Imagine you throw a knife in the air to impress people around you and you try to catch it as it rapidly falls. If you succeed, you look like a pro. If you fail, you will catch the blade and cut yourself. Picking a stock rapidly dropping on the market is like catching a falling knife. Some stocks will bounce back and make a great investment, others will continue to drop and bleed your portfolio. Therefore, we call a stock that is brutally dropping a falling knife.

As you can imagine, not all falling knives are great investments. In fact, quite the opposite. There are probably more horror stories than successful trades made on companies that lost the market’s love. However, great returns can be accomplished when you proceed with caution. Here are a few of my tricks to catch a falling knife with my teeth and smile at my public!

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01 Get rid of a common investor bias

Before you start catching any falling stocks on the market, make sure you get rid of this common investor bias; what goes down doesn’t automatically go up. It’s not because General Electric (GE) once traded at $30 that it will bounce back from $13 and get back to what it once was.

Source: Ycharts

The price of a stock is like the love you have for someone. I’m sure you fell deeply in love while a teenager and that high school crush had the most important place in your life. But 10, 20, 30 years later, do you still think about your first love? Do you think such an adrenaline rush will be felt for that person again? Please don’t answer if you’ve been with the same girl since then (I know the feeling, I’m married to my high school crush! Haha!).

Rule #1; don’t buy a stock thinking it will go back to its original price. Past stock price has nothing to do with what comes next.

02 Understand why it falls

In some occasions, it is quite clear. The company is struggling in its competitive environment, a catastrophe happened, management cut its dividend, etc. Then, it’s easy to assess the reason why the market drops the stock like old stinky socks.

However, it’s not always that obvious. I remember recently that a DSR member sent me a quick email about Emera (EMA.TO). The stock dropped like a rock and this subscriber couldn’t figure out why. No news, no financial statements issued (Quarterly report happened a week before the drop), not even a press release around the drop. What the hell was going on??

Source: Ycharts

I’m never worried about the market noise, but it’s always good to understand the rationale behind it. Therefore, I dug a little further to realize that the whole sector was going down. Overall pessimism around interest rate rising was probably the cause of this drop. EMA, along with many utilities, are getting hit by rising interest rates from 2 sides. First, their capital-intensive business requires a large amount of debts. When interest rises, future projects won’t be as profitable. Second, many income-seeking investors bought utilities for their relatively high and safe dividend yield. Now that interest rates are rising, they can move back to bonds and other fixed-income opportunities. In other words; EMA is still a strong utility paying a sustainable dividend. Nothing has changed here.

Rule #2; once you know why the stock drops, you can assess how (or if) it will go back.

03 Do reverse engineering; have a buy list prepared

My last piece of advice is quite simple, yet incredibly powerful; get a buy list ready. There is a problem with a falling knife. When you start to hunt them, you feel the blood in your mouth and you are convinced you are going to make a great deal. There is nothing like the rush of buying a dropping stock with a single thing in mind: “I’m going to make so much money out of this trade”. Then, each drop on the market sounds like a Black Friday ad to your ears. Why don’t you try the opposite and make your gifts list before they get on rebate? I was following SNC Lavalin (SNC.TO) for a while before the stock dropped.

Source: Ycharts

Having a buy list ready has two great advantages. First, you know what you are buying. You have looked, analyzed, and understood a company prior to making a trade. Do you buy a 5^th TV just because it’s on sale? No, you don’t. You buy it only if you really needed a TV in the first place. You know the company and you know why it should be in your portfolio (e.g. you wrote down your investment thesis). The reason the stock drops isn’t at the center of your thesis but it becomes a great incentive to add a position to your portfolio. Second, you are ready to pull the trigger. Once you are convinced a company should be part of your portfolio, it’s only a matter of time before you add it to your holdings. You are not catching a falling knife anymore, you are making a sound investment in a temporarily undervalued stock.

Rule #3, get your wish list ready before a market drop, you have fewer chances of catching the blade and bleeding.

I’m sending my buy list this Friday

As the market goes up and down recently, there are a few opportunities rising. I’ve made some research and pulled a list of stocks that are down double-digit since the beginning of the year (dividend excluded). I crossed referenced those falling knives with my existing buy list and a short list of my favorite picks during this market roller coaster.

I’m saving this buy list for my Dividend Stocks Rock members. If you register before tomorrow, you will receive it in your email and you can take the weekend to analyze those picks and make a few trades on Monday. You can register for a monthly rate of $19/month and cancel anytime. Check out our pricing options here.

Happy trading!

You know what’s as hard as knowing the right time to buy for an investor? Trying the right time to sell! Last week I shared my tricks to get rid of the paralysis by analysis syndrome, which was designed into a series of 6 steps to follow in order to get into the right mindset and start investing instead of waiting on the side line.

Now that we have faced a mini correction and that some sectors are still get kicked around (REITs, MLPs and Utilities anyone?), some investors are getting anxious and wonder when it’s the right time to sell. Here are my tricks to know when it’s time to go.

Why selling in the first place?

As a dividend growth investor, my goal is to build a portfolio filled with money-making machines. Most importantly, those money-making machines need to print more money year after year. The true power of dividend growth investing lies inside the ever growing dividend paid. Companies doubling their payouts every 7-10 years will offer you a tremendous return over the long haul. Therefore, why should you ever sell any of those incredible money printing machines? Because you and me are human and sometimes, we make mistakes.

In an ideal world, we would only hold stocks that we will keep forever. For that reason, I don’t have a “process” to get myself in the right mindset to sell. When it comes down to selling, it is often the opposite; you should have tricks to get yourself in the right mindset to ignore market noises and do not give up to fear.

01 Never sell because you are losing money

My first “mantra” is to never sell because I lose money. Unfortunately, I have a few losers in my portfolio. However, only two of them are “long-time” losers, meaning they have been in my portfolio with a paper loss for more than a year. Short-term losers are not really bad investments, just consider them as being “temporarily unlucky”. A good example would be one of my recent trades in Enbridge (ENB.TO) that is now -15% in my portfolio. Is it a bad investment? Not at all! But I’ll get to that in a moment. Let’s keep our focus on real losers for now.

I have 2 small positions in Helmerich & Payne (HP) and Gluskin & Sheff (GS.TO) showing negative returns (excluding dividend) of -28% and -47% respectively. One could get “tired” of having those reminders of a failure each time they look at their holdings, or one could panic and sell just because he doesn’t want to lose more money. When a stock is showing a loss for a long time, I go through a very simple process to see if I should keep it or drop it.

02 Is the dividend sustainable?

As I mentioned several times on this blog, dividend growth is the most important metric for my investing strategy. Therefore, when a company is struggling, the first thing I look at is its ability to maintain its dividend.

I look at the company’s revenue and earnings trend but also at its payout and cash payout ratio as well. Sometimes, you must do more research and look at the FFO and AFFO (and the payout) to make sure you get the right numbers. If the company proves it can continue to pay its dividend, I’ll be patient and wait to see if it can get out of its troubles.

03 Review your investment thesis

Once I’ve confirmed that the dividend payment is sustainable, my second and last step is to review my investment thesis. Why am I using a simple 2-step method to determine if I should sell or not? Because my goal is to keep my holdings, not sell them!

Instead of wondering about the timing or about what is happening on the market, I isolate my decision. I ignore the noise and solely focus on the business. I do that for 2 reasons. First, everybody looks good on their prom night. Second, everybody looks awful next morning. Therefore, if you consider the market noise, everything is a buy in 2007 and everything is a sell in 2008.

By keeping my decision within the very reasons why I purchased the stock in the first place, I make sure I don’t make a mistake by selling a potential winner. When I wrote my article about the buy struggle, I highlighted the importance of convincing yourself you are making the right decision. By identifying a list of reasons why a company will thrive in the future is a good way to do it.

Then, if you want to know why you sell, the same company must not meet the reasons you have previously listed. It’s that simple.

You thought the company would establish itself as a leader and failed? You might want to sell.

You thought the company would grow its market internationally and it’s not working? You might want to sell.

You thought the company would launch a new service and grab market shares, but it sucks? You might want to sell!

But if the company does everything you thought it would and the market is just being difficult, then you should keep your stock and cash your dividend with a smile.  Helmerich & Payne is a good example of this situation. The business is currently evolving in a challenging environment where several smaller players are dying. HP is the leader in drilling wells in the U.S. Each year, it grabs more market shares and finds a way to survive. The energy industry is cyclical (duh!) and when it will go back on an uptrend, HP will be among the first company to benefit from it.

Note that in this case, the dividend may be compromised at one point. Since HP represents less than 2% of my portfolio (a rare low weight in my portfolio), I decided to keep it nonetheless. However, I follow HP evolution quarter to quarter with great interest.

04 Never sell because you make money

Some investors have 20% or 30% rules to manage their portfolio. Whenever a stock jumps or drops by 20-30%, it becomes an automatic sell. While this method avoids you being stuck in a paralysis mode, this is far from being optimal.

As a referenced, I wrote an article about the triple digit club. Those are the real winners in your portfolio. If you sell stocks when you make good money, you will definitely cash your profit, but you will also leave a lot of money on the table. Some companies could even generate a 1,000%+ return over time. You don’t want to sell those after making a 30% profit over a year, don’t you?

If you sell… what’s next?

The point will always be the same: never surrender to fear. Make sure you know the reason why you hold each stock in your portfolio. Then, it is a lot easier to know why you should keep them or you should sell them.

But if I have one last trick to offer you is this one:  if you sell, have your buy list ready. If you don’t, your money will lie in your cash account doing nothing for several month and you will get back to square one: paralysis by analysis!

Aaaahhh… the largest investment struggle is definitely suffering from paralysis by analysis. You know the feeling that if you wait a little bit longer, you will have a chance to pick-up the right stock at the right price? The market drops by 10%? Wait a little longer; the big crash is only starting. The market is up by 10%? Just wait for the next correction, it will be worth the wait. Then, 3 years later, you are still on the bench wondering where everybody goes…

Here are my tricks to get in action

If you wonder what this picture is about; it’s my RV where I lived for 12 months between 2016 and 2017. I decided to make a bold move, retire at 35 and travel the world with my family. I decided to jump and take action. That was the best decision of my life. If you want to feel like that after investing your money today instead of waiting for another decade, I’ve prepared a list of tricks to help you get out of this paralysis. If you are looking for a more in-depth approach, I have something for you at the end of this post…

01 Write down a potential buy list. There is nothing better than thinking about the future without committing completely. By screening the market and identifying 10 stocks that would make a good fit in your portfolio, you imagine the future, but you don’t invest just yet. This is the first step to getting out of your investing rut.

02 Write down an investing thesis on each stock. After selecting interesting picks, start writing down all the good reasons why this company should be in your portfolio. What are their competitive advantages? What are their growth vectors? What will make this company great in 10 years? The more detailed you get on this step, the closest you will become to being convinced to invest.

03 Establish the worst case scenario. The reason why you don’t invest isn’t because you want to make sure you pick the stock at a perfect price. Let’s be honest. The real reason is that you fear of buying right before a market drop. You know Microsoft (MSFT) is an amazing pick, but you would hate yourself to buy it at $95 and see it drop down to $78 two months later. Take your list, go back in time and look at how each company reacted to 2008. Then, add another 3 years to see how fast the stock price recuperated. Don’t forget to add the dividend into your calculation. You will be amazed how fast a company can bounce back.

Source: Ycharts

04 Start small, but start. I can appreciate that you are terrified to invest, let’s say, $100K in the stock market next month. You have worked hard to amass this amount, and you don’t want to see it melt away like cheese in a poutine. How about you start this month by making your first investment with 10% of your cash? I did take two months to invest 100K in the market, but you can definitely take twelve and it won’t be the end of the world. It’s like putting your feet in to test to the water. Once you get used to it, you will want to jump in.

05 Focus on the dividend growth. To best honest, nobody knows when the next crash will come. We all know it will happen, especially after 9 amazing years. However, if you complete step 01 and 02 correctly, you will have a bunch of solid companies in your portfolio. Those very same companies will increase their payouts while their stock price drops. The market value is just an indication of what your stock’s worth today. It’s a fictional value unless you sell. However, the dividend paid is real hard cash being deposited in your account. Focus on what’s real.

06 Think about how long you will be invested. You have read that many times, but it is darn right: market timing is nothing compared to time in the market. If you invest for more than 10 years (meaning that your account will show a $0 balance in more than 10 years), then you should not be worried about the next market crash; you will get it anyway! Hahaha! Investing is like driving; you don’t get to focus two feet in front of your car, you need to look further. If you don’t, you will definitely crash your vehicle.

You want more in-depth tricks to buy stocks and build your portfolio?

Six months ago, when the market was trading at its highest level since 2008, I invested the sum of $108,760 in the market. Do you want to know how I invested 100K without blinking? Here’s your chance to take a peek at my investment process. This Thursday, I’ll be hosting a free webinar on portfolio creation. I will show you how I built my portfolio while tossing away the eternal buy & sell struggle. You can register here for free:

You can claim your free spot here

Topic: Portfolio Creation – Addressing the Buy/Sell Struggle

Date: Thursday, March 15^th at 1 PM EDT

Description: Many investors struggle with the right timing of buying or selling their positions. We will explore various tools to help you make your investment decisions. We are going to discuss how to build a portfolio from scratch and how to adjust it over time.

A few notes about the webinar:

• While I address a common topic to all investors, this webinar has a Canadian spin.
• You must register with Webinar Ninja to attend. This is completely free and the webinar is free also.
• The presentation is about 25-30 minutes.
• There will be a Q&A session of about 25-30 minutes.
• The webinar works on Google Chrome or Safari from a laptop or computer. (Not compatible with smartphones or tablets)
• You will get the presentation and stock reports to download for free.
• If you can’t make it on time, there will be a full replay available, but you must register to the webinar to access the replay.

Register to the webinar here