phenomenal company and an immensely popular product that you love, but price is the final arbiter. Even though you might have just bought your first pair, it wasn’t the beginning of a trend anymore. You are trying to find stocks at an all-time high, but be wary of stocks that have run 700 or 800 percent from their first all-time high.
Finding the Next Winners: The IPO Market
Ninety-nine percent of all great trends start at an IPO. Microsoft, IBM, Google, Starbucks, Ford, and General Electric all had their first day of trading. An IPO is the first clear public signal that there is something interesting going on with the company. It tells you what bankers, venture capitalists, and entrepreneurs have created.
When you are looking at companies going public, you can be guaranteed that they will be in industries that are in the public consciousness because bankers have to feel confident that they can sell the stock. In 2001 and 2002, after the Internet crash, there were very few dot-coms going public, but those that did get public had good business models. You can find hidden gems on the IPO list. If a company is good enough to get public and they need capital, they don’t care about market conditions. They need the money. That IPO may struggle in the beginning. Google, for example, became public at a time when nobody thought Internet stocks could do well. Back then, homebuilders were going public and gold-mining stocks were in favor because there was a huge demand for them. The IPO market works just like any other market. It is a supply-and-demand dynamic, and you have to stay in tune with what is in supply and what is in demand.
A stock is at an all-time high on the day it comes public, but there is no context for how it has been or could be. For those reasons I will let a company age for six months after the IPO in order to get some feel for it. Do people want it or do people want out? Google came public at eighty-five dollars in August 2004, quickly went to one hundred, and was considered overvalued by everybody from the Washington Post to the Wall Street Journal. If you had waited six months you still would have fared mighty well.
I did stretch my six-month boundary for Chipotle. I put an order in the day before the IPO. I had to own it the day it came public because I really believed in the company and thought I understood the context and the story. The context was that the company would now have money to open hundreds more stores. I paid more than I expected. Chipotle was one of those one-in-a-million businesses that I wanted to own, and with that came the extra risks of chasing the IPO.
I also loved Lululemon (NASD: LULU), which came public in 2007. Lululemon is a yoga apparel chain founded in Canada. I did not chase the stock on their IPO day because, unlike Chipotle, I didn’t have enough experience with their products. I wore and loved their products, but I didn’t have a feel for how well their stores could do and which markets they could exploit. I was not confident in the total opportunity. Lululemon went straight up to sixty dollars but quickly back to thirty. I now have context for owning the stock if it ever did hit another all-time high.
When Chipotle came public, it already had the funding it needed and the partner it needed—McDonald’s—and it had already been successful at over a hundred stores. There are blogs about restaurants that I could go to for insights and information, but a restaurant is generally a feel and an experience for me, and so something I know about because I eat out all the time.
That’s why you should check the IPO list. You can find that at Investor’s Business Daily and at ipohome.com. Those two sites give you a list of companies that are coming public or have filed to go public. This provides information about the early winners and losers and, therefore, they are good places to stay on top of new trends.
In a bad market, you will not see many companies go public because, in a bad market, nobody wants to own stock. On the other hand, if you see a lot of soft-ware companies coming public, or restaurants coming public, that is an indication that bankers are confident that people want those kinds of stocks. If you see lots of IPOs, that is usually a good time to get in the market because it is willing to take in an extra supply of stock. As always, context is important. In late 2000, there were hundreds of IPOs a week, so it is not an absolute thing, rather one of many indicators you should use to gauge the market’s health.
To-Do List
1. Study the all-time-high list.
2. Wait for healthy markets for healthiest returns.
3. Don’t rush—investing is about opportunities. Stay in the game!
4. Price trumps personal opinion.
5. There’s no reason to be early and call bottoms.
6. Go with the money flow.
7. IPOs are a great place to track future winners: www.investors.com and www.ipohome.com.