This is how you take your cannabis investing skills to the next level…
Successful stock investing takes more than knowing what stocks to own.
You need to know how to trade, especially when it comes to cannabis stocks.
Investors must take care not to pay too much for a stock. Or, when they exit the position, they need to make sure that they don’t do so clumsily and cut into hard-won profits.
They can also find themselves with far more risk on the table than they intended, so your position size needs pruning every now and then. Even when the risk is low, it just makes sense to harvest profits from time to time.
This is doubly true of cannabis stocks, most of which don’t trade with a lot of liquidity.
We’re still in the early stages of the cannabis game, and given the legal complexity of running a U.S. cannabis company, the major exchanges will not allow them to list.
And regardless of where they operate, most cannabis companies don’t quite meet the requirements to list on the New York Stock Exchange or Nasdaq – at least, not yet.
That leaves the Canadian Securities Exchange, or CSE, and over-the-counter, or OTC markets in the U.S. as the place to trade. Institutional investors are not yet in cannabis stocks in a big way. So, the trading is pretty thin.
To get the right price for a stock, and manage your position risk, you need a trading philosophy grounded in experience.
Don’t Rush In
Subscribers to the Cannabis Investor’s Report and Cannabis IPO Insider have received a lot of trade recommendations from me over the months since we launched the National Institute for Cannabis Investors. Over that time, a common refrain subscribers hear from me is to “be patient,” and “be a tough trader.”
The first thing to know – and this is not something I can determine for you – is how many shares you want to own of any given stock. What makes a full position in any single stock is entirely up to you. Everyone has their own financial situation, appetite for risk, and goals.
But based on any subscriber’s personal assessment of how much stock they want to own, my initial recommendation is almost always to buy half of the intended position size. By that, I mean you determine how much in total you want to spend, and in your first trade, you buy half of your planned total position.
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I do that because of the power of dollar-cost averaging. When I recommend a trade, it’s because I know the stock will be worth a lot more in the future. But, over the near-term, prices react more based on external market factors than on long-term prospects. And if a stock price happens to go down after I make my recommendation, I want to take advantage of the opportunity for you to complete your position at a lower price.
That makes the average cost of your position lower and magnifies the potential profit you can earn on the stock when it ultimately goes much higher.
However, if the stock simply continues to shoot higher after my recommendation and I don’t feel it is prudent to buy the last half, that’s OK. Owning even half of a position in a stock shooting higher is still a great way to make a lot of money from investing in cannabis stocks.
Second, my recommendations always have a maximum price to pay for the stock.
I do this because I don’t want anyone overpaying for a stock out of the gate. Overpaying is the surest way to hamper the gains that cannabis stocks will deliver. I want my subscribers to make the most of their hard-earned investment dollars.
Also, our paid members comprise a large group, and when so many investors move to enter a position, this can run up the stock price over the near term.
So, I put the maximum price there to encourage patience. More often than not, in the event the price goes over my published maximum, the price backs off a bit and those diligently following my recommendations can get into their desired position size at a better price. It takes a tough mindset to do this, but, in my experience, that patience will pay off handsomely.
Once you’re in a stock, position risk management becomes critical.
Think about managing risk like this. Say you own an equal dollar amount of five stocks. One of them doubles in price while the others stay the same. You now own twice as much of the stock that doubled as you intended, so the time is right to take some gains and add to another position.
Big money managers do this all the time, and they call it rebalancing. By doing this, you reduce the concentration of any single holding in your portfolio and add to cheaper, but still great, positions.
To help subscribers manage position size risk, I often tell them to sell half of their position when a stock has posted a big return – typically when it doubles in price from my original recommendation. This way they can pocket the original investment as gains, and any future gains on the remaining position will be pure profit.
In addition to managing position size, two other situations arise in which I give sell recommendations.
One is when a stock has rallied a long way, quickly, and the price has gone higher than I think it should over the near term. In this case, I’ll put out a sell alert, take the quick, easy money, and look for the next trade in which subscribers can put that stake to work. When the stock pulls back as I expect, I may recommend another buy at that time.
Another situation in which to sell is simply when the prospects for the company take a dramatic turn for the worse. When the facts change, I change my mind, so a company that has proven its promise is less than what we originally thought gets sold.
Open Buy Recommendations
Before I leave you to your weekend, I want to address a question I often get from members when I recommend selling part of a position.
Cannabis Investor’s Report and The Cannabis IPO Insider add new subscribers every day. That means there are a lot of members adding positions long after I send my original trade alerts and at prices higher than my original limits.
The direction to sell a one-half position is for those that got in at my recommended price. I want them to take their original stake off the table and reap some profits. It’s part of the position management I mentioned above.
Recommending selling only half of a position that doubled means those members will still own the original full position in the stock. When you see that there is still an open buy recommendation on the stock, it’s because the stock has a long way to go. The gains we expect from cannabis will be multiples of the original amount invested, not a fraction. So you should know that any stock that still has a buy recommendation, even if I have directed some members to sell half, is one that I think you should own.
While recommending some members sell half of their position while simultaneously recommending that newer subscribers enter the position may seem like a contradiction, it has everything to do with managing position risk.
As always, when it comes to trading, practice patience and have a tough mindset. That way, you can be sure not to leave precious wealth building profits on the table.
Executive Director, National Institute for Cannabis Investors
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17 responses to “Let This Philosophy Maximize Your Cannabis Profits”
April 11 2019