Trading Course 101: Buy Low, Sell High

Everybody knows they should buy low and sell high, but few traders have the psychological fortitude to actually stick with the plan. When shares are cheap there are always negatives that get well publicized.

Fund managers and guest hosts on CNBC are much more prone to explain price weakness while acting as if they had predicted it, than to recommend buying shares that are currently bargains, but sport ‘bad charts’.

Conversely, when stocks are soaring it’s hard to find anyone who isn’t telling viewers or readers why the stock in question is deservedly hitting new peaks and is likely headed even higher.

A greater percentage of daily volume is made up of short-term traders than ever before. That gives longer-term thinkers an edge.

Our Market Shadows Virtual Value Portfolio has traded Coca-Cola (KO) and Kelly Services (KELYA) previously for nice gains. Today we sold our latest batch of KO while deploying the sales proceeds plus most of our cash reserves back into KELYA.

A glance at the charts illustrates why we made the swap. Coke is near its three-year high while Kelly Services is close to a yearly low. We booked an 11.67%, 4-month gain, plus $61 in dividends on the latest KO trade. That’s pretty good on an annualized basis, particularly on a very conservative holding.

KELYA was one of our original picks when we started up our Value Portfolio on Oct. 26, 2012. We paid $13.13 per share back then. Kelly was sold on Dec. 23, 2013, at $25.30. That was a stellar 92.96%, plus dividends, gain. We were able to buy KELYA back for $17.64 per share this morning.

As of 11:12 AM today the entire portfolio had gained more than 52% since inception (about 31.5% annualized) simply by following our buy-sell discipline while adhering firmly to our well-diversified approach. We are well ahead of the benchmark S&P 500, a very tough hurdle to beat for most actively managed accounts.

We also made one new trade in our Virtual Put Writing Portfolio today. Market Shadows sold 3 contracts of the January 17, 2015, $55 puts on Jacobs Engineering (JEC) @ $3.40 per share.

We are now committed to purchase 300 shares of JEC at a net price of $51.60 ($55 strike – $3.40 put premium) if exercised.

Our best case gain would be keeping 100% of the $1,020 collected. This will occur if JEC closes at $55 or better on Jan. 16, 2015. That is not much of a stretch. JEC was bidding $54.84 at the time we initiated the trade.

There can never be a guarantee that shares will not go below your break-even price. We find it reassuring, however, to know that JEC has not spent even one day during the past 12-months at that low a price.

Check out all our closed-out and current equity and option positions by clicking on the following links…

Virtual Value Equity Portfolio and Virtual Put Writing Portfolio.