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The Ten Percent Solution

Conventional wisdom says buy low, sell high. The trick is - how do you know when a stock is at a high and how do you know when it is at a low.

Conventional wisdom also says it's impossible to time the market so one should invest for the long haul. But here's the rub. What is the long haul? Ten years? Twenty years? Thirty years perhaps?

The fact is, bear markets sometimes devastate stock markets and what may seem like a long haul is actually a short haul in the grand scheme of things.

Take for example the Crash of 1929. The market hit bottom three years later in 1932 and then took until 1954 to recover its pre-crash level. That's an extremely long haul. The poor chap who bought a basket of stocks in mid-1929 to hold for the long term who didn't sell at an opportune time ended up waiting 25 years to break even!

But we have devised a way to buy low and sell high. We've tested it on four stocks so far and it seems to work in theory. I'm planning to research the matter further over time so consider this an idea in progress.

The strategy is simply this. Pick a stock - any stock. (We will actually develop a few guidelines to enhance the selection method, but our theory is that it will work with dogs as well as the cat's meow.)  Buy the stock and track it daily.  As it hits new highs, note the new high. When it closes below that high mark, note the percentage drop. When it has dropped ten percent from its high, sell.  This ensures that we sell within 10-15% of a stock's peak.

Now, with the same stock, monitor it while keeping your cash on the sidelines. This time note each new interim low. If it closes higher than its interim low, note the percentage higher it has risen. When it has risen ten percent from its interim bottom, buy back in. Then we repeat the cycle continuously with new interim highs and new interim lows as our pivot points.

Why ten percent? Our reasoning is that there is no good reason that a good stock should lose ten percent of its value. If it does, there is a reason. Either it's shot up too high and is overvalued or its fundamentals are faltering or it's had some bad press. In any event, the factors driving the stock down are likely to continue driving it down further.

Less than a ten percent fluctuation can be viewed as a normal correction. More than ten percent indicates trouble - right here in market city. And that rhymes with "B" and that stands for bail. Bail out of the stock.

On the other hand, when a stock climbs ten percent out of the hole it's fallen into, that is an indication that the stock is turning around. Less than ten percent can be viewed as a bounce.

This is all very hypothetical, of course. But if you take a look at the studies I've done so far, you'll be quite amazed. The method works best with fairly volatile stocks - stocks with wide fluctuations in their price history. It doesn't work with stocks trading a narrow sideways channel.

Here are our studies:

Case Study # 1 - Barrick Gold
Case Study # 2 - Microsoft

Case Study # 3 - Tecsys Inc.
Case Study # 4 - Loewen Group

Case Study # 5 - Nortel Networks

More studies will follow.

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