Make More Money by Trading Around a Core Stock Position
There are certain techniques that you can use when investing in stocks and exchange traded funds that will enable to become a better investor and make more money. One way to enhance your profits is to trade around a core stock position. The first thing you need to do is to find a stock that you believe represents a sound business with staying power. You will likely be trading around this core position for many years so the company has to be a solid company. The alternative is to trade around a core exchange traded fund if you are concerned about your ability to pick individual stocks.
Allow me to explain how this works for me using Goldcorp (GG). I own Goldcorp stock in my 401(k) retirement account. It is the only stock that I own in that particular account. (I do have other accounts that have different stocks so I am more diversified.) I consider GG a core position since I believe that the risk of inflation over the next several years will likely benefit the price of gold and hence, Goldcorp stock. I have been trading around my GG position since January of 2007. During that almost 3 years time, my account has increased by 114%. Furthermore, it is easy to figure that out since I have not added any money to that account since 2005. All of the growth of the account has been due to profits from GG stock.
On January 3, 2007 GG stock opened at 28.70. Yesterday it closed at 41.16. That represents a 43.4% gain over the same time frame. So how is it possible that I can be up 114% when the stock is up less than half that amount? It is simply because I have been trading around my core position and selling GG when it goes up and using the cash to buy more stock when it goes down. Then when it goes up again I have more shares to make more profit. Recently, I sold some GG shares at $43.14. Now I have that cash available to me to repurchase more shares. I should have picked them up under $40 this past week, but I thought I would wait until it fell closer to $35.
How can you set up a system to trade around a core stock position? Take any big blue chip stock that you think might have a solid business plan and will be around for several years. Let’s look at Microsoft (MSFT). It is a well known name with a decent brand and will probably still exist as a company over the next 5 or 10 years. If we look over the past year, we see that it started around 26 and traded down as low as 15. It is now back up to almost 25. If you had simply held the stock, you wouldn’t be any better off now than you were then. But, if you had bought about one-third the total amount of stock that you wanted to own, bought another third at 20, and another third at 15, you would be sitting on a fair amount of profit.
Let’s look at the numbers for a $10,000 investment:
- $3,333 divided by $25/share means you will purchase 133 shares
- $3,333 divided by $20/share means you will purchase 166 shares
- $3,333 divided by $15/share means you will purchase 222 shares
- Total shares purchased is 521 so that at $25 per share, the total value is $13,025
Had you simply bought all the shares at the beginning you would just be back to even. Some may be concerned that this is doubling down which can be risky. Granted the last year has seen its share of risk. So, I would advocate only doing this with blue chip stocks that you think will be around even under worst case scenarios. Also, notice that you shouldn’t put all your money in at one time. It pays to be able to keep some around. This is really dollar cost averaging. Now that MSFT is back up, I would consider selling some of the shares (say 100) for $25 per share so that I had cash available to buy more when it falls. If it keeps going up, I would sell another 100 shares at $30 then 50 shares at $35 keeping a core position of about 200 shares. Then when it falls, buy back more shares so you can have even more when it goes up again.
I honestly didn’t realize until I saw what had happened with Goldcorp and my 401(k) how effective this could be. Looking back over the transactions from 2008 and 2009, I can see lots of purchases of shares in the 20s and low 30s and lots of sales at 35 and 40. Yes, I had a few shares that I purchased in the high 40s when I thought the stock might go a lot higher, but when it turned I ended up selling and buying back at a lower price. The more I learn about the stock market, the more I think it is not so much which stock you pick as how you manage the changes that occur along the way.
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