Normally I talk about how to make money in the market – a way of investing I call “Serious Investing.” Serious investing takes very little effort because you buy things for long periods of time and forget you own them. This is how you make money and change your family tree. But serious investing can get a bit boring for some who like to spend their time glued to CNBC or have stock alerts on their phones.
Today’s post is not for the serious investor, but instead for the hobbyist who likes the thrill of playing the market and paying brokerage fees. the serious investor who is looking to hold stocks for long periods of time and make serious profits may find the post of interest as well because it shows the kind of stock to avoid because it will never make money long-term. That is the cyclical stock.
Examples of cyclical stocks are semiconductor companies and airlines. Neither of these business create the desired steady, long-term price appreciation desired. Instead, they tend to experience regular cycles of boom and bust. While some of the booms are larger than others, the price eventually always busts and the stock falls back down.
For semiconductors, this is because there is a sweet spot in the life of a new chip where they are selling a lot and therefore making a good profit. In this part of the cycle the company ramps up production, opening lots of fabrication plants. Eventually, however, foreign competitors start to flood the market with chips, causing the price to fall and the company to shutter factories and pay the associated costs. The stock price then falls back down and somehow the amount of money the company actually has in the bank is about where it was when they started. This repeats as new newer, faster chip is created and reaches the sweet spot on price.
I have owned Cypress semiconductor several times in my life and made money each time. I learned early on that the price would periodically take off and then fall. See the long-term price chart and you’ll see what I mean:
A friend and I used to joke that the stock always went to 11, so if it was below 11, buy, if it was substantially above 11, sell. Any price between 10 and 20 really could have been picked and this philosophy successfully applied, but 11 was a humorous value as devotees to Spinal Tap will attest. Substantial money can be made with this type of stock by figuring out what is “low” and what is “high” and then just waiting for the price to fall within the desired ranges and act accordingly. The trick is to avoid the temptation to think that “this time is different” and hold too long or buy too high.
Note that the closer you set the values together the more often you will be in and out for the stock, but the returns, strangely enough, will be about the same if brokerage fees and taxes are ignored. It makes sense therefore to set the limits fairly far apart so the stock is not traded too often.
Cypress CEO TJ Rogers actually did an analysis of trading Cypress based on Price to sales ratio. This study is available from their website and is well worth reading: http://www.cypress.com/?rID=34959
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.