BY: Den Somera
William O'Neil is a strong advocate of what is known in stock trading as "averaging up." It's a powerful concept of maximizing trading profits. It blends and works well with his investment management style, which is to buy and keep more stocks that are doing well.
This is not exactly his original idea. O'Neil claimed to have picked up the method from the book of the legendary Jesse Livermore, who lived in the early part of the last century. The book was How to Trade in Stocks.
I introduced William O'Neil in my previous column as one who could certainly be in our golden gallery of market winners, owing to his unique approach and success in beating the market.
O'Neil is best known as the founder of Investor's Business Daily, a national competitor of The Wall Street Journal, if you don't know that yet. He is a professional investor with a unique investment concept reflected in his famous CANSLIM system.
At 30 years old, he accumulated enough trading profits to buy a seat at the New York Stock Exchange and founded his own investment research organization.
In 1988, O'Neil wrote How to Make Money in Stocks: A Winning System in Good Times or Bad. The third edition is its latest and is completely updated.
The principle of averaging up is simple. The game plan is to buy more shares of the stock that is increasing in value.
In other words, it is a process by which you buy additional shares at higher prices. The investor accumulates an increasingly larger position in a stock while keeping the average cost of the position lower than the stock's current market price.
For example, you buy Pacific Online shares for P12 apiece, and as the stock rises you buy equal amounts at P16, P20 and P24. This will bring your average purchase price to P18 per share.
Assuming that you sell, even at P24 per share, you would have made about 33% (estimated total sales proceeds of P96 less total acquisition cost of P72).
In actual terms, the final return on investment is derived by deducting related transaction costs such as broker's commission and other trading charges and slippages.
If you average up by buying shares in decreasing volume as the prices of the shares go up, you will be realizing a higher net return than when averaging up in equal volume.
The process will also result in a pyramid-like formation of shares when you stack up the shares according to their volume and share prices. This is the reason why averaging up is also called pyramiding.
Other than this visual form, this process is in no way similar to the pyramiding scheme that recently hit a number of moneyed residents of Forbes, Dasmarinas, Urdaneta and highbrow scions in the business circle.
This pyramiding scheme is a classic investment fraud in which the operator pays high returns to current investors from the contributions made by new investors.
The funds are not invested or insufficiently invested in any productive asset. These are simply paid out as a return to those who invested earlier. The operator must continue to attract more prospects and receive more contributions. A snag or decline in the stream of investment money coming in will result in a serious deterioration of the scheme. This is called the Ponzi scheme, named after its original proponent.
When averaging up, you will notice that the average price that the investor pays for all the shares goes up. Thus, the payoff of averaging up comes as a result of the stock price continuing to go up.
Otherwise, the investor will suffer substantial losses if the stock price quickly drops. Its successful application will largely rely on the right market condition or timing.
Averaging up is the opposite of the natural tendency to buy additional shares at lower prices, called averaging down. O'Neil does not agree with the merits of averaging down. It's something that produces the same false hope that the turkey trap story promises.
To him, "The whole secret to winning in the stock market is to lose the least amount possible when you're not right." Thus, when wrong, don't average down.
The first mistake is the cheapest. Don't add more to your mistake. But when right, exploit it to the fullest by averaging up. We'll have more of William O'Neil's CANSLIM and trading schemes next time.
Trading was mild on Wall Street on Friday, but relatively stronger on a weekly basis. Overall, nothing positive is expected to happen in the near term.
There are those who insist that the Federal Reserve can't stop recession in view of the disappointing latest retail sales figures. The rate of increase fell to 0.3% in August from 0.5% in July.
The slide came as a surprise as economists had expected another 0.5% jump. Household spending accounts for two-thirds of the US economy.
The fears sparked by falling home prices, costly gasoline and tighter loan standards may cause consumers to put away their wallets.
While the Fed is expected to cut rates at its policy meeting on Sept. 18, experts are divided on whether this could be of help to prevent a much feared recession in the economy.
In the meantime, oil prices have reached all-time highs and are expected to still go up in the long term.
This reminds me that we'll soon have production in the Palawan area. Watch out for more details.
(The article has been prepared for general circulation to the reading public and must not be construed as an offer to buy or sell any securities or financial instruments referred here or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that can affect the objectivity of their reported investment activity. You may reach the Market Reader at densomera@yahoo.com)
This is not exactly his original idea. O'Neil claimed to have picked up the method from the book of the legendary Jesse Livermore, who lived in the early part of the last century. The book was How to Trade in Stocks.
I introduced William O'Neil in my previous column as one who could certainly be in our golden gallery of market winners, owing to his unique approach and success in beating the market.
O'Neil is best known as the founder of Investor's Business Daily, a national competitor of The Wall Street Journal, if you don't know that yet. He is a professional investor with a unique investment concept reflected in his famous CANSLIM system.
At 30 years old, he accumulated enough trading profits to buy a seat at the New York Stock Exchange and founded his own investment research organization.
In 1988, O'Neil wrote How to Make Money in Stocks: A Winning System in Good Times or Bad. The third edition is its latest and is completely updated.
The principle of averaging up is simple. The game plan is to buy more shares of the stock that is increasing in value.
In other words, it is a process by which you buy additional shares at higher prices. The investor accumulates an increasingly larger position in a stock while keeping the average cost of the position lower than the stock's current market price.
For example, you buy Pacific Online shares for P12 apiece, and as the stock rises you buy equal amounts at P16, P20 and P24. This will bring your average purchase price to P18 per share.
Assuming that you sell, even at P24 per share, you would have made about 33% (estimated total sales proceeds of P96 less total acquisition cost of P72).
In actual terms, the final return on investment is derived by deducting related transaction costs such as broker's commission and other trading charges and slippages.
If you average up by buying shares in decreasing volume as the prices of the shares go up, you will be realizing a higher net return than when averaging up in equal volume.
The process will also result in a pyramid-like formation of shares when you stack up the shares according to their volume and share prices. This is the reason why averaging up is also called pyramiding.
Other than this visual form, this process is in no way similar to the pyramiding scheme that recently hit a number of moneyed residents of Forbes, Dasmarinas, Urdaneta and highbrow scions in the business circle.
This pyramiding scheme is a classic investment fraud in which the operator pays high returns to current investors from the contributions made by new investors.
The funds are not invested or insufficiently invested in any productive asset. These are simply paid out as a return to those who invested earlier. The operator must continue to attract more prospects and receive more contributions. A snag or decline in the stream of investment money coming in will result in a serious deterioration of the scheme. This is called the Ponzi scheme, named after its original proponent.
When averaging up, you will notice that the average price that the investor pays for all the shares goes up. Thus, the payoff of averaging up comes as a result of the stock price continuing to go up.
Otherwise, the investor will suffer substantial losses if the stock price quickly drops. Its successful application will largely rely on the right market condition or timing.
Averaging up is the opposite of the natural tendency to buy additional shares at lower prices, called averaging down. O'Neil does not agree with the merits of averaging down. It's something that produces the same false hope that the turkey trap story promises.
To him, "The whole secret to winning in the stock market is to lose the least amount possible when you're not right." Thus, when wrong, don't average down.
The first mistake is the cheapest. Don't add more to your mistake. But when right, exploit it to the fullest by averaging up. We'll have more of William O'Neil's CANSLIM and trading schemes next time.
Trading was mild on Wall Street on Friday, but relatively stronger on a weekly basis. Overall, nothing positive is expected to happen in the near term.
There are those who insist that the Federal Reserve can't stop recession in view of the disappointing latest retail sales figures. The rate of increase fell to 0.3% in August from 0.5% in July.
The slide came as a surprise as economists had expected another 0.5% jump. Household spending accounts for two-thirds of the US economy.
The fears sparked by falling home prices, costly gasoline and tighter loan standards may cause consumers to put away their wallets.
While the Fed is expected to cut rates at its policy meeting on Sept. 18, experts are divided on whether this could be of help to prevent a much feared recession in the economy.
In the meantime, oil prices have reached all-time highs and are expected to still go up in the long term.
This reminds me that we'll soon have production in the Palawan area. Watch out for more details.
(The article has been prepared for general circulation to the reading public and must not be construed as an offer to buy or sell any securities or financial instruments referred here or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that can affect the objectivity of their reported investment activity. You may reach the Market Reader at densomera@yahoo.com)
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