How To Trade A Flat Stock ? 6400 Personal Finance

Has the following ever happened to you?:

You did your due diligence on a stock.

You?ve determined that it is trading with a significant margin of safety.

You are convinced that once more analysts pay attention to the stock it will take off.

You are ready to hold the stock for years.

So you buy?.and nothing happens. ?At all. ?The damn thing gyrates up and down a few points each year but always stays within sneezing distance of a mean price level. ?You collect a pittance in dividends for your trouble but you become increasingly convinced that your long-term thesis was flawed. ?Finally after holding for a year you let it drift back up into positive territory so you can sell for a small profit and move on with your life.

That was me with Activision Blizzard (ATVI) a couple of years ago. ?I actually found my old investment journal where I laid out my thesis for buying the stock. ?Apparently I had too much faith in World of Warcraft addictees and wannabe GI Joes playing Call of Duty. ?This was also right around the time that Farmville was exploding in popularity so part of my thought process was that once Wall Street got over its crush on ?mobile gaming? it would realize that serious gamers were going elsewhere. ?I still think that thesis is correct: I just don?t think I can make money off of it with a buy and hold strategy.

However?COMMA?.

There are other ways to make money than buy and hold. ?You know those radio commercials you?ll hear on the drive home that are pitching a strategy that will make you money no matter what the market does? ?Take a second to think about how you might do that legitimately. ?When the market gets into serious bull mode exciting innovative companies like Apple are going to lead the charge while more ?defensive? companies like Illinois Tool Works are going to lag behind. ?When it goes bearish those defensive companies that pay dividends can be had at attractive valuations and provide an income stream while you ride out the decline. ?Simple enough.

But what do you do when the market is flat?

Better yet, what do you do when a particular stock in your portfolio is trading flat?

Trading around a flat stock is something I have only done on paper so far (because I try not to acquire flat stocks with real money). ?However I am sold that in the absence of other more attractive opportunities that this would be a valid approach to make money off an otherwise boring as hell stock. ?Don?t let the word ?trading? scare you, depending on the stock this method only involves a couple of trades a year.

Let?s use Activision as a case study. ?For the last three-years the stock has been trading like this:

What you are looking at is a lot of short-term volatility mixed with long-term flatness. ?Make sure you are sitting down because I am about to show you the simplest trading strategy that you have ever seen (no moving-average lines or anything).

See? Fire your broker folks, I just made you a bunch of money with freaking PowerPoint.

Here is how this works: $11.50 fits the bill as a price level that this stock trades around pretty regularly. ?From 2009-2011 it dipped well below it on occasion and since then it has spent a decent amount of time farther above it. ?So I drew two lines: the green line is at $12.00 and the red line is at $11.00. ?Two rules: Buy at $11.00 and sell at $12.00. That?s it.

From the fall of 2009 through the fall of 2011 you would had made five trades using this method. ?If you traded based on closing price you would still be out of the stock today because that most recent dip you see up there went only to $11.12. ?Using a commission price of $7.95, assuming a worst-case scenario tax wise that you get pinged with the 35% short-term capital gains rate, and that your initial buy in 2010 was for 1,000 shares this method would have you sitting on a profit of $3,800 today, or just under 35%. ?Not too shabby. ?Not to mention that this doesn?t include dividends that you would have picked up along the way.

If you had held onto your 1,000 shares from the beginning your returns (price-based) would have been a pitiful -6.58%. ?If you re-invested your dividends you would have just missed breaking even. ?Not that Activision should have been high on your list of dividend plays in the first place.

Take a look at some of those boring stocks in your portfolio. ?Not the ones with boring business but the ones with boring price action. ?Are you doing all you can to juice your returns from them? ?For my own portfolio I am looking at putting this method to work on half of my position in Leggett & Platt (LEG). ?It has a big dividend and likes to trade around a certain mean so I am willing to trade some of the dividend income to juice the capital gains.

Bottom line: You are not a slave to any investment strategy. ?There is no reason to accept 80% success with your stock picks and letting the other 20% drag their feet. ?Do what you can to make the other 20% earn their keep or kick them out of your portfolio and look for better options.

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Source: http://6400personalfinance.com/2012/08/13/how-to-trade-a-flat-stock/

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