In an effort to find niche investing moves that I feel most traders don't take advantage of, I spent a day brainstorming with a friend of mine over some of the lesser used "tricks" we sometimes use to invest. These are small items that we've learned over time that we use and average investors may not. These are five tricks of the "trade" that you can use to enhance your return on investment.
1. Post-Buyout Announcement Buys
Often, investors feel as if they have already missed the big play if they weren't in a stock before its buyout was announced. Sometimes, however, this isn't the case. There is a case to be made for making a modest gain buying directly after a company announces a buyout, as people already in the stock are at a rush to sell and potential uncertainties behind the transaction keep the price slightly lower than the bid price.
Take, for my latest example, Miscor's (OTC:MIGL) recent news of buyout. The news dropped before trading on Thursday 3/14/13. Integrated Electrical, the buyer, announced that the buyout would be between $1.48 and $1.57 per share.
The stock opened up over 10%, but quickly sat at $1.41. Why $1.41 if the buyout price minimum is supposed to be lower than that? This WikiFool article says it best:
A buyout may take months to complete because it must be approved by the shareholders or may require government approval, because other buyers come up with a better offer and start a bidding war or because the board of directors of the company being bought out objects to the offer. This element of uncertainty would keep the shares of the company trading at just under the buyout amount. Shareholders who want to take their profits now, without waiting for the last penny, may decide to sell their shares for slightly less than the buyout price to speculators who purchase them on the expectation of a few cents a share profit if they buy enough shares and the buyout goes through as planned.
A savvy investor that I'm friends with read the news and noticed MIGL was trading at an ask of $1.41. Being the alert investor he is, he was able to pick up shares. By the end of the day on Thursday, it had closed at $1.45. If the buyout occurs at the lowest estimated price of $1.48, it's a gain of 4.96%. If it happens at the high end price of $1.57, it's a gain of 11.35%. If a bidding war starts (as happens way more often than people think) for the company, who knows how much of a profit he may have netted himself buying at $1.41.
2. Stink Bids on Wide Spreads After-Hours/Pre-Market
After hours trading is a neat little valuable commodity. It allows you to play earnings before the market opens or after it closes, it gauges how the market will fare either later in the day or the next day, and it can be a value tool to making profitable trades.
What I look for in PM (pre-market)/AH (after hours) is mainly to take advantage of large bid/ask spreads due to the thin trading that takes place PM/AH. Often, you'll see $50 stocks after hours trading for spreads like $46 x $52. The strategy here is simple, put in a low ball "stink" bid (like $47), and hope that someone has to sell. Every once in a while, you wind up scalping a quick couple percent discount. Of course, the underlying equity has to be something that you'd fundamentally otherwise buy (or already own).
3. Short Cramer Spikes or Go Long Cramer Sell Recos AH
Again, a lot of this takes advantage of two things: thin trading after hours and impulsive buying and selling by unsophisticated investors.
The facts about investing are as follows: You are either a leader or a follower. I talk about how the "common folk" invests in My 17 Definitive Cardinal Rules for Investing Success. Again, as I often bring up in my articles, I talk about the importance to knowing when to do the opposite of what the "common" investor is doing. In my article, I talk about "Fading the Public":
"Fading the public" simply means doing the opposite of what the public's doing. It's important to not blindly just do the opposite of what the public is doing; the public creates important trends that need to be respected and noticed. In the world of sports betting, the benefit is usually a couple of extra points on a line; in finance, the benefit is usually a cheaper share price to buy at or a higher share price to sell at. Keeping your emotions in check is vital, as I'll discuss later. These strategies play off the emotional instability of the common investor.
Keeping yourself in this mindset of doing the opposite of the public is how big money makes money, and how you can, too. The sooner you start to think like one of the sharks, the less chance you have of becoming eaten alive.
I go on to say :
Having said that, it's a big boy & big girl adult game that is played. The losses are every bit as painstaking as the gains are amazing. One minute, you can feel like you're cheating the world with how much money you're making; the next, you could be wondering where it all went wrong. The market is an extremely unforgiving teacher.
"Listen up, maggots. You are not special. You are not a beautiful or unique snowflake. You're the same decaying organic matter as everything else." - Fight Club
Even if you don't think you are, you are part of the mass pool of money that makes up retail investors USA. Everything that you're looking at has already been looked at fifty times over by some analyst somewhere at a fund or firm. You are one of the sheep. Your retirement accounts and your hard earned money that you've saved with your blood, sweat and tears are gambled with on a daily basis by banks.
It's probably what you don't want to hear, but you need to know this going into the game. You also need to know that if you don't understand what the fundamentals of the market are, you don't belong anywhere near it. Put your money in a savings account, and grow it the old fashioned way.
Every weekday for the last eight years, Jim Cramer rolls up his sleeves and works himself up into a sweaty, red-faced frenzy shrieking at the top of his lungs about things like price-to-earnings ratios and other things that would not normally result in someone being exhaustively out of breath. Also, every weekday, the average mom and pop investor watches Jim Cramer scream, pant, shout and sweat his stock picks through their TVs at home. There is a faction of people that hang on everything that Cramer says, and trade accordingly. Sometimes, there's two great reasons to take advantage of after hours moves that Cramer creates:
- Because Cramer is on every day, he doesn't have the lasting power of an analyst. His picks are often forgotten about shortly after he makes them.
- If the after hours market is illiquid, Cramer induced rallies in either direction won't last. This is why we like to buy or short against them.
Of course, this isn't true for all of his picks, but is a strategy that can yield results if done with correct timing.
4. Be The First to Catch News & Read Seeking Alpha Transcripts of Conference Calls
This seems stupid in this day and age, but even with the way news is instantaneously disseminated via the Internet, there's still always a run up (or run down) on catalysts delivered via news and filings. While analysts and savvy traders are usually right on top of emerging news, the average mom and pop investor isn't. Your goal is to get in on a move during the upswing, as denoted on my archaic looking homemade diagram:
When it comes to conference call transcripts, it's easier to pick up on things you may have missed in the call because it was said too quickly. Seeking Alpha does a phenomenal job of posting accurate transcripts of most major conference calls, one of my favorite tools on this site. The transcripts are perfect because you can study and dissect every word at your own pace.
5. Short Biotechs After Good Phase I/II/III Data or FDA Approval Day
In "My 17 Rules...," one of the recurring themes is emotion in trading and how to use it to your advantage. I wrote:
Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they baghold buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:
"This stock may never stop going up! Better get in no matter what cost!"
"This company is doomed! We are going to zero right here, right now, on this crash!"
This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash.
One trend that I've noticed is that there is a lot of emotion behind biotech stocks leading up to catalysts. Most, like my recent experience following Celsion (NASDAQ:CLSN), have great stories of searching for great cures in addition to having the ability to make savvy investors rich if they're on the right side of the trade.
What I've noticed from a lot of biotech catalysts is that the emotional charge behind the event often leads stock running far higher than rational, and that on good news the share price usually pulls back and corrects. Here are three examples of biotech catalysts and corresponding price movements:
|Stock||Event Date||PPS Spike||PPS Low|
|Keryx (NASDAQ:KERX)||1/28/13||$9.08 (1/31/13)||$6.43 (2/28/13)|
|Amarin (NASDAQ:AMRN)||4/18/11||$19.50 (5/27/11)||$6.35 (12/16/11)|
|Arena (NASDAQ:ARNA)||6/27/12||$11.81 (7/10/12)||$7.24 (8/13/12)|
Shorts playing the exact right time in these three could be yielding anything from 30% and up if done correctly. You need to feed off of other people not having control of their emotions when dealing with biotechs and use that to find realized gains in your portfolio.
Ultimately, you're not going to be able to use all of these at any given moment, but they all have their time and their place. I hope that you can find a use for these methods going forward, and as always, best of luck to all investors.
Disclosure: I am long CLSN with calls. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.