Valyooo (99.81)

What is your favorite kind of trade?

February 29, 2012 – Comments (4) | RELATED TICKERS: MHS.DL , IP

Don't kill me for posting two blogs in a row, especially since I started to mention this in my other blog.

 Everybody (I think) has one type of trade they are very good at, or understand very well.  We all know TMFDeej is nasty with the special situations, BravoBevo is good with the limit triggers on volatile stocks, etc.

My favorite trade, is listening to what smarter people have to say, and just doing it, and not doing stupid stuff. 

Like a few weeks back when the ESRX and MHS deal fell through, I told my mom and  a friend to buy a ton of MHS.  The stock dropped big, to like $60.  I know MHS is a good company.  My thesis for the trade was, if ESRX is trying to buy them out for about $75 a share, and they know more about PBM value than pretty much anybody else on the planet, the market price is wrong.  $75 is an overshoot because buyouts are always expensive, and the company is worth more to ESRX due to synergy than to an average investor.  But even with that factored in, ESRX must think the stock itself is worth at least $67.

So, they did nothing, and ESRX rose to $68 within a week or 2. So you could have made about 13% in 2 weeks, which is a fantastic gain.  ESRX said "we know our business well, and this stock is cheap"

I remember this happened with IP a few months back.  I forget what company they tried to acquire, but when the merger didn't go through, the stock dropped 25% or so in a day.  If you picked some up at the open, it recovered over 5% that day.  5% in a day because I trust that IP knows their industry well enough.

It is important to note that these mergers have to not fall through because the buyer went through the books and didn't like it.  Also, the stock has to fall back to close to where it was before the announcement was made, because thats where the stock was so cheap that the other company just HAD to buy it.  if the stock runs from $20 to $30 on the announcement, and the buyout price was $30, and falls to $27, it is not worth it.  If the buyout price was $35 though, then it may be worth a look if it falls to $25-$27.

My main problem with investing is I am not too good at deeply understanding most companies/sectors. I just notice patterns, and I understand to an extent how money managers think, and I know who knows what they are talking about and what they are making up.  Like when oil experts start speculating on biotech, and they don't understand the company.  Good way to lose money.  Piggybacking on people who know what they mean, can make you serious dough.  This is the trade I feel like I have pretty much mastered, because even if I don't understand the deal, I have an instinct that I have been right, I am pretty sure, 100% of the time, so it can't just be all luck.

Maybe if I stuck to only these trades, and not trying to mess with options sometimes, I would actually be pretty good at trading :P

So what is your favorite trade? What is the trade you feel you have mastered even if it is not your favorite?  Or, what is the trade you think you utilize well that is not often mentioned?

Feel free to give examples of when you have executed well, and your insights into it. Maybe we can all learn a few tips on a few different styles and all make money together.