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Investment Strategy

Making Dream Trades a Reality

By Roger S. Conrad, on Mar. 18, 2014

Buying low and selling high is every investor’s goal. Unfortunately, the opposite happens all too often.

Even shares of best-in-class companies are still hard to buy after a meaningful pullback.

Conversely, all too many investors get impatient and overpay for a winner, forgetting that even the best performers have to take a break every once in a while.

One solution to this problem: Set dream buy prices for stocks you want to own. Then resolve to purchase the stock in question if it falls to your dream price–regardless of your emotions at the moment. Alternatively, you can set buy-limit orders that will execute automatically if your target falls to your dream price.

This strategy worked best when the financial crisis and Great Recession sent the stock market spiraling lower from late 2008 to early 2009.

However, this approach also bore fruit on several occasions during the five-year bull market that followed.

  • In early 2010, the Arab Spring and the crisis surrounding at Japan’s Fukushima Daiichi nuclear power plant culminated in the wild volatility of the Flash Crash, when some stocks inexplicably plummeted intraday. On March 15, blue-chip master limited partnership Enterprise Products Partners LP (NYSE: EPD) opened the day at $40.19 per unit and closed at $39.51 per unit. However, at one point, the company’s stock traded for as little as $28.75–a dream buying opportunity.
  • Dream buyers got another chance to back up the truck in autumn 2011, when Standard & Poor’s downgraded of the US government’s credit rating to AA+. This news spooked the stock market, ironically triggering a rally in Treasury bonds as investors fled to this traditional safe haven.
  • Opportunity knocked again in 2012, when worries about the US government defaulting on its debt reached a fever pitch.
  • Dividend-paying stocks landed on the bargain counter last year, after Federal Reserve chairman Ben Bernanke set the ground rules for when the central bank would begin to taper its bond purchases.

Predicting the proximate cause and timing of the market’s next major downdraft is a fool’s errand; being prepared to profit from this opportunity, however, is prudent investing–assuming you pick the right targets.

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