When Controversy Hits
Facebook is off 20% from its highs mainly because of a controversy about how it sold user data – not user IDs – during the 2016 presidential election.
That has some investors worried that Washington might try to rein in the social networking leader.
While Congress will certainly spend some time grilling Facebook CEO Mark Zuckerberg – and rightfully so – I doubt anything will come of it. And even they were to pass some form of legislation, I firmly believe the courts would strike it down as an abridgment of free speech.
Amazon is another example of a stock hurt by controversy, with shares off nearly 14% from their recent high.
Of course, I’m talking about President Donald Trump’s recent Twitterrampage, blaming Amazon for running brick-and-mortar retailers out of business.
He also alleges that Amazon is taking advantage of the U.S. Postal Service’scheap shipping rates to pad profits. Never mind that other shippers also use the USPS for the last mile journey to your home – or that Amazon doesn’t set those rates (it just takes advantage of them).
Here’s what the president is missing. Amazon now sells products for thousands of small businesses that would never have access to global markets without this king of e-commerce. So, Amazon has actually been a boon to mom-and-pop shops all over America.
Now, like I said, it’s not the time to just buy a lot of tech stocks with hopes of boosting your portfolio’s gains.
So here’s your plan of attack.
I believe my unique Cowboy Split system is tailor made for just this kind of market.
Here’s how this “split entry” system works.
If you’re doing a traditional Cowboy Split, you buy one-half of your usual investment “stake” – if you usually buy $1,000 worth of a stock, you buy $500 worth – at market. Then you put in a “lowball limit order” to pick up the second half stake if the stock dips.
To help you better understand this defensive but profitable move, let’s walk through two examples.
Let’s say you have your eyes on XYZ Tech Corp. The company is in a hot growth sector, has great financials, and has a solid chart – and it’s selling at $25 a share.
Let’s further assume you want to own XYZ for the long haul. You can use the Cowboy Split to buy on the dips – and increase your overall stock profits.
You start by investing half of your standard stock purchase – like I said, invest $500 if you’d usually invest $1,000 – at market ($25 a share). As soon the market order fills, you then enter what’s called a “lowball limit order.”
You tell your broker that you want to buy a second half tranche of XYZ at a much lower price. A 20% discount is a great rule of thumb for filling the second half of your Cowboy Split.
You then enter a “limit order” for the second round of XYZ at a price of $20 or lower. If the stock falls to that price, your order automatically fills, and you now have an average purchase price of $22.50.
Once XYZ resumes its climb, you have baked in extra profits. For instance, when XYZ hits $30 a share, your cumulative gains are now 33.3%. ($30 minus $22.50 divided by $22.50 times 100 equals 33.3%.)
Had you simply bought the stock at $25 and held, your returns would have been just 20%. ($30 minus $25 divided by $25 times 100 equals 20%.)
So, the Cowboy Split increased your profits by more than 50%.
Let me be clear about one thing. If the stock doesn’t correct and your lowball limit order doesn’t fill, that’s perfectly fine.
No, you didn’t increase your overall gains, but instead you got portfolio insurance for free.
*This has been a guest post by Money Morning*