Market Sheep Shearers

Market Sheep Shearers

Stock Market “Sheep” & Stock Market “Shearers”

By Dr. Winton Felt

A stock market sheep will say, “this is a great company.  I think I’ll buy some shares in it.”  Then he waits for a year or two while the stock moves like a slug.  Perhaps he bought it at $50 a share.  He holds on while the stock makes a long slow decline to $35.  At this point, many sheep would not be able to “take it” any more and they would sell to their “shearers.”  However, the particular sheep in this story will not sell because he has no sell strategy and he cannot bear to lock in a loss.  Then the stock slowly climbs over a period of a year or two until it reaches a price of $60.  After that, the stock slowly declines.  He does not sell because, after all, stocks do fluctuate and a “wise” investor does not panic because of a little downturn.  “You have to give stocks a little room to fluctuate,” is his favorite saying about the stock market.  Also, this sheep prides himself on being a long-term investor.  He is not one of those “shoot-from-the-hip” speculators who “churn” their own accounts.  Besides, the stock just made it to $60.  If he waits, it might go to $70.. 

About fives years after he bought the stock, he notes that it is still selling for around $40.  He finally loses patience and comes to a decision.  He decides to sell the stock when it reaches his purchase price.  A week later the stock drops $5 in one day because the president of the company, whose inventions the company quickly converted into money-making products, retires from the company and leaves his son in charge.  After a few months the stock is trading at $40 again. 

This “sheep” does not really have a sell discipline.  He does not even know what a sell signal would look like.  After all, he is a long-term “investor.”  He is not a “speculator.”  All he knows is that he has held the stock for over five years and it is still below the price he paid for it.  He finally concludes that the stock market is not for him, and he sells his stock for a 20% loss in money and more than five years in time.

The “shearers” monitor their “watch lists,” waiting for a “setup” to complete and then for a “trigger event” to occur before buying a stock. The setup gives assurance of a relatively low risk entry point.  The stock is not likely to have a significant decline from the purchase price because it was bought just above support.  These shearers know that the support evident in the chart represents buyers waiting to snap up the stock if it drops another $1.  The trigger event tells our trader that the time to act is now.  In this case the trigger event was a small but quick rebound off of the support line with a surge in volume.  If his stock does not have a follow-through surge in price within two weeks, our trader will sell regardless of the price.  That might mean he will have a very small gain, break even, or even lose $1 (2%) on the transaction.  Since this position is only 10% of his portfolio, such a loss would represent only two-tenths of one percent (.2%) of his portfolio.  Nevertheless he considers the small risk to be well worth the potential reward. 

The shearer will not wait for a month or two to find out if he made a mistake.  If the stock surges as expected, the shearer will gain more in a month than most sheep gain in a year.  Why?  The shearer bought at the beginning of a significant move when the timing was right.  He will sell on a pre-planned sell signal.  That’s what shearers do.  The shearer does not get caught up in the glamour or “story” of a company.  The setup and the timing of entry are what count for him.  His selling strategy is well-defined.  Either his sell signal or his stop loss will get him out early when the stock begins to decline.