Cheap stocks. Why you should avoid cheap stocks in the stock market and why value investing
is a trap. Let me know your thoughts whether you believe it's best to buy or
to leave alone cheap stocks in the stock market. you can go to BestStockStrategy.com
and enter in your email address and receive over $400 worth of free training
materials. I am someone who likes good values so if I see something and I
believe that it's at a good price then I will buy it and I'm much more likely to
purchase that product if, in my opinion the price is lower. The problem with that
methodology when you apply it to the stock market is that you're not exactly
sure how much an underlying security is worth because you're not actually sure
what you're buying. You see if I buy a product at Whole Foods or a local market
I know exactly what I'm getting but if you buy a stock you're not really sure
what you're getting. There are so many variables that you're just simply unsure
how much that product is worth so again if I see a product then you can make a
quick decision regarding whether and you can quickly ascertain whether that
product is worth twenty dollars to you and if it's selling for fifteen then
you're going to buy it for fifteen and then you're gonna realize five dollars
of marginal utility with the stock market is different because if you buy a
stock like Facebook at $170 a share you are not sure
whether Facebook's true value or whether it'll be trading at in three months at
150 or 200 you have no idea so essentially all you're doing is price
guessing that's why I do not think that you should look for value stocks instead
what I believe you should do is look for market leading stocks that have
undergone a relatively short a relative short term weakness for example last
week which is the first week of April in 2019 Raytheon was trading around one
hundred and eighty seven dollars and fifty cents on Monday or two
then on Wednesday it fell around $8 and it fell all the way down from his
closing price on Tuesday which is around 183 to around a hundred it fell eight
dollars on Wednesday to run one hundred and seventy five dollars so in my
opinion because nothing has changed with that stock I can make the perception
that where I can make the argument that Raytheon which is a market-leading stock
along with Lockheed Martin and Boeing even though Boeing is more commercial as
opposed to governmental contracts in defense but Raytheon Lockheed Martin our
market leading stocks in the defense sector and on Monday Raytheon was
trading around one hundred eighty seven dollars and fifty cents and then on
Wednesday because some bad news came out the market decided to overreact and then
punished raytheon's who the extent that it sold off it shares and now that same
stock is trading at one hundred and seventy-five dollars in my perception
that represents a ideal scenario for you to sell a put
however because you're not sure what the true value of Raytheon is let's say the
stock market falls another four or five percent on Thursday and Friday as a
result because most of the stocks are highly correlated to the s py index for
the S&P 500 Raytheon would likely follow the trend of the overall market and sell
down maybe if it would sell all the way down to $165. That's why I like selling
options because when you sell option premium you're able to build in a
substantial safety net so when Raytheon sold down, and recognize that Raytheon is a
market leading stock in a solid industry with predictable revenues and cash flow
and governmental contracts, it sold off around 9 percent from its high when it
was trading at $187.50 and I was trading at $175 I could then sell a $160 put in
collect around $1.50 of premium and as long as the expiration is not too
far in the future I can even close it out early and be able to capture
anywhere from 50% to 65 percent of the premium and that type of trade will be
profitable around 95% of the time if you contrast this with simply believing that
a stock has sold you have no idea where the bottom is. And
yes you can make an argument that by buying Raytheon are selling a put in
Raytheon you still have no idea where the bottom is and you would be 100%
correct. The issue with that line of thinking is that because with everything
that we do we are just price guessing by selling options you might as well give
yourself a wide moat and a high statistical probability of profit and
choose to sell a 160 put which would be $15 dollars away from the current market
price of Raytheon so remember we build in the moat we build
in the safety net and we recognize that Raytheon has fallen 9% in two
days I have no idea where the bottom is do I believe that Raytheon is going to
fall an incremental $15 to 160? No, I don't . But I can't tell the future so I
don't know. As a result I'm going to sell the 160 put and collect $1.50 in
premium and this trade will be profitable around 95% of the time. But the reason
why we don't simply by buy value is because we have no idea what the real
price of that stock is. Remember , even if you take a stock like
Amazon which historically goes up if this straight line represents the fair
market value of Amazon you're going to see the actual price be wild in its
gyrations sometimes it'll be overpriced other times it'll be under price and
it's just going to swing but the long term it's going to likely increase in
price along a specific trading range but during the short term the prices are
very inaccurate that's why when a stock reports bad news then there'll be a
massive sell-off and when a stock reports good news then there's usually a
massive upswing only to see some type of retracement either to the bottom or
type of retracement where it's going to retrace some of its early losses. This is
something that we call reversion to the mean and it's very important because
what it tells you is that don't try to guess what the future prices are instead
put the odds in your favor. And this is one of the main reasons why we simply do
not buy value and the reason is that unlike something that you can pick up at
the store and you say this has $20 dollars of value to me it's trading at
$15 dollars as a result I'm going to buy it, when you buy a stock you have no idea
what the real value is. And that's one of the main reasons why you should not buy
value instead what you should do is you should have your watchlist be filled
with market leading securities and then get comfortable with the recent trading
range of those market leading securities wait for them to sell off and then you
sell a put. Or if we're in a stagnant or a bear market like we were in October or
December of 2018 you would wait for a relative high in those specific stocks
and then you would sell a call option that's how you generate revenue during a
stagnant or a bear market David Jaffee with BestStockStrategy.com you can
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