You're going to be tempted to dismiss what I'm about to tell.
You'll want to say, "That's a strategy for day traders... too risky for my blood."
But it's not. It's one of the most reliable ways to make an extra 10% or more on your investments... or possibly even double your money in a year.
Let me explain...
Every stock has its share price fall from time to time. Sometimes the fall is justified - think General Motors (NYSE: GM) circa 2009. But other times a stock will fall as much as 10% in a day based on faulty reasoning.
If you can tell when an overnight drop is a buying signal, then you'll be able to pocket some quick gains. Surprisingly, it's not difficult. There are certain conditions that almost always result in a stock bounce.
Here are a few "buy" signals that I've used recently...
A short-sighted selloff
I bought Yahoo! Inc. (Nasdaq: YHOO) in my Stock of the Month portfolio last August. Shares of the media technology company dropped just a day after my first purchase. I was initially concerned until I read through Yahoo's regulatory filing and subsequent analysis.
It seems that the new CEO, Marissa Mayer, was reviewing the company's strategy, especially relating to the proceeds from the planned sale of Yahoo's stake in the Chinese company Alibaba.com.
Investors thought they might receive a big fat cash dividend from the sale. So they were disappointed to learn that the CEO was considering putting that cash back into Yahoo and/or acquiring other companies that would lead to shareholder growth.
Quite frankly, I liked the news. I was happy Mayer was thinking about growing the company's top line in the long term. So I doubled down on my investment.
Yahoo ended up giving the lion's share of the proceeds to shareholders, but held back a fair amount for reinvestment in the business. Once the dust settled, the share price bounced, giving me a quick 6% bump.
The lesson? If a stock falls from a one-time event unrelated to earnings and growth, then that could be a buying signal.
While I still hold Yahoo! in my "real money" portfolio, I have another example of a company that I actually cashed out of after a quick gain from a one-time event.
A natural disaster
I held Tiffany & Co. (NYSE: TIF) in my portfolio when a massive earthquake rocked Japan in March 2011. At the time, Tiffany derived 18% of its sales from the island nation. It was hard to imagine the Japanese people prioritizing luxury purchases in the months following the quake. As a result, the stock dropped 12% in just a few days.
But investors failed to realize Tiffany had been relying less on the Japanese market. The vast majority of its expansion in Asia during the prior few years had been in faster-growing markets like China and Singapore. In essence, the market was ignoring the remaining 82% of its solid growth.
I sent out an e-mail alert to my 10,938 Stock of the Month subscribers telling them that I would be buying 30 more shares of Tiffany. Less than three months later, I closed half my position for a 17% gain.
The lesson? If a rare one-time event, like an earthquake, directly affects a company's sales, then you should consider selling. But if a stock is only temporarily affected, or is just being sold off in a panic, then this can be a great buying opportunity.
While these gains may seem modest, they can rapidly increase your returns. For example, if you invested $10,000 in a company that grew 10% in a year, then your gain would be $1,000. But if you added a 10% boost from buying after one of the "buy" signals I mentioned here, then your growth would be 20%, or $2,000 -- twice as much money.
And even if it doesn't double your money, an immediate gain is great for peace of mind. It's easier to sleep at night knowing you've got a cushion protecting you from short-term fluctuations.
Risks to Consider: Of course, like all investing, there are no guarantees with this strategy. Occasionally a stock will stay down, even though all signs point toward it bouncing back.
Action to Take --> But the point remains that just because a stock has a short-term selloff, there's no reason to panic. As long as the fundamentals are sound and the company still has a positive growth outlook, one-time events could prove to be some of the market's best buying opportunities.
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