This book by author Ivaylo Ivanov, gives us different methods to find the next outperformer in the market. When he talks about next outperformer, he does not mean finding stocks that gives 20%-50% returns but aims to achieve returns beyond imagination.

This is really very helpful book for fundamental investor to find the right entry price for their stocks, and if done with proper diligence on complete stock universe, a technical trader would definitely find it useful and earn significant. Momentum Trade or Price Momentum is the concept most touched upon by the author. I would like to present a summary to you which will be directly implementable in the live markets, so I hope you are interested in following up till the end of this post.

Momentum Trading is very simple concept which means buying securities that are rising and selling them when they look to have peaked. Stock market has the history of finding new outperformers every decade and history of major failed companies filing bankruptcy. Major companies usually trade at their peak prices due to higher attention and valuation offered by active investors. This is the reason, “We find stocks which are smaller companies showing prospect of rising from 100 to 1000, and not from 1000 to 1500. Those price ranges only mean that, smaller companies have potential to gain higher market capitalization and rise 10x when compared to bigger companies. So, the very first rule is to find companies which are smaller in sizes. And, it is obvious to go for smaller companies when we try to find the outperformers for the next decade, i.e. the next apple (Apple rose from $10 in 2010 to $120 in 2020.)

When we saw Apple in 2010 at $10, we did not even imagine how big it might get. As author says ‘Even Steve Jobs and Tim Cook could not answer how big could Apple go, when asked.’ This is the beauty of stock markets. Even founders don’t realise how big they will get, how can we? We can only judge the potential multi-baggers of decade by using few simple tricks, which are just a ‘high probability’ play. Every outperformer which gave returns of 5x to 20x have obviously passed through their 52 Week Highs as well as All-time highs. Author says, we need to consistently find companies which crosses their new 52Week high from proper base (or sometimes 50 day high).

The criteria for new 52W high list is quite interesting. Firstly, we are playing stocks by their prices and not by other news, fundamentals, etc. Hence, the only thing we should be concerned is prices. Now, when we only focus on prices, we cannot say why the stock has reached their 52W high. There might be reasons for the same, but we only understand the prices. Note, there might be some reasons always, even if companies have negative profit, negative growths, negative sentiments, etc. still the stock price might touch 52W highs. The fact that stock went so higher mean that smart investors, institutions, etc. are accumulating it for some strong reasons. They are the ones who enter a stock first, followed by others. This is good enough reason for us to buy the same stock. And these are the stocks which are potential multi-baggers, currently just at their initial stages.

Stocks rise for two primary reasons:

• One, when expectations from public is higher for companies to perform better. When expectations are consistently met by company’s performance, the stock keeps going higher. These companies usually belong to hot/famous industries.

• Two, when companies post exceptional results which no one anticipates, the stock prices perform thereafter. These companies usually are from boring industries not tracked by many.

• Many reasons, but we are focused on “Prices”.

Tracking regularly 52W High stocks, will definitely increase our probability of finding multi-bagger stocks, the stocks of next decade, the next apple. So, 52Week high or All-time high of stock combined with just a few catalyst (i.e. drivers of price), would be strong points for us to enter a stock. There are multiple ways and tricks to find stocks which could potentially be next multi-bagger. Let us focus on those catalyst + 52W high stocks, as given by author:

• IPO Strategy: IPO’s not always provide good opportunities as more mature companies go for listing these days.  So, we have to be careful here. Entering post-IPO, we could suffer losses as majority of their gains are captured when they are privately held. Still, there are IPO’s which have provided great returns after going public. An opportunity could be sensed in post-IPO’s as below:

1. 52W High IPO stocks listed during bad market + bad/boring industries + coming from a proper technical base.
2. All-Time high stocks + Hot Industries + coming from a proper technical base.
3. Recent IPO + Bull Market + Good Company + Less Float.

These three combinations would help in finding good post-IPO entry in stocks. Companies listed during bad market do not rise much and the valuations are attractive. When these companies are from boring industries, they are even ignored highly, giving us an opportunity to enter the stock at lower prices. Hence, these catalyst along with 52W high or All-time high prices offer good opportunities to enter.

If IPO’s are of Hot Industries from a bull market, the prices usually zooms due to general people’s fear of missing out, leading to expensive valuations. We need to ride the prices and get out early here. Lesser float is added advantage as the supply is less, the prices of stocks usually zooms very fast then imagined.

• Invest in what you love: You invest in companies whose product or service you love to use. Consumer traits match mostly, so, if you love a product or service there is high possibility others will love it. Entering into a stock, whose product are loved by consumers will gain traction sooner. When those stocks are at their highs, it is an added confirmation that companies stock will also perform. So,

1. 52W High + Products & Services you Love.

Above forms a deadly combination to earn. Note that, there are strategies to guide you when to exit a stock. Strategies stating when to avoid entry even if it touches 52W high, we will all touch those points later.

• Buying from 52W low list: There are many stocks which touches 52W low. These stocks do not provide returns so easy, they are there at 52W low for some reasons. During a bull market, a 52W low stocks is even dangerous. Hence, we do not touch a stock which touches 52W low during a bull market. However, bear market might bring good opportunities. During a serious bear market, almost all stocks reach 52W low, even the bests of stocks. Hence, it gives us opportunities to buy them. But, we do not accumulate these stocks when they are at their 52W low. We observe these 52W low stocks during a bear market, let them pass a certain price level i.e. 50 Day high or 52W high, before we buy them. Generally, the stocks to rise first from a bear market are the next hot stocks of coming bull market.

1. 52W low initially + Bear Market + Reaches again 52W high. 

• Stocks from Bad industries: Bad industries are the industries which are generally hated for not giving returns, not profitable and are laggards all times in view of the general public. They are often not attractive and are ignored by investors, public, media, etc. The sentiments of people for these industries are very negative possibly due to past losses to them from stocks belonging to these bad industries. But, when stocks from these industries form new high, there is something fishy, generally unknown in the market.

1. 52W High + High Short Interest + Very Negative Sentiments

Stocks which reach 52W high with negative sentiments are stocks to enter. They are hated and hence people go short in these companies. The fact that stock has reached 52W high is due to accumulation from smart people. When results come, or some news are out, they are usually a greater surprises. The result leads to covering of short interest, traction in prices, attention of media, etc. All these gives faster returns than usual.

 

Hence from all the strategies above, we are well poised to exploit the inefficiencies in market. Now that so much have been provided above to grasp, a checklist would always help. A quick recap of all the above strategies are given through a checklist below:

Sr. No.	Entry Plan
1	52W High IPO + Bad Market + Bad Industries + Proper Technical Base.
2	All-time High IPO + Hot Industries + Proper Technical Base.
3	Recent IPO + Bull Market + Good Company + Less Float.
4	52W High + Product/Service you love.
5	52W low initially + High Short Interest + Reaches 52W again.
6	52W High + High Short Interest + Very Negative Sentiments.

But, checklist is generally not enough. Even if we know all the points to successfully earn through stocks, we might tend to lose. From all the above paraphrase, we did learn “When to take an entry in Stocks”, but we should also learn when to exit. Exiting a stock is as important as entry. Some stocks rise 2x-5x in few months before giving 70% of their gains, whereas some stocks rise 2x-5x in few years but still give up major portion of their gains. The catch here, which we want, is to enter the stock right after the trend has established (justified by 52W High + Catalyst) and exit the stock at almost their peak levels (slight before trend is going to end) giving us the maximum possible returns. Timing is most important in market. As far as timing is concerned, we tried to understand the entry and now let us try to understand exiting a stock at appropriate time.

“Sooner or Later, Every Trend Ends”. But why trend ends? If we are able to judge or understand the reasons behind trend ending, we will be in position to exit a stock before its major fall. As per author, trend ends because of various reasons:

1. Weakness in General Market.
2. When results of company falls short of expectations.
3. Valuation are way too high i.e. extreme rise in price of stock.
4. An increase in supply (i.e. more shares are offered for sale).

When we observe any of the reasons above appearing in our entered positions, we should be careful and look to exit or book partial profits. Through this, we will not give up much of our gains and also be able to protect major drawdowns. Obviously, the stock need not end its trend as we anticipated. But, no one can see the future, these points would just help time our exits better and there is no surety that it will always work. When we observe the above reasons in our entered position, we remain careful while looking for many other additional things or indication that will help us to time our exits. Things or Indicators as mentioned below:

When the prices of stock do not rise even on good news, it is possible that they are no more acquired. Good news drive the prices of stock upwards. But, when stocks do not rise even on good news, there are always some strong reasons behind it. As mentioned earlier, we are not concerned with reasons, we are only concerned with prices. Hence, if prices do not react on good news, possibly there is more of selling than buying. It is one of the indications that the trend in stock might come to an end anytime soon. Our above logic also coincides with “Distribution i.e. an increase in supply”.

Even on good news, there is enough distribution/supply of shares that the prices do not rise. Hence, Distribution (i.e. supply) is also an indication that trend in a stock is weakening. Well, there is no particular way to understand distribution, but there are technical indicators to help us with.

Relative Strength Index (RSI) is one such indicator. RSI is simply a technical tool drawn over the chart. Leaving all logics behind, if RSI crosses 80 levels, it means that stock is in overbought position and can fall anytime. If RSI is below 80 levels, then there are chances that the trend still has some potential to go higher. There are lot many technical indicators which helps to judge the direction of stock, but we are not concerned about those over here. What we want to understand is to get out of the stock before the trend reverses. Reversal in trends are not in our hands. Trends might reverse suddenly and all our indicators would fail to detect it. We are often not prepared for sudden trend reversals. But, it does not mean that we should always be ready to take higher losses when trend unexpectedly reverses. With the help of simple stop-losses in our trading strategy, we might save a lot of our money.

Stop-loss should be placed at a level where our investment or trading strategy is invalidated. We enter a stock when they rise from a proper technical base. What if after initial rise in price, the stocks falls and goes below that base? When prices falls below the technical base established, it will take even more time to cross its high. Hence, it invalidates our strategy and that should be our stop-loss. When our stop-loss is hit, we exit our position and take loss or exit in profits. But, drawdown is restricted here and known, and it helps in properly managing risks. Stops are generally placed by understanding the price patterns along with Risk Management and Position Sizing techniques.

According to author, keeping a basket of 10-12 stocks and investing 5% to 10% on each of them is a good technique of diversification. Even if our stop-loss is kept at 10%, we will lose only 1% of our total capital (i.e. 10% of portfolio into each stock with maximum 10% loss per stock.) This is where position sizing and risk management comes into play. Our risk is restricted to maximum of 1%, and we take position of maximum 10% in any stock. These two techniques will save our capital from major drawdowns. With this technique under implementation, when our stocks fail to perform we only lose 1% of total value whereas when our stock performs and goes 2x, it puts a deep uptick on our portfolio returns.

But, stocks we enter not always perform. We need to understand that there are no guaranteed returns. By buying all the stock from the list of 52W high + catalyst, we are only playing the probability in our favour. By shortlisting 52W high stocks, firstly we are buying only stocks which could be possible multi-bagger of future. This improves our universe of stock selection with highest probability of performing stocks. There will be losers from our list as well but when we lose we only lose 10% in particular stock (our risk management), but when we ride a stock that goes on to became multi-bagger, it puts a huge positive impact on our portfolio returns. That is the reason why author has stated, we need to control our personal biases while entering a stock. We know that airline, steel, etc. are business which are hardly profitable. But, even if we are reluctant to buy and all indicators direct us to enter a stock, we should. We are playing out probability and hence there should not be any biases in it.

That is all from the book “The Next Apply” by Ivaylo Ivanov, the summary i.e. a quick recap is explained by me. I hope you like the short content from this book.

Conclusion:

By entering the stock which are at new 52W highs along with few catalyst, we are only increasing our probability to find multi-bagger stocks. Our aim is only to focus on prices and not the reasons behind them. When we follow properly the entry and exit strategy by looking at their prices and keeping any personal biases aside, we are positioned well to enjoy the benefits of investing through this technique. But even will all these, certain things will not go in our way. Hence, proper risk management and position sizing will keep our returns go higher and losses lower.

Thank You!!

 

Disclaimer: Well, I have tried to just give a brief of what author has conveyed in their books. I could only compile the ideas and explain to you in brief. The ideas are well explained and originated by author himself. I might have interpreted some things in different way (through this summary) than the author, but the gist of the book remains intact as explained above. Do appreciate the content, thank you!!