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Conquer Volatility – and Cash In – With This Single Move

6 | By Michael A. Robinson

Investors in LinkedIn Corp. (NYSE: LNKD) recently had one of those days we all dream about.

On Feb. 6, shares of the big-cap business social networking player soared 10.7%. In a single session, it returned five times as much money as the Standard & Poor’s 500 Index has all year.

And on the very same day, Yelp Inc. (NYSE: YELP) investors also witnessed an “amazing” performance – shares of the business review website fell some 21.5%.

If you’re not careful and haphazardly apply your trailing stops, this sort of volatility can knock you out of a good stock before you’re ready – and you can lose a lot of money.

However, there’s a tool you can use – one that many investors know little about – to turn these choppy markets into huge profits.

It’s perfect for today’s markets…

Still a Bull

On the surface, here’s what happened Feb. 6: LinkedIn reported a great quarter, while Yelp reported a mediocre one.

But there’s much more here than meets the eye.

This one-day snapshot perfectly illustrates the volatility we’ve seen in the stock market over the last several months. And we’ll be dealing with this choppiness for the foreseeable future.

As I’ve been saying, I still believe we are in the midst of a generational bull market for U.S. stocks.

And I haven’t seen anything in the last several months to make me change my view. In fact, after surveying some key economic trends, I’m still very bullish about the U.S. economy and the tech sector.

Let’s start with the one thing that affects every working American – jobs. In January, employers topped forecasts by adding 257,000 new jobs.

That’s part of a major trend. Just two weeks ago, the federal government revised upward the hiring numbers for November and December, making 2014 the best year for job growth in 15 years.

This comes on top of robust auto sales. With total sales of new cars and light-duty trucks hitting 16.5 million units, in 2014 automakers just had their best year since 2006.

For tech investors, there’s even better news. Tech and healthcare (including the biopharma companies we look at here) firms are crushing on earnings.

According to Thomson Reuters, 88% of firms in those two sectors have beaten earnings forecast so far this season. That compares with about 72% for all other industries.

So, more people are working and buying cars than in years – and companies are raking in the cash

But the market so turbulent.

Here’s why.

The Great Energy Debate

It boils down to a giant economics debate.

On the one hand, there’s a group of investors who think falling energy prices will help stimulate the entire economy.

With crude oil prices down50% since last summer, everything from tourism and construction to manufacturing and electronics will benefit from cheap energy.

On the other side of the debate is a group whose members believe the rising value of the dollar trumps all. The thinking is this: Higher dollars means fewer U.S. exports and less growth for firms with foreign sales.

Against this backdrop of this debate, the stocks of companies whose earnings beat Wall Street’s forecasts rally. And those that miss – sometimes by just a penny a share – sell off on heavy volume.

This is the kind of climate that makes many retail investors nervous.

But they don’t need to be.

The Perfect Tool

There is a tool tailor-made to turn choppy markets to your advantage. I call it the “Cowboy Split,” and if employed properly it can really juice your returns

Simply stated, you can earn more money in a turbulent market like this with “split entries.” (Because we’re often talking about Silicon Valley firms here, I jokingly refer to this as the Cowboy Split – a great way to play the “New West.”)

Here’s how it works. Instead of buying your standard amount of a tech stock – for instance, 2% of your trading capital “bankroll” – you divide your entries into at least two tranches.

Let me give you an example. Say you want to invest in a company we’ll call Ultimate Tech Inc. at $50 a share. It has a good chart, has great financials and is in a growth sector.

With the Cowboy Split, you start by investing half of your standard stock purchase at the current market price. In this case, 100 shares would cost you $5,000, but you cut that in half, starting with $2,500.

As soon as that market order fills, you put in what’s known as a “lowball limit order.” Basically, that’s an order to purchase shares when they fall to a specified price.

Usually, I set my Cowboy Split at a 20% discount from my original entry price. That’s good general number for filling the second half of your Cowboy Split, but use your best judgment in each individual case.

In this case, you’d buy a second round of Ultimate Tech at $40 a share.

When the stock falls to that price, your order automatically fills and you now have an average cost of $45, a 10% discount from your original order.

The beauty of a move like this is that once the stock starts to rebound you have baked extra profits into your portfolio.

It works like this: Let’s say Ultimate rallies all the way to $60. Based on your average price of $45, you have cumulative gains of 25%. Your original order has gains of 16.6%.

But your second half has earned twice as much – 33.3%.

In today’s market, I regularly employ the Cowboy Split. And over the long haul, it’s turned out rather well.

I’ll give you an example from my premium trading service, Radical Technology Profits. In fairness to my paid subscribers, I can’t reveal the name of the semiconductor stock.

But I can tell you that we made our first one-half entry in July. Our lowball limit order filled during mid-October’s sell-off at a nearly 25% discount.

For months later, overall, we’re up 50%. But the second half of the Cowboy Split is up nearly 69%.

That’s an annualized run rate of 207%.

The Power of Profits

Thus, the Cowboy Split is a powerful investing tool. It’s an excellent way to keep you from staying on the sidelines and potentially missing big money moves.

Think of it as playing both offense and defense at the same time.

You’re on offense when you make your opening bid. You defend against getting stopped out by buying more of a stock at a discount, which also increases your overall profits.

And if the stock takes off and the lowball limit order never fills, that’s fine. When the stock has enough gains, you simply cancel the second order and look for the next big winner.

In the meantime, you’ve set yourself up to make money no matter what happens.

That’s the whole point of the Cowboy Split system. You make money in both stable markets and the kind of volatile ones we have today.

It reinforces the prime rule of tech-stock investing – no matter how bad things look, never be out of the market.

P.S. I encourage you to “Like” and “Follow” my communities of friends, colleagues and readers who are eager to make big money in tech stocks not in some future time… but right now – today.

Editor’s Note: Have you used the Cowboy Split? How are you doing on those stocks? Let us know in the comments below. We love hearing from you.

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6 Responses to Conquer Volatility – and Cash In – With This Single Move

  1. Andrey says:

    Michael, when u have your full postion in a stock, where will you place your stop-loss? 25% down from your average cost? If you placed a stop-loss order, then what about “never be out of the market” ?

  2. Dim says:

    The problem with this approach for me is that I’m doing my brokerage through Citi and each transaction cost is 90$. So this strategy is working only on rather big transactions where it is neglectable. Not 5000 as in your example but 10K or more

    • Marc Hall says:

      If you are paying $90 per trade, all I can say is that you are getting ripped off royally and need to get a discount brokerage to execute these instead. That’s unheard of anymore and extremely expensive. Most charge $10 or less. Do yourself a favor, do a very little bit of paperwork, Fire CITI Bank (too big to do anything for you anyway) and move all your assets to Vanguard or another GREAT custodian which charge reasonable fees. Nobody charges less in management fees than Vanguard for ETFs or Mutual Funds and they have a ton of choices. Plus if your portfolio is over $50k, you trade all their ETFs Commission Free!. That one move will make you more $ than any other “trade” you can do right now by actually saving you money on transaction fees.

  3. Barry says:

    So Cowboy says buy additional when the stock drops 20%. I am seeing your partners suggesting stop orders at 25% drops. This is getting a little confusing. I understand both philosophies but what the hell, confusing if you ask me. Can you clarify regarding these two views?

    Thanks Barry

  4. Marc Hall says:

    What Michael is explaining is a trading strategy to Lower your basis in a stock you want to own now and to keep long term by buying more at discount when those nasty sell-offs bring down the whole market. By only taking a half position now versus whole position and using a low ball order to get the other half at 20% less, you achieve several things. First you get into a position now versus waiting for that better price which in some cases never comes. You also prepare with the lowball order to get the chance to significantly reduce basis by 10% overall in this example if a sell-off presents that gift of another half at 20% less price.

    Yes you would stick to your max stop loss on the first half for now, but in the case of hitting your lowball order; if you still felt the stock had long term merit and the hit recently was only a temporary “market driven” versus “specific stock” driven event that would change your thesis for owning it in the first place, it makes a lot of sense then to double down on second half at a lower price.

    You would then adjust your new stop lower based on average cost, which basically keeps it at the same risk profile as before % wise. Sometimes this strategy would make all the difference between actually stopping you out entirely on an initial full or half position for that matter if say you were a bit too early into a trend that was turning around long term but had short term volatility. The current oil environment comes to mind right now as an example of a situation where we know long-term prices will stabilize upwards but still could have more short-term drops as it consolidates and builds a new base. A half now, half later strategy seems very smart under these conditions as a way to reduce risk and provide more upside if your thesis was right to being with taking a position at the current price.

  5. Cindy Taylor Speck says:

    I have used the “Cowboy Split” for buying stocks as well as buying options and it works! I use it to sell puts against the stocks I already own for extra income, but only if I want to own more shares of the company at the lowball price. I trade options every day and I use the “CBS” to purchase my first order of calls, puts, spreads, etc…& I put in a lowball order for the second order. If I don’t get the second round that’s ok b/c I’m still making money; its just a more conservative approach. Michael is the most savvy tech investor I have found and the only subscription I pay for. There are so many times I wish I would have bought into a new stock he recommended, and didn’t, but over the years he’s gained my trust and I trade with confidence now b/c he must work 24/7 with all the research he does and the CEO’s he holds meetings with as well as his contact list is impressive !!!!

    Thank you Michael for all your great stock recommendations!!! I just watched your latest video about the device to cure all diseases and the tiny Bio-Tech company that holds over 800 patents. Great video!

    A happy investor and from Texas, so of course “The Cowboy Split” made total sense!
    CTS

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