The Valuator As A Discipline Tool
An Effective Discipline Using The Valuator
Many systems can be designed with the aid of The Valuator. Though The Valuator does not make specific recommendations to buy or sell any securities, we believe it can be extremely helpful in screening stocks on the basis of a variety of criteria and in assisting you in maintaining discipline. The following “rules” are an example of just one of the disciplines that could be used with The Valuator.
1. Do not buy any stock unless it has one or two stars (or some other indicator in the left margin). These stocks are “LO” (or were “LO” recently), will yield at least a 15% potential gross profit if bought at the “RECNT PRICE” and sold at “HIST FV,” and have been rising faster than the average rising stock. If you buy such a stock and it declines, the stars may be removed in the next issue. This is not a sell signal. See rules 4 and 5 for selling. [Note: We have made some recent changes. Currently, we post “►” AND “♦” ALERTS rather than stars: If a stock can rise 10% or more before reaching its C.G., a “►” is displayed at the far left. If a stock can rise 6% or more, before reaching its C.G., a “♦” is displayed at the far left.] We may return to the use of stars and change the percentage gain indicated. The important thing here is the discipline, not the details.
2. If the price is above the “RECNT PRICE,” be sure that a buy at the current price and sale at the “HIST FV” or “Center of Gravity” price, will still give at least a 15% gain. If not, do NOT buy it.
3. Except under special circumstances or for special situations, make it a habit to never put more than 10% of your portfolio in one stock.
4. Even long-term “buy-and-hold” investors should place a “stop loss” order no more than 15% below their purchase price as a safeguard in case the stock resumes its downtrend. They should keep it no more than 15% below the highest closing price since their purchase. Tighten up on the stop-loss once you have a significant profit. This 15% stop is a very “loose” stop-loss that might be used by a person who likes to ride out most of the ups and downs of a position. If you buy at a trendline or other region of significant support, an 8% stop-loss is not inappropriate. If you buy near a trendline and the stock declines until it closes 8% or more below the trendline, sell. Another alternative is to use the 20-day or 40-day low for the stock as your stop-loss target. The 20-day low is provided in each issue, and is a relatively conservative figure. More aggressive traders can use shorter periods (5, 10, and 15 days are popular alternatives). The low price for the last x-days should be checked daily and the stop-loss should be adjusted upward as needed but never downward. A comparison of the 20-day lows in two consecutive issues will help you approximate the 40-day low. It’s best to buy just after the stock has touched support and has begun to climb. Define your sell rule before you purchase. Active traders may keep their stop-loss only 2% to 3% below the highest low price achieved since purchase. Some use an even tighter stop-loss. Much depends on the type of trend you are trying to catch. Steeper trends do not last as long and it is wise to be stopped out of such a trend quickly. Stops that automatically compensate for the volatility of the stock are far better than fixed-percentage stops (see the description of Stops for more on this).
5. Sell before the “HIST FV” price is attained. Cancel the “stop loss” order when you sell. An alternative favored by some investors is to not sell at any pre-determined target price, but to simply continue following the stock up with a stop-loss until the stop-loss order is triggered. This approach can result in a greater profit if the stock has considerable momentum. However, the risk is that your profit will be reduced by the amount of decline it takes to trigger the stop-loss.
Add These “Do Not” Rules A. Do not buy when the overall market trend is bearish (see the market trend indicators: Summation Index, etc.)
B. Do not buy a stock that is below its moving average, or that has a declining moving average (see charts).
C. Do not buy a stock that has poor relative strength (review the stock’s strength ranking in the tables).
D. Do not buy a stock that has significant nearby overhead resistance. For example, if a stock is at 30 and the chart shows that the stock has repeatedly been turned back at 32, it will require unusual buying power to break through. Such a breakthrough could be a buy signal if all other conditions are acceptable (see charts).
E. Do not hold onto a stock just because the PE-Ratio is low or sell just because it seems high).
F. Do not average down in a negative situation. The stock is more likely to inflict pain than cause joy. Such situations often become much worse before becoming better. The stock is behaving badly for a reason.
~ Dr. Felt
Note: The Valuator now uses “Center of Gravity” (C.G.) rather than “Fair Value.” The general approach given above should be adapted to the statistical/probability-based approach now in use.