Many rules of thumb regardingstock investing are fine in theory,but how do they actually playout? Let's consider the company NetworkAppliance and its recent stock drama.
Good, Better, Best
"This stock was a lousy stock for years,and it finally bottomed out in October2002," Jack Rothstein, head of Wealthcast.com, explains. "Now it's starting tolook like something again." The firstmajor breakout in Network Appliance'sstock occurred in summer 2004, when itrose from about $17 to $20 in just 2 days."That was a signal to buy the stock,"Rothstein says.
"The stock continued that advance,making another huge move in November,rising from $25 a share up to $28a share in 1 day on heavier volume thanthe volume that occurred in August,"Rothstein explains. "That would havebeen a signal to buy the stock, or buymore of it." Despite Network Appliance'ssuccess, Rothstein cautions that based ona 5-year chart, the company's stock couldrun into trouble in the future.
"The chart reflects a lot of congestionaround the $55 to $65 range," he pointsout. "If that's the case, and the stock iscurrently trading in the low 30s, it's agood stock to get involved with rightnow." Of course, let's not forget aboutthe other half of the strategy equation(ie, the exit strategy). What doesRothstein have to say about that?
"A good goal to have—a good exitstrategy—would be between $55 and$65 a share. And once it gets up to thatrange, that would be a good time to notbe greedy and start moving out of it,"Rothstein explains. "In the meantime,you have your stop-losses, so that youknow how much you're willing to partwith when you put your money in. Youdetermine that; you control that."Although you can't control the market,you do have some control.
Rothstein says that stock selection isa never-ending process and thatinvestors are always searching for a patternthat is similar to the one thatallowed them to make the kind ofmoney they made on their first successfulstock. He also points out that it'sgood form for investors to sell stocksthat have made major moves.
"The only way you can make money ona stock is by realizing the gain, not by sittingthere and looking at the gain onpaper," Rothstein explains. "You don'trealize the gain until you take the profit.And you want to be in the sectors that areworking and in the stocks that are healthiestwithin those sectors. That's the way tomake money in the stock market. Thenyou use stop-losses and take the emotionout of it."