Although I invest for the long term, I’ll admit, from time to time, I speculate on market movements for short term gains.
I call this Thrill Money Investing.
I only allocate a very small portion of my investing funds, funds that I can afford to lose without losing sleep, towards TMI. Any gains are plowed back into boring, conservative stocks or ETFs.
This is essentially profiting on current events, mob psychology and market trends rather than on company fundamentals.
Of course there are many methods, these are some of the techniques I’ve used personally with good success.
Profiting From Stock Splits
On May 11, 2010, each share of Baidu (BIDU) was trading at $714.17. I bought a few based on Baidu’s 1:10 stock split announcement that was to happen next day. I had 10 times as many shares as I had bought. A stock split doesn’t change the value of a company. A single $100 bill is the same as 100 $1 bills! Any smart investor knows this. But for some reason, people find a lower price attractive.
Baidu soared in the coming months. I finally sold all my holdings in Baidu in less than 7 months locking in a gain of 55.89%!
(The sell timing was 90% nervousness and 10% luck! I did not have any special insight on Baidu!)
I didn’t trade BIDU on fundamentals. As a company, I think Baidu lacks creativity. (Here’s a sneak peek of how Baidu will look like in a few months from now!) But there is money to be made on what others think of Baidu!
I successfully pulled this trick with GMCR as well!
Do all stocks rise after a split? No. There are numerous examples of stocks falling after a split. Why did I choose Baidu and Green Mountain Coffee Roasters? Because they were ‘hot’, expensive stocks with a high PE and high valuation. Even without a stock split these stocks were rising, the split accelerated the rise.
I wouldn’t try this on conservative stocks.
Profiting From Anticipation
This is last year’s chart for a small biotech company called Intermune. The dramatic rise and fall of Intermune in the chart below, can be traced back to one drug in Intermune’s pipeline, Pirfenidone for treating a fatal lung disease, idiopathic pulmonary fibrosis.
On Jan 4th, 2010, FDA approved and granted Priority Review Designation for Pirfenidone’s NDA (New Drug Application). An action date of May 4th was set. On May 4th, FDA declined to approve the drug! You can see the investor sentiment reflected in the stock’s movements!
Now I never bought or sold Intermune, but I was watching it keenly and missed pulling the trigger at the right time. But this is a fascinating case study.
How I Could’ve Profited From News Related To Intermune
On Jan 4th, 2010, Intermune received favorable news and a clear action date for a yay or a nay. Now if Pirfenidone had received approval, the stock would’ve soared. But it didn’t and yet, one could’ve made money by buying the stock after Jan 4th and selling it before the Action date of May 4th! You would’ve made a profit of more than 200% no matter what the FDA ruled!
Biotech’s are a different beast and you have to have a basic understanding of how a drug approval process works in order to profit from news related to biotechs. Check out my primer on the Drug Approval Process if you are curious.
Profiting From Apple Events!
Although I shun tech stocks, I do make a few exceptions and Apple is one of them. Also note, I’m long on Apple, but since I follow AAPL closely, I do realize there is ample opportunity for short term gains!
Any big announcement, or rumors of a big announcement from Apple is usually followed by a surge in Apple stocks!
I speak as a fanboy and as an investor – there is money to be made!
Profiting From Irrational Market Fears
Now, I normally don’t give buy or sell recommendations. But during the flash crash last year, I made an exception and posted this on Sat 8, 2010, two days after the flash crash.
The market crash was a great opportunity to stock up on quality stocks. I didn’t recommend a high beta stock because no one can predict how long a market might be down and volatile stocks can bring you down hard (NASDAQ hasn’t yet recovered from it’s dotcom highs). But with good dividend paying stocks you can actually make money in a down market.
Profiting From High Beta Stocks
Beta is an indicator of how volatile a stock is. High beta stocks can rise and fall dramatically when compared to the market in general. One such stock is CLF (Cliff Natural Resources). It has a beta of 2.36. Due to recent events (Euro worries, feds etc.) the market has been generally down and this stock which was trading at over $100 a share in April, fell to low 80s in less than two months.
Of course, the gains are real only when I sell. Haven’t done that yet!
Word Of Advice
The above are some of the ways I use play money for quick gains. Market timing is hard. The stocks above were not randomly selected. I’ve been watching some of them for months getting a ‘feel’ of how it moves and yet I realize none of the above techniques are a given. An unforeseen event can throw all studies out the window. BP is a good example.
Speculation should never be your core strategy.
What are your market timing stories?
DISCLOSURE/DISCLAIMER: Short on CLF, long on T, BP and AAPL. This is for educational purposes only. This is not a recommendation to buy or sell.