How to Create Wealth Investing in Turnaround Stocks
Do you use the website Seeking Alpha and rely on its commentary and analysis? On their site, you can get unlimited opinions from multiple analysts who all appear to have the right credentials and backgrounds. However, the problem with Seeking Alpha for investors is that you won’t create wealth listening to any of the ideas or opinions. It’s not the stock picks that create wealth its how you manage the stock purchases.
The world of money management consists of security analysts and hedge fund managers that make their money and wealth not from capital gains but from salary and fees.
The majority of portfolio managers and security analysts underperform but earn vast sums taking fees from investors such as yourself.
The goal of turnaround Stock Investing is to help you create wealth investing in turnaround stocks. It’s not as difficult as everyone thinks. The key is to follow the wealth creation formula for stock market investing.
First, every stock you purchase must have a 5 to 1 to reward to risk scenario. Your analysis must suggest that you can earn 5 dollars for every dollar of risk you take.
Second, understand that 20% of your investments in a year or lifetime will create most of your returns and wealth. So, when you get a winner don’t sell it so quickly especially if it looks like the company is just coming out of a downturn.
Third, if 20% of your positions in a year are going to generate 80% of your gains, you have to cut your losses on stocks that are performing poorly and not double down. I know this is hard for investors because our egos are tied up in the idea and people hate taking losses. However, I have a way to help you overcome this problem. Just remember that you can always buy back the stock.
As you know value investing is prone to value traps. Its normal and has to be expected. So instead of doubling down, stop out and reassess the situation. The markets are not as stupid as value investors think. The collective wisdom of the markets in the middle of a trend is usually correct.
This is why I believe value investors should learn basic technical analysis. If you want to create wealth in the stock market you are going to have to learn how to read a basic chart.
I have saved a great deal of capital selling stocks that have broken critical support. That technical signal gave me a valuable piece of information that I was early and the turnaround would be delayed or not occur. There was no press release from the company and no phone call from a due diligence contact. It was just Mr. Market telling me to get out. After I sell a stock from a technical signal I sit on the sidelines and watch and wait. In 30% of the cases, I eventually re-enter the investment. For the other 70%, the companies never recover and the decision to sell was a good one. You will only learn the reason for the break and weakness after the fact.
In most cases, it was an unexpected loss of a customer or more industry price weakness that was going to dramatically cut EBITDA. That’s the value of watching a stock chart. When a stock does something you don’t expect wake up and take action.
So, I suggest if you’re interested in creating wealth in the stock market consider my wealth creation formula. I know it’s not easy to cut losses or admit error. You need positive feedback and encouragement to take action and dramatically increase your odds of success. This is what you will get as a member of turnaround stock investing.
