Entry Point
Chapter 1: Getting to a Profit - Profitable Entry Points Reside on the Upside

There are many ways to make money investing in stocks. For example, you can make a fortune if you identify the next Microsoft in its infancy and hold on to your shares during the company’s growth years. Successful companies that dominate their industry routinely reward early investors with ten-to twenty-fold gains, if not more.

Or you can time your purchases and sales of a cyclical stock. Buy at the beginning of a price cycle and then sell near the top of the price cycle. You then wait out the cyclical downside and buy at the beginning of the next price cycle. Astute investors follow one or more cyclical stocks and become proficient at spotting the start and end of their recurring price cycles.

Another way to make money is to buy a stock on the upside and sell it for a pre-determined percentage gain or dollar amount after a short period. Here you can make your money in minutes, hours, days or weeks. Traders and speculators make their living executing frequent trades.

Investors who buy and hold a stock with a long-term price upside can make a fortune. For example, Stryker (SYK), a maker of orthopedic devices, has made many of its patient investors rich.

Stryker investors had many opportunities to buy the stock at low a price so their entry point, or price of the purchase, was low enough that there was a strong likelihood that a profit would result. Even if the stock went down after it was purchased, the entry points were low enough that prices would eventually increase to ensure a profit. The key to making money with any investment is to buy it at a “low” price.

Do Not Pay Too Much

For some investments an investor makes only one purchase so it is essential not pay too much. A good example of a one-time purchase is when you buy a piece of real estate or a parcel of land. If you pay top dollar at the peak of the current price cycle, you may have to wait years just to break even. And if you have to sell soon after the purchase, you would probably loose money. But had you bought at the bottom of the market, the purchase price would have ensured a profitable investment almost immediately. The principle of paying a low price holds for any investment whether it is real estate, stocks, bonds, puts, calls, corn futures, classic cars, coins, stamps or whatever.

It is always best to buy at low prices, but is it better to buy low when prices are rising or falling? Generally, you have better than an eight in ten chance of making money when prices are rising and only a one in ten chance when prices are falling. I used to routinely buy stocks just after they had dropped in price upon announcing “bad” news. I assumed that I was getting a bargain. But in most cases I was not, because I was buying on the price downside. I did not realize that almost ninety percent of all downside buy and sell combinations lost money. So I was forced to either sell the stock for a small loss shortly after I bought it, or hold on to and experience a sinking feeling as I watched my paper losses mount. Unrealized losses can be are just as unpleasant as realized ones.

Make Money On the Upside

It is intuitively obvious that it should be relatively easy to make money with a stock that increases in price. For on the upside most entry points lead to profitable buy and sell combinations, but on the downside most entry points do not. But because prices do not go up or down in a straight line, you can lose money on the price upside and make money on the downside.

On the price upside, prices move up to a point, then retreat, move up again and fall back. The upward trend is maintained as long as the advances are greater in magnitude than the declines. This recurring advance and retreat pattern is common to all price upsides. For the price downside; prices fall, move up, fall more and so on. But on the price downside, prices decline more in amount than they increase.

These ups and downs of prices are the reason why all upside buy and sell combinations are not winners and all downside buy and sell combinations are not losers. If you buy on at a local top and sell at a local dip, you could lose money even if the price trend were up. But for a price upside, most entry points end up with a profit because the overall trend is up. Likewise you could buy on a price dip and sell at a local high on a price downside and make money. But most entry points will result in a loss because the overall trend is down.

Cover Contents Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6

Posted February 21, 2007.

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