A couple of weeks ago, I told you that some of my longtime readers made more money on Apple Inc. (Nasdaq: AAPL) because their shares fell sharply along the way.
If that sounds counterintuitive, then you’ll want to pay close attention to today’s report.
That’s because I’m going to show you how they did it using one of our best trading techniques.
Better yet, I’m going to show you how to do the same thing with the stocks you own now.
Let’s get started.
No Free Lunch That Day
About a dozen years ago, I found myself having a stimulating conversation one sunny day in San Francisco with the great economist Milton Friedman.
It’s a conversation I’ll always remember.
I studied economics in college – in fact, I’m the recipient of an honors degree in that subject – and the tireless free-market advocate has long been one of my big heroes.
We were standing on the balcony of his spacious Nob Hill condo taking in the sweeping San Francisco Bay views and talking about economics and Washington politics. At one point he looked me in the eyes and said, “You know, Michael, I’d like to see the Federal Reserve replaced by a computer.”
As the 1976 Nobel Prize in Economic Sciences laureate explained it, he felt the Fed had become too obsessed with micromanaging the nation’s economy. Remember, this was more than a dozen years ago, long before the Fed started quantitative easing and heavily manipulating interest rates.
Of course, I’m not suggesting we replace the Fed chair with a robot.
But I always recall Freidman’s thought experiment whenever the markets or an individual stock I like get choppy. That’s when I know it’s time for defense.
So today, let’s explore a classic investment strategy that I’ve given a brand-new nickname to reflect our focus on the “New West” of Silicon Valley tech stocks.
We call it the “Cowboy Split.”
Today I’m going to show you that when employed properly the Cowboy Split will protect you from volatile markets.
But that’s not all.
If your stocks go down, on the recovery, you make more money…
Rounding Up Profits
Even after the big, big run-up we’ve seen since the Nov. 8 election, we’re still in the early stages of a generational bull market that could run for up to two decades.
The U.S. economy continues to gain momentum.
And tech is leading the way with high corporate profits, strong cash flow, and great operating margins.
However, we’ll keep seeing setbacks along the way. No bull market advances without occasional corrections and sell-offs.
Just imagine what might happen if a major scandal emerges from the Trump administration, North Korea tests another nuclear weapon, or if a firefight breaks out in the South China Sea.
While the Dow Jones Industrial Average keeps breaking to new highs almost daily, many investors are getting just plain scared that another major correction could occur any day.
Then there’s individual stocks. The depressing trend of companies with the slightest hint of trouble quickly selling off does not seem to be ending.
But I’m not worried. This is a great time to take a defensive approach to investing in tech stocks.
In fact, I think I’m getting a reputation for my defensive splits.
Despite leading off this report with a visit from Milton Friedman, the Cowboy Split is hardly academic. However, it is very effective. And my readers through Nova-X Report and Radical Technology Profits have used it to make some good money… some really good money, in fact.
With it, in a nutshell, you make “split entries” when you acquire shares of a great tech stock.
Here’s how it works. We buy a first tranche at market – say, 50% or 33.3% – and then enter a “lowball limit order” to buy more shares when they correct, generally after the stock is down 20%. You choose.
In other words, what for others would be a 20% stop-loss becomes a 20% discount for us.
Had you put my Cowboy Split into place when Apple peaked at $132.65 on a closing basis on April 27, 2015, your lowball limit order would have triggered at $106 almost exactly four months later.
The good news is that, after falling a bit further, the stock has come roaring back as Wall Street regained its senses.
Since it hit a closing low of $90.34 on May 12, 2016, Apple has surged 42.9%. By contrast, the S&P 500 Index is up 11.3% over the same period.
That means a stock Wall Street hated less than two years ago smashed the broad market’s returns during the period by an amazing 280%.
To help you better understand the Cowboy Split, let’s mosey through two examples… and then we’ll watch together as your profits rise.
Cowboy Split Play No. 1
Let’s say you have your eyes on one of our most recent recommendations – Intel Corp. (Nasdaq: INTC).
It’s trading around $36 a share. Driverless cars, smart houses, interconnected devices, cybernetics, artificial intelligence (AI), smart clothes with sensors, and virtual reality surgery are all coming – some prototypes are here already – and they all depend on the chips made by Intel.
Let’s further assume you want to own Intel for the long haul. You can use the Cowboy Split to buy on the dips and increase your overall stock profits.
Here’s how you do that. You start by investing half of your standard stock purchase at market, in this case $36 a share. As soon the market order fills, you enter what’s called a “lowball limit order.”
You tell your broker that you want to buy a second tranche of Intel at a much lower price. I usually use a 20% discount for filling the second half of a Cowboy Split.
You would then enter a “limit order” for the second round of Intel at a price of $28.80 or lower. If the stock falls to that price, your order automatically fills, and you now have an average purchase price of $32.40.
Once the stock resumes its climb, you have baked in extra profits. For instance, when Intel hits $43.10 a share, your cumulative gains are now 33%. ($43.10 minus $32.40 divided by $32.40 equals 33%.)
Had you bought all the stock at once and held, your returns would have been 20%. ($43.10 minus $36 divided by $36 equals 20%.)
So, the Cowboy Split increased your profits by more than 50%.
But what if the stock doesn’t correct and your lowball limit order doesn’t fill?
No, you didn’t increase your overall gains. But you did get portfolio insurance for free.
Cowboy Split Play No. 2
There’s a variation on the Cowboy Split that many pro traders employ. This entails cutting your entries into thirds. Traders do this when they want to pick up more shares at a discount but don’t expect a reversal of more than 10% or so.
This time let’s use Pegasystems Inc. (Nasdaq: PEGA), a small-cap stock we looked at earlier this year. Just a little more than a month later, we’re already up 7.7%, and it’s trading at near record highs.
You put in an order, at $41, for a 33.3% position, and then put in two lowball limit orders. The standard amounts with this approach are a 10% discount on the second stake ($36.90) and a 20% discount on the third ($32.80).
If the second two orders fill, and you get an average price of $36.90, then you once again would build in extra profits when the stock resumes its climb.
If the stock climbs to $49.10, your gains are again 33%. ($49.10 minus $36.90 divided by $36.90 equals 33%.)
If you had bought and held, knock that gain down to 20%.
As you can see, the Cowboy Split is a powerful investment management tool. It’s a great way to play defense when a bull market turns choppy – or when a good stock gets hit by bad news.
And with this approach you won’t get left on the sidelines once the uptrend resumes.
By making staggered entries, we turned market setbacks or declines in individual shares to our strong financial advantage.
It lets you buy great tech stocks at a discount… and make even more money in the long run.
— Michael A. Robinson
Source: Money Morning