The full title of this book is “Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital Made a Fortune Investing in the Stock Market” by James “RevShark” DePorre. The book comes with a website at www.investlikeashark.com.
Most of the book goes through the best practices of trading. The key takeaway for me is to practice thinking about the emotions of people who are looking at the stock (holders, people looking to get in, traders, investors, etc.) while looking at that the stock chart. I did have the idea before reading this book of building a spreadsheet template that would automate this process in a more scientific manner, but have not gotten round to it; it just didn’t strike me to do it manually.
The book is an easy read, and goes through things at a high-level and does not focus on detailed techniques. One thing that the book deviates from others is in the ‘partial buy’ method. Usually partial buys are used by fundamental investors with a longer time who are buying based on perceived value. The trading way is to not buy more if the stock goes down when you expected the stock to go up. Nonetheless, it is a method that worked for DePorre.
Some other good points captured below.
Focus on Price Movement
- Picking great stocks that didn’t do anything wouldn’t make you any money.
- Focus on getting into stocks that institutions had already found and were buying aggressively.
- If a stock was going up on high volume, that probably meant that someone big with good information was buying and wanted to join the party.
Focus on Psychology and Emotions That Moved Stocks
- Movement caused by swings in greed and fear often provided the best opportunities.
- Charts serve as a predictive tool to help you understand the emotions that are driving prices, and they give you insight into where things might be headed.
- Try to imagine the emotions of buyers and sellers at various points along the way as a chart moves along.
- What are buyers and sellers feeling today as the indices continue to rally?
- Are they inclined to sell some positions and take some profits, or are they afraid they are being left behind and are anxious to buy?
- What are the predominant emotions of the day? Greed? Fear? Relief?
- if you know where we have been by studying the charts, you will have some good insights into those emotions and how the stock is likely to trade in the future as events unfold.
- After a stock turns down from a resistance level 1-2 times, many people will be regretting that they did not sell earlier, and will be inclined to sell and take profits when it gets back to the resistance level.
- If a stock keeps trending down, many people will look for opportunities to sell and escape the misery of bad judgment.
- Support and resistance levels are price points or psychological hurdle levels which reflect the action of many people with similar emotional concerns.
- When people have a loss in a stock, they are much more inclined to sell than if they have a gain. When a stock breaks down after being range-bound for a long time, it means most of the holders are suffering losses, which would result in the stock dropping fast and furious.
- A stock spikes up with huge volume after releasing a strong quarterly earnings report, over the next few months the stock pulled back with low volume (because many people held the stock at much lower prices previously and now cashed in on the spike), then the stock went back all the way up (because buyers knew something good was happening to the stock and accumulated during the pullback).
- Stocks bouncing at the 50-day MA are due to buyers wanting in on the stock, but not willing to chase it higher, hence they waited for it to pullback before jumping in.
Stalk Your Prey After a Volume Alert
- A surge in volume with a spike up in price means that a lot of people want to be in this stock.
- Sharks will start stalking it to find an entry point. Eventually when the stock settles down, and pulls back to a point where there are buyers who will support the stock (buyers who were waiting to come in during a minor weakness).
- Enter a position. If the stock falls back into the gap area, cut your losses.
Sell and Buy Aggressively
- When in doubt, get out.
- If you quickly cut your mistakes instead of holding on to them when they develop into major problems, you are likely to make more buys. The more buys you make, the better your chances of hooking on to some big winners.
- Aggressive buying provides you with increased opportunities. Aggressive selling limits the cost of trying the opportunities.
Don’t Play the Prediction Game
- Individual investors shouldn’t waste their time playing the prediction game. They are far better off moving quickly when something actually happens, rather than making bets on their ability to predict how the future might unfold.
Plan Your Attacks
- Imagine how events will play out and the market’s reaction to them makes it much easier to react when events unfold.
Latch Onto the Market Trend
- Hold many investments when things are going up, hold mostly cash when things are going down.
- Only when behavior becomes extreme does the wisdom of the crowd begin to break down.
Have the Agility to Sell and Re-Buy
- Selling is a cheap form of insurance. If a stock breaks down after you buy, sell it, but continue to monitor it. If the stock finds support, re-buy the stock once it starts to act the way you thought it would.
Determine When to Exit
- Flat percentage stop loss – sell when loss reaches a fixed percentage, start with an arbitrary level of 8% and improve from there.
- Moving average – sell when stock drops below a MA line (e.g. 50-day MA).
- Trend line – sell when stock crosses down a trend line.
- Support and resistance levels – sell when a support level is breached.
- Almost never put more than 5% of your capital in one position.
- Be more diversified if you favor highly volatile small caps, compared to holding big, slow-moving blue chips.
- Highly aggressive investors who watch the stock market closely may feel much more comfortable with concentrated exposure in a smaller group of stocks.
Partial Buys and Partial Sells
- Average in and average out of a stock over time.
- Average in as long as the reason for buying the stock remains in place, even if you end up paying more or less than your original price.
- Sell a portion for a quick gain if a stock goes your way, use looser stops with a portion for a longer term to capture more gains.
- There is a difference between averaging in to establish a new position and averaging down into a losing position. When you average into a stock, you have a plan of attack in mind to buy a certain amount of the stock over a certain number of buys. Averaging down is an emotional and reactive.
Fundamental Analysis: P/E ratio to Growth Rate Comparison
- Projected earnings growth rate should ideally be at twice the trailing P/E.
- To get the potential price increase, assume the P/E remains the same over the next year and multiply that with next year’s expected earnings to get the potential price one year later.
- Step 1: Create lists of new ideas
- Do a lot of reading. Identify “investing themes” (e.g. China-related stocks, solar energy stocks, etc.), create watch lists of groups of stocks for each theme.
- Make long lists of stocks that look interesting, narrow them down later.
- Daily Graphs Online from IBD allows you to look for stocks that are priced between 10 and 20, have had large increases in volume, have good relative strength compared to the broader market, and are trading within 20% of their highs.
- Step 2: Narrow down your list
- Look at the chart to see if the stock is attracting buyers and showing strength, e.g. bases, support, up trends, consider the emotions that are likely in play
- Next, look at fundamentals, whether it is in a favorable sector, PEG ratio
- Step 3: Stalk your prey
- Track your stocks, understand how they move, decide on a plan of attack.
- Take a small initial position on stocks that look interesting.
- Step 4: Make your move
- Decide the time frame, stop loss levels, position size, number of partial buys, profit taking level, etc.
- Take your position
- Step 5: Manage your position
- Monitor, sell if the stock starts to act in a worrisome way.
Investing / Trading as a Career
- Need a minimum of $200K to $500K in capital before you should attempt to do it full time.
- If your timing is poor and you hit a difficult market, you may not succeed even though you possess the requisite skill.
- The shorter your time frame (for trading) and the greater your turnover, the less capital you probably need.