Penny Stock Investing: Four Basic Rules

eveloping a mindset for penny stock trading comes with time. They are risky investments for any investor whether you've got 1 or 20 years trading experience. Regardless, the concept is the same, the penny stock market (OTCBB & Pink Sheets) can provide huge short-term trading opportunities. However, you MUST know you could lose every nickel of a trade if you don't embrace what I believe are the four basic rules. Even then, the risks can be overwhelming.

(1) Use Limit Orders: Don't put in a "market order" to buy a penny stock. Market makers will fill your order where they want to and it could be much higher than you want. Use limit orders when you buy, pay what YOU want NOT what the market makers want. The OTCBB and Pink Sheet markets can be the "Wild West" when it comes to executing orders so give yourself the best chance to book profits, use limit orders.

(2) Watch The Open: The future of a stock for the day is often told in the first 30 mins or less. When a stock experiences high volume BUT remains flat with little or no increase, this is not a good sign. Big selling early means selling will typically continue and the stock will likely weaken throughout the day. On the other hand, good movement early could mean sellers are laying off. If it's moving and your limit order is filled where you want then you're half way home to making gains.

(3don't chase itfilled where you wanted and the price is running, . Know there will always be a new opportunity and chasing them up limits your odds of winning in the end. The window of opportunity on penny stocks can be very small. If the you miss the window you will only be buying someone else's profits on the way down. Trust your read on what happens at the open, put your limit order in and then let the market Gods dictate if you are going to be in this one or not. If you are, see Rule 4.

(4) Book Profits When You Can: Greed typically costs you far more than it makes you. Thinking "this could be the big one" sounds fun but it's not practical and it's not going to help you consistently book profits. If you can book gains from 10%-50% and move on, do it. More profits have been lost as traders fall victim to their own greed.

Best of luck traders!

Back Testing Trading Systems - Four Facts You Should Know

If you're into stock trading, one of the first things you should really look into is back testing. Sadly, not every trader puts as much importance on this as they should. Before you make any decisions about it yourself, there are a couple of important points about the procedure that you should clearly have in mind.
#1- You can't skip tests and expect to win in trading.
You may have heard seasoned traders say that success lies mainly in having a trading system. In reality though, it isn't enough to simply have a system or plan in place. The real element that can make you a true winner is if you follow a system that has been tested. The key to winning big in the markets is to back test.
The plain and simple fact is that you can't expect to earn much if you don't get into this process. This is because it is in the tests that you get into that you are able to determine if a plan has a good chance of working well in current market conditions. Unless you make the effort and take the time to look in detail at your system, you will not get anywhere close to earning a decent income through trading.
#2- No actual money is involved in the process.
Aside from having to pay for the tool used for tests, there is no real huge cost involved in back testing. This is because in the actual process, there is no money involved. What actually happens during the procedure is that your system will be taken into historical trading conditions or situations. Results will then be presented on how well your system performed under these conditions.
You might wonder how such a process can determine the value of the system to current conditions when historical data is used. You don't actually need current data to see how well a plan will function. Tests using historical data will give you a good enough approximate idea of the value of your plan.
#3- Everything hinges on the software.
A successful back test relies on the kind of software that you use. Most charting packages have their own tool but some default tools aren't very good because they can't manage a system across a portfolio of assets. In real life, you will most likely be dealing with more than just one asset so you need a piece of software that can take a portfolio as a whole.
#4- There are no perfect results in tests.
There is no use trying to modify systems to reach perfect results. Perfection just isn't feasible or possible at all. You will never stumble upon a system that will give you a hundred percent success rate. What you should do instead is to get a couple of systems through tests and then pick that one plan that can give you minimal losses.
With so much at stake in stock trading, you can't afford to belittle back testing. Before you start your own trading account, running tests on your system is the one thing you can do to make sure you don't go down the loser's path.

Reference: Reece matthews

Why investing in stock

In terms of an asset class, stocks are hard to beat. Over time, they have higher returns than bonds or real estate. There are a few reasons stocks are such a great asset class, but stocks do have a few drawbacks as well:

Benefits of Stocks:

Returns: Over time, stocks outperform bonds, CDs (and other cash investments), and real estate. Stocks on average return about 10% a year, whereas these other investments generally return at about 5-7%.

Taxes: If you hold a stock for more than a year, your profits (when you choose to sell your stock) are taxed at long-term capital gains rate of 15% instead of your standard tax rate. Money you make from interest in a savings account or CD is taxed at your regular tax rate, which can be as high as 35%.

Diversification: Unlike real estate, it is easy to diversify your stocks. In fact, you can buy whole indexes of stocks, such as the S&P 500 or Wilshire 5000, by investing in ETFs that track those indexes. When you buy real estate, your returns are largely the result of how popular that area becomes. If you buy a house in an area that goes downhill, you will lose a lot of money on that house. For stocks, you can own a stock that literally goes to zero, but it's not a big deal provided you invested in a wide variety of stocks.

Disadvantages of Stocks:

Risk: The stock market can vary wildly. If you invest in a stock, your investment can literally go to zero if that company goes out of business. However, if you are properly diversified, the risks associated with the stock market are not that bad. Over the long run, the stock market goes up. Nevertheless, the risks with stocks will always be higher than a guaranteed return with a CD or government treasury.

Penny Stock Watch List - How To Pick The Right Stocks For Your List

When compiling your penny stock watch list, you only have two basic requirements to look out for. First, the penny stock must have sufficient trading volume of at least 50,000 shares since anything less than that can be a sign of too little interest on the stock under consideration. But you must also consider the factor of insider trading wherein just a few people are moving the penny stocks to make it seem that it has a high trading volume.
Second, the penny shares in your list must have a high degree of volatility. Basically, you are looking for penny stocks where traders can purchase the stocks at or near the support levels on one hand as well as sell at or near the resistance levels on the other hand. Look at the price level, which should allow any sensible penny stock trader to cash out and cash in on the profits.
Of course, these two basic requirements for inclusion in the penny share watch are just that - basic. You still have to consider other factors in the choosing especially as penny shares are high-risks albeit high-rewards investments of sorts. Also, we understand if it will take time, effort and, of course, money before your watch list for penny stock becomes reliable and profitable.
But before you can even compile your watch list, we recommend thinking things over in regard to your involvement as a penny share trader or investor. We cannot overemphasize the fact that these shares are not for every trader or investor, not even the savviest one in the bunch for many reasons.
For one thing, these shares are highly volatile securities that can rise and fall in mere seconds. Since it is not as highly regulated as the stocks of the blue chip companies, the risks for losses are higher. For another thing, effective monitoring of your stock holdings requires the proper mindset, attitude and approach, not to mention the time and effort on research necessary. Even your penny stock watch list today may not be applicable two days from now and, thus, it will require almost constant monitoring.
But if you have the time to monitor, evaluate and analyze the penny shares on an almost daily basis, then becoming a penny share investor or trader is the right path for your wealth-building activities. You have to possess a personal computer with an Internet access so as to be able to check the stock prices at a moment's notice, usually between 8 to 12 times daily depending on your stock holdings.
Aside from the prices, you also have to monitor the bid and ask lots, the market movements and the industry conditions, to name a few other factors. With such a fast-changing environment, it is no surprise that the watch list for penny shares changes fast, too.
The rewards for all your time, effort and money, fortunately, more than outweigh the costs. With the right stocks on your penny share watch list, you can proceed to buy and sell the stocks to your advantage - increasing your wealth a few thousand dollars at a time, that is. You might even be able to afford setting up your own micro-cap company and let others trade or invest in the penny stocks.

Unusual Options Activity - 4 Easy Tips to Track Options Activity

Whether you are an individual investor who wants to expand your horizon by moving past the fairly safer confines of the regular stocks, bonds and mutual funds portfolio and cross over to the more speculative and thrill-seeking even though riskier environment of options trading, or if you're the market analyst of a multi-national company looking to hedge the cost on one of your company's main raw materials, it is usually to your advantage to be as well-informed as possible before making that all-important decision whether to take the plunge into the high-reward but also high-risk gambit that is the options trading market.

The oracle of Omaha, Warren Buffet, referred to options as 'financial weapons of mass destruction'. Granting that the options market isn't meant for everybody, for that well-seasoned trader nevertheless, it offers advantages and safety outside the capabilities of other much more conventional securities that are often available in the securities market.

Having an access to a dearth of information that are readily obtainable from the internet at just the speed of thought, it has truly become very easy nowadays to access several applications, resources, charts, graphs along with other information associated to options trading. Do not be lulled into thinking that this is all you've got to do however, simply because for you to have gainful trades you should also have technical and fundamental analyses, together with an awareness of the pertinent developments regarding the underlying assets, like scheduled announcement of earnings, FDA meetings, purchaser conferences, mergers, takeovers, approaching dividend ex-dates, and so on.

But when you are new to the business and faced with a seemingly endless parade of organizations, ticker updates, profiles and interviews, as well as getting bombarded with all sorts of real-time as well as archived info, it will be understandable if in case you stop to ask your self: exactly where, do I start in the midst of all this overwhelming information?

Well, it would be a great idea to begin with a few options which are presently generating all of the chatter and activity within the marketplace. Those select few that for reasons still unknown to you, are presently turning in performances which are much more than their normal daily average. Make no mistake about it, they are certainly out there. It's just that they are not that easy to catch for an untrained eye.

So, how do you spot unusual options activity?

Following are some important guidelines to keep in mind if you would like to piggyback on that potential goldmine:

Options Volume

Your curiosity should be aroused if a particular company is presently trading at triple its typical every day volume with regards to either calls, puts, and also open interest, especially if the attention is concentrated on the shorter-term options and mostly to just one or two strike prices.

Keep a close eye on large blocks of contracts changing hands and note the time that they had been traded because this usually signifies that institutional investors are getting involved and not just your run of the mill retail investors. These big boys are synonymous with "smart money" because they usually possess powerful information which the rest of the players in the industry might not be aware of in the moment. You can ride the "smart money" as soon as you have confirmed that the transactions were not just components of a spread trade, a rollover, or some other complex method (which, most of the time just means that there's really nothing extraordinary happening).

Implied Volatility

Unlike stocks, which has a clearly defined number of shares, options possess a practically unlimited supply. But if buyers are prepared to shell out additional 10 or 20 cents premium on a $1 item even though there seems to be no considerable movement within the fundamental stock, then that suggests that there is a higher demand than willingness to sell for that specific contract and something is definitely brewing. You should immediately ask around and probe the market for the reason of this, after which make your move accordingly as soon as you have confirmed most likely catalyst for all this action.

Pending News, FDA Occasions Or Upcoming Catalyst

In spite of all the obtainable option trading software programs, resources, charts and graphs at our disposal, they are still not 100% dependable when it comes to accurately predicting the price movements of options contracts. The reason for this is really simple, the market is still being ran and controlled by human beings who by all accounts, are extremely emotional creatures. This creates a lot of room for a lot of erratic and unexplainable trends that we observe in the market from time to time.

So you have to be technically sound and fundamentally adept, but at the same time be continuously on the lookout for substantial information, events and developments regarding your underlying security such as mergers, takeovers, new management, earnings report, and so forth. These have the potential to create emotional reactions which could have a direct effect on the perceived worth of your security. Don't be caught with your guard down, you may just suddenly realize that a snowball has been formed and that it completely takes the market for a ride.

Look Over The Shoulders of Experts

Finally, modern day technology, in particular the internet, has made it really convenient for us to gain entry into vast quantities of helpful resources and information which may trick any wide-eyed new investor such as yourself into believing that you can tread the waters on your own, armed with just these collection of resources and information in hand. Be warned however, there is definitely more than meets the eye when trading overly complicated derivatives like options. Be very wary if you plan on using more than your risk-capital, because you can possibly lose everything that you have worked hard to build on if you're not careful.

Oftentimes, it is more advantageous for you to just let the experts deal with the complicated stuff, like understanding how to look for unusual options activity, and you can just concentrate on reaping the rewards of much better trade decisions as a result of competently analyzed and well-researched market information. You will find selected web sites that can help you with ideas, strategies, methods as well as trainings for much better and much more profitable trades.

Reference:-joshua belanger

                                                                             

What to know before investing in stock

It is important to be independent in our decisions to invest, and be able to evaluate and understand the companies that we are considering for potential investment. In this article, I want to share with you some of the things that I look at when deciding if a stock is a good investment or not.

Revenue

To pick out a stock that will create good long-term value for its shareholders, investors need to look at the sales figure to see if it is growing at a healthy rate long-term.

Investors should, however, make sure that the company is not over-aggressive in its expansion and taking on too much debt; spreading itself too thin. Investors should also make sure that the company is not in the habit of regularly issuing new stock to fund its growth, as this kind of activities will dilute the holdings of shareholders. The best companies are usually the ones that can mostly or fully fund their expansion from internally generated funds.

Investors also shouldn't overpay for stocks with high growth rates, as this will put investors in a situation where they find themselves with big losses because a high-growth company they bought shares in missed earnings estimates by 0.1% or something.

It is important to figure out if the growth rate of the company is sustainable by reading the annual report for information on growth and looking at the industry the company is in, as well as the size of the company in relation to the size of its largest competitors. A company doing $8 billion dollars in sales in a mature industry where its biggest competitor is only doing $10 billion dollars in sales generally can't grow much and shouldn't have too high a rate of growth.

Most important, however, is that an increase in sales is only a good thing if there is an equivalent growth rate or a higher growth rate (due to scale) in income over the long-term. We will look into income a little later in this article.

While I do believe that investors can get good profits from investing in large-cap stocks, I also believe that if investors are looking for stocks that have the potential to go up 20-30 times in value that they have to look for this kind of gains in small-cap to medium-cap stocks. It's much easier for a $20 million dollar company to grow ten times its size than it is for a $100 billion dollar company to even double its size.

Operating Income

Investors should look for companies with operating incomes that are rising. There don't have to be an increase in income every quarter or even every year, but there should be healthy growth in profits over the long-term.

The operating margin is the percentage of revenue a company translates to profit before paying interest and taxes, and before taking into account non-operating profits and losses. A company earning higher margins is able to expand faster and better fund its expansion from funds generated internally, while relying less on debt or issuing new shares that will dilute the holdings of its shareholders.

Many companies make losses during recessions as demand for their products drop. Companies with high operating margins are, to a certain extent, somewhat protected from adverse economic conditions and may still make at least some money during bad times. Additionally, when there is an increase in the costs of materials, companies with higher margins are able to delay passing on the increased costs to the customer and gain market share from their competitors that have no choice but to raise prices early.

While it's true that investors should generally look for companies with high profit margins, in industries with high profit margins, investors should also take into account things like business models, return on equity, and expansion plans. Wal-Mart for example thrives on a business model that entails low margins, because it is its business model that permits it to earn a high rate of return on equity and experience great growth that turned it into the largest retailer in the world. All this has translated to very impressive profits for shareholders over the long-term.

Companies spending aggressively on expansion will temporarily experience lower profit margins (It is important that each dollar a company retains to expand its business, returns to shareholders in the future as more than a dollar plus whatever return shareholders could acceptably have earned had the company instead paid out dividends with the money used for expansion).

Net Income

While operating income allows us to have a better idea of the efficiency and growth of the company, net income is a more accurate measure of the current profitability of a company, as net income takes into account taxes and interest expense.

The Price/Earnings ratio can help investors tell if a stock is cheap. Generally, a low P/E ratio indicates that the stock is cheap. Investors should, however, take into account that a low P/E ratio could also be a sign of bad things to come. The P/E ratio could also be low because of big one-time gains (which should be taken out when evaluating profits). Companies can manipulate earnings, or accounting rules can give temporary boosts to earnings, and these things will also result in the P/E ratio being unreliable.

Investors should add the latest annual net income figure available with net income figures from the past few years and average them out. This will somewhat give investors a more normalized view of profits. The same goes for operating income and return on equity.

Return on Equity

It isn't difficult for companies to increase earnings. Companies can for example, take on more debt or retain earnings to deploy in profit generating projects. What's important is the return on equity, as that is the rate of return earned on shareholders' money.

Here are some questions investors need to ask themselves with regard to return on equity: "Does the increase in assets and liabilities due to the company taking on more debt translate to an increase in return on equity that's significant enough to compensate shareholders for the increased risks inherent in holding stock in a company that has become more leveraged?"

"Can the company continue to achieve an above average return on its equity that's constantly rising (due to retained earnings)?"

Investors should always look for companies with high returns on equity (and if possible, rising return on equity), but should also beware of companies earning high returns on equity solely due to the fact that they are taking on lots of debt and operating on very low levels of equity in comparison to their assets.

When analyzing stocks, it is important to see if the return on equity is consistent over the long-term, even if equity has been gradually rising over the years. If the amount of debt has been rising over the years, investors need to make sure that the increase in assets paid for with money the company borrowed resulted in an increase in return on equity that is acceptable.

These are some other things that investors can factor in when evaluating a company's return on equity:

As an organization grows bigger, it might not be able to sustain its growth without adding new products to their product line, expanding into different lines of business, or entering new markets. The company's expanded operations might not be able to generate a return on equity that's similar to that of its past operations (This assumes that the company uses mostly retained earnings and little or no debt to fund its growth). In this kind of situations, investors need to ensure that if the company is not able to achieve a return on equity that is as high as the past, the company has to at least achieve a return on equity that's above average.

Increased competition is another factor that can reduce a company's profits and ultimately the company's return on equity.

Balance Sheet Strength

Investors should generally look for companies with as little debt as possible and as much cash as possible. I usually look for companies with cash and short term investments equaling at least 40% of total liabilities and 150% of current liabilities.

For me the more cash the company has the better, as cash allows a company to weather downturns and even take opportunities during downturns to acquire assets at depressed prices. While on the surface I think it is a good thing for a company to have lots of excess cash, I also would need the company to have a great track record in terms of using its cash wisely, whether it has been known to make great acquisitions at reasonable prices, launching share buyback programs when the company's stock is undervalued, or etc.

Companies shouldn't have excess cash for a long period of time as not only will inflation erode the value of the company's cash holdings, but the shareholders will be much better off if the company paid out its excess cash in dividends.

I can't remember the exact quote, but Warren Buffett once said something along the lines of "If you're smart you don't need debt, and if you're dumb you shouldn't get involved with debt in the first place." I try to recall this quote every time I think about personally taking on debt to invest or buying stock in a company that have a little bit too much debt for my liking.

I generally dislike debt, but I do understand that companies can benefit from taking on debt when the cost of debt is very low. However, I find it important that the company don't take on more debt than it can very comfortably manage, no matter how low the company's cost of debt is. When evaluating if a company has taken on too much debt, I generally look at book value to total liabilities, cash to total liabilities, and owner earnings to total liabilities.

Another thing I look at when investing in a company that has debt is the maturities of the company's debts in the short to medium term, and if the company is able to build up enough cash to repay any maturing debt in the near to medium term. I also look at the company's cost of debt and will tend to exclude the stock from my list of potential investments if the cost of debt is too high, as not only will it be harder for the company to service its debt, but it is a sign that there could be something fundamentally wrong with the company that justifies it having to pay higher interest rates on its debts.

This segment of the article describes very generally some of the things I look at when evaluating companies' balance sheets. There are of course other things that investors should take into consideration when evaluating a balance sheet.

Owner earnings

Warren Buffett wrote about a concept he called "owner earnings" in Berkshire's 1986 letter to shareholders. While it has been quite some time since I read about owner earnings, this is how I calculate owner's earnings:

Net profit (I try and take out one-time gains or losses) + depreciation and amortization +/- certain non-cash items - average capital expenditure needed to maintain current profitability and competitive advantage - increase in working capital (if there is).

Some companies might be building up cash, and this might result in a significant increase in working capital. I try to take this into account by factoring out the cash portion of the working capital increase once the company's total cash reaches a certain percentage of current liabilities(depending on the industry the company is in and what you believe is enough cash for the company to run smoothly).

After calculating the owner earnings figure, I will discount the company's owner earnings for the next 20 years (I use 20 years as I feel that this is the minimum timeframe for long-term investing, investors can of course use their own timeframes) to the present at a discount rate of 6-7%. I suggest applying a 6-7% discount rate, as I feel these are the returns investors can very reasonably earn over the long-term by dollar cost averaging into a low-cost index fund. The value I get from discounting all the owner earnings to the present will be the base from which I will determine the company's intrinsic value.

After I'm confident that I've roughly arrived at the intrinsic value of the company, and I believe that the stock of the company will make a good investment, I make sure that there's a margin of safety before buying the stock. I generally look for the market price of the stock to be at least 40% below my estimate of the stock's intrinsic value but may require less of a margin depending on factors like high profit margins, strong cash position, and etc. No matter how sure an investor is in his or her calculation of the intrinsic value of a stock, the investor, to be prudent, should still have a significant margin of safety when investing, as this will give the investor some protection if things at the company don't go well, if there are adverse economic conditions in the future, if the investor's valuation of the company is off, and etc.

Investors should note that different people may come up with a different value for owner earnings, as well as a different intrinsic value for the same company.

(I read a little bit about the margin of safety before, and I know that Benjamin Graham wrote about it in the "Intelligent Investor" (which for some dumb reason I haven't read), but I currently don't have a good understanding about the margin of safety, and I'm not sure if I'm applying the concept correctly (even though I think what I'm doing makes sense). I am of course going to make reading the "Intelligent Investor" a top priority, but until then, I would greatly appreciate it if anyone could share some information about the margin of safety).

Competitive advantage

Companies need to have some sort of a competitive advantage if they are to produce good returns for shareholders over the long-term. A great brand or a great reputation, an effective distribution system, an exceptionally strong focus on the customer, being the low-cost producer, having a product that's the de facto standard, and having a great business model that is incredibly difficult to profitably copy can all be a source of competitive advantage.

Economies of scale can be said to be a source of competitive advantage, but I wouldn't, in most cases, count on it being a lasting competitive advantage over the long-term as some competitors can gain scale with time. There are also an increasing number of smaller companies that are able to effectively compete against their larger counterparts due to the fact that they are able to successfully integrate technology into their business models. Don't get me wrong, economies of scale is great and can contribute to a company being a low-cost producer, I just don't think it's a very substantial competitive advantage on its own.

I do, however, believe that having a near monopoly over a market is an excellent source of competitive advantage. Companies that have achieved almost monopoly status not only get all the possible advantages of scale in their markets, but also pricing power as a result of their huge market share, as well as significantly higher margins than they normally would due to a lack of meaningful competition which would most certainly put pressure on prices.

Usually, there is a reason why some companies are able reach a point where they're almost monopolizing their respective markets. The reason could for example be a license that makes the company the sole distributor of a certain product, or the company has a product or line of products that have become the de facto standard in their product category (example: Windows engine). These reasons are the things that make these companies able to somewhat sustain their near monopolies over their markets.

Intellectual property, especially in industries like the pharmaceutical industry, can be a great source of competitive advantage assuming that the company has a great R&D department that works closely with the production and marketing departments to consistently come up with feasible and profitable products that have a big enough market potential for the company to enjoy really huge returns (needed to compensate for the risk that the new products won't be successful) on R&D costs and the costs needed to bring the new products to market.

There are also competitive advantages that are unique to their industries. In the banking industry for example, a large cheap deposits base is a source of competitive advantage.

Great management is also a very good source of competitive advantage. Here are a few things to look for to tell if management is good:

Management is committed to enhancing long-term shareholder value. Management that aims to enhance shareholder value will do things like buyback shares when the stock is undervalued, pay out dividends when the company can no longer reinvest earnings at higher returns than shareholders can, and focus on activities that will result in long-term profits.

Management has a good track record of doing what they say, whether it is to cut costs, reduce debt, increase revenue contribution from a certain division, or etc.

Management is committed to keeping costs low. This can be seen in terms of the company's selling/general/administrative expenses being significant lower than that of similar size competitors.

Management is conservative. A company that is run by conservative management will have low debt levels and hold enough cash on its balance sheet to ensure that the company doesn't find itself in financial trouble. The company will also distance itself from risky activities.

The executives own shares in the company worth significantly more than their total annual compensation. The shares these executives own should come not only from stock options, but also from them investing their own money on their own account. While this doesn't indicate that management is good, it ensures investors that management's interests are aligned with the shareholders.

Management should be honest and open with shareholders, whether it's about the current performance of the company, the company's goals and the progress made towards those goals, the slip ups of the company, or etc.

Price & Understanding your investments

Companies in different industries are valued differently. For example: book value and cost of funds are important in determining the value of a bank, while a lot of weight is put on same-store sales figures in the evaluation of the investment appeal of retailers.

Not knowing what to look for in a particular industry, can lead to investors not being able to properly value companies in that industry. Because of this, investors should put their efforts into analyzing stocks in industries they understand, as this will increase their chances of properly identifying and valuing a truly great company. It is also important to note that great companies can be found over many different industries, and investors will be better off specializing in and really understanding a few industries (even one will do) as opposed to knowing just a bit about many different industries.

Investors should always try to avoid overpaying for stocks, and should instead just build up cash and wait for the stocks they like to become undervalued. This is one of the most basic rules in investment, and everyone knows this, but there will always be people who will still do it anyway, whether they realize it or not. A 50% loss on overpaying for a "hot stock" that has come back to ground will require the stock to go up by a 100% (which could be years) from its no longer irrational price just for you to breakeven. So, even if you are confident that you've found a really great stock, you should wait till the price of the stock drop to a point where if bought, could turn out to be a very great investment.

reference:- Packie mcreary