Catching Stocks Is Like Catching Fish
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Posted in : Investing:
- On : Aug 14, 2006
by Wendell Cayton
Plop! There, got another one! Fishing? No, I was catching stocks. Only instead of the high stress method of thrashing around on the Internet and day trading, I was practicing the low-stress, low-IQ, method of adding to portfolios by using simple limit orders to buy the stock.
I find a bit of similarity between ‘catching’ stocks and ‘catching’ fish. I grew up in Central Washington. The Ahtanum Creek came down from the Cascades not far from our home. On hot summer afternoons my brothers and I could often be found reclining in the shade along its banks, with our fishing poles, a worm swimming on the end of the line, propped up on a forked stick. With little effort we could usually catch enough trout for dinner.
We preferred this laid back approach to catching fish as opposed to flailing our poles back and forth, in a more typical Type A manner. The latter method required more worms, and often caught more snags than fish. It was much more relaxing to put out our bait, enjoy the day, and pull in the fish that picked our worm.
Stock can be ‘caught’ the same way. The procedure is simple . . . just use limit orders. A limit order is an order placed through a broker to buy or sell a stock when it hits a certain price. These instructions are transmitted to the floor specialist at the stock exchange who will hold them as an open order to buy or sell at that price.
Your target price to buy must be below the current trading price, or above if your order is to sell, otherwise your order will be immediately executed as a market order.
When placing the order, you can either leave it in place for that day, or until you chose to cancel, known as “Good Till Cancelled.” You can also instruct the broker that you will—or will not—accept a partial execution of the order.
Buying stocks in this manner works well for stocks that you intend to buy and hold and that are trading within a somewhat definable price range. Setting the price target is like picking a fishing hole. Some places in a stream are not likely fish habitat. If you set the price too low, the price may not come back to that level, leaving your order unfilled
When stock prices are rapidly moving up, as they did last fall after the September/October correction, limit orders to buy do not work well. Reminds me of spring along the Ahtanum when mountain runoff would swell the creek with swift flowing rapids. The water was going much too fast for the fish to find our bait. Neither is the market going to look back for a price set too low.
There are several ways to arrive at your target price. Using fundamentals such as earnings, ratio of price to book value, sales volume, etc. you can calculate your ‘fair value.’ This is the price you would be willing to pay to own a piece of that business. Above that price, you would not be interested.
If you are satisfied that the stock is trading within a range that you consider fairly valued, you can watch daily trading activity, noting the high and low prices occurring during the day. Put your target at the low point within that range.
There are a number of sites on the Internet where you can see charts depicting the trading range for the day or other periods. I find the Yahoo’s financial section works well. There I can find charts for the day, 5 days and 3 months, all of which depict the ranges for the day. This site also provides historical pricing for any date(s) showing the open, high, low, and close.
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