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I decided to write a 5-part series (this is part 3 of 5) on the common misconceptions that really need to stop being promoted. Keep in mind, these are all my humble opinions, but after 16 years of trading and studying market history, one really begins to notice what works and what doesn’t.

Common Misconception #3 – Buying Low-Priced Stocks

In September of 2004, a friend of mine had $20,000 he wanted to invest in a stock. I told him to buy $GOOG. He asked: “How much is it trading for?” I told him around $105. He immediately jumped out of his chair and yelled: “105 dollars per share!!!” It was a similar reaction to the one Doc Brown had in the movie Back to The Future when he screamed: “1.21 Gigawatts!”

I asked my friend what was the big deal? He said that it wasn’t worth it for him because he couldn’t buy many shares. This is a common misconception that I hear all the time. Many investors only think about the number of shares they can buy, when they should really be thinking about percentages. For example, people would rather buy 10,000 shares of a $2 stock than 100 shares of a $200 stock.

This is all wrong and leads me to my main point: You get what you pay for! What I mean by this is most lower priced stocks are low for a reason. They are usually struggling, low-rate companies that are not backed by the institutions. Think about it in today’s market. The majority of the quality stocks out there all trade for $50 per share or higher. There’s a reason a steak at Morton’s cost more than a hamburger at McDonald’s. It’s because you are paying for quality. In addition, these “expensive” stocks tend to be highly supported by the institutions.

This point is especially important for beginning investors who are trying to turn a small amount into a larger one so they can “afford to buy $AAPL.” You can afford to buy a higher priced stock right now if you simply think in terms of percentages. As for my friend, well, he bought 10,000 shares of a $2 stock that he sold at 60 cents one year later. Meanwhile, $GOOG tripled during that same time. Oh well

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http://tpn.thepulsenetwork.com/clients/trading-big-winners/identifying-big-stock-market-winners/

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1) Democrats and Republicans will fight and continue to hate each other (gotta start with something attainable so I can at least get one of these right).

2) Google ($GOOG) will get back into China and, as a result, Baidu ($BIDU) will get hurt. Even if this doesn’t happen, $BIDU has topped and will see $80 or lower at some point this year (it closed 2011 at $116.47).

3) The Los Angeles Dodgers will be in the World Series (trust me, I have that Sports Almanac from Back to the Future Part II and Biff has no idea about it).

4) Apple’s ($AAPL) growth will slow and the stock will perform in-line with the general market (plus/minus 5%). Of course they will still grow (20-25%), but you can’t sustain 50%+ growth when your sales are $110 Billion. Remember, there’s a big difference between a company and the performance of its stock.

5) We will see a third leg down in this Bear Market correction with a possible bottom in March/April. It will be swift and catch many people off guard. The only way I don’t see this happening is if the Fed starts QE3 (or some form of easing) to prevent the decline.

6) I will make my CNBC debut at some point this year. It will be in a hexagon split screen with Howard Lindzon, ZorTrades, Carrot Top, Josh Brown, and one of the Kardashians. It will be hilarious and one of CNBC’s highest rated segments ever!

7) Brett Favre will throw an interception. It might be in one of those Wrangler Jeans commercials, but I wouldn’t be surprised to see a short-term comeback later this fall.

8) The Mayans will be wrong and the world will NOT end on December 21, 2012. I know this because I just bought some Advil that expires on 7/2013. C’mon! The drug companies wouldn’t lie to us, would they?

9) Ancestry.com ($ACOM) will drop below $10 (it closed 2011 at $22.96). Their business model makes no sense to me and I can easily see Google or Facebook coming out with a free competing product to connect people and crush their business. After all, isn’t that what Facebook is for? Connecting us with people that we have successfully been avoiding for the past 15 years.

10) There will be a HUGE rally at some point this year. It may only last for a few months, but it will be long enough for traders to produce a decent return for the year. My reasoning is that Obama wants to get re-elected and will use every resource available (Congress, the Fed, etc.) to make it happen. Don’t argue with it, just trade it and enjoy the ride!

All these predictions are for entertainment purposes only. If you take anything I say (or anyone else’s predictions) seriously, you deserve to be beaten with a wooden spoon . In all seriousness, I specifically did not give any long ideas because I’m not comfortable with the market right now. But don’t worry, follow my blog this year, and when the market’s healthy again, there will be PLENTY of trading ideas.

Happy New Year and best of luck in 2012!

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Now before you start saying: “But Joe, you recently put out a blog post talking about why you continue to sit out,” keep one thing in mind…MY OPINION OF THE MARKET CHANGES FREQUENTLY. Why? Because the market is extremely dynamic and can change its character very quickly. You have to be open-minded and flexible. Being stubborn and sticking to an opinion gets you nowhere, especially when the market is proving you wrong. That is why I run screens and go through approximately 1,000 stocks every night. It’s the only true way I know how to evaluate the market’s overall health. When I find an abundance of setups, I feel more positive about the market. When the ideas dry up, I become more defensive.

Last week, I started to find a few decent setups. The end result: I took profits on some stocks ($V $MA $CMG $HANS) and got stopped out of a few others ($BIDU $ACTG $WYNN). I took quick profits because I don’t trust the market yet, and I took small losses because my number one rule is to protect my portfolio. The bottom line: I made very little progress, further telling me the market is not ready to start a SUSTAINABLE uptrend yet.

I realize that many big caps are holding up well ($AAPL $AMZN $GMCR $PCLN), however, as we start to bottom, I would prefer to see leadership broaden out. Currently, it seems very narrow to me. In other words, everyone’s watching the same 5-10 stocks! Historically, that does not bode well for the market.

Wednesday morning (9/21/11), I returned to a 100% cash position when my trading instincts told me to be defensive. As a result, I dodged the subsequent decline on Wednesday afternoon. Going forward, I feel the market needs more time to correct before we will see a sustainable advance. My advice is to remain cautious and keep positions light if you trade. An even better suggestion is to simply sit out, as traders tend to get “chopped up” during these volatile times.

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1) I am finding very few quality setups. Many of the stocks I got stopped out of recently have traded lower, and most of the stocks on my watch list have failed to breakout…all these observations make me cautious for now.

2) When I tweeted these thoughts earlier, many people responded: “You’re in the wrong stocks.” I realize that a few stocks such as $AAPL $GOOG $BIDU $PCLN $LULU $AMZN $GMCR are acting well, but the leadership seems to be narrowing.

3) The narrow leadership reminds me of Sept/Oct 2007 when the market was being driven higher by 3 stocks: $AAPL $GOOG and $RIMM. I’m not saying that we are topping here, but I would prefer to see more “broad-based” participation. In addition, most of the big cap stocks mentioned above are getting “later-stage” in their moves and are extended from proper buy points. Keep in mind that I look for the best “low-risk, quality setups” that I can find.

4) The debt ceiling issue is not a factor in my stock trading. Why? Because after it’s done, the media will find something else to scare us. Remember Egypt, Greece, Libya, the earthquake in Japan, all the nuclear waste that was headed our way, Italy, Greece again, etc. That’s why I pay attention to the price action of stocks and ignore the news.

5) I always keep an open mind and realize that my analysis can be wrong. Therefore, I constantly maintain a watch list of quality stocks. If they begin to act better, I will be ready to pounce on the long side. For now, I remain in 100% cash. If I’m wrong, I’m not worried because I can always get back in.

I suggest being a little defensive and trading lighter-than-normal positions until conditions improve. Keep in mind that I trade with an EXTREMELY defensive posture and I use tighter stops than most traders. I live by the Paul Tudor Jones quote: “Play great defense, not great offense.” Although the major averages are holding up well, my trading instincts are telling me to be defensive for now.

$AAPL $AMZN $BIDU $DIA $GMCR $GOOG $IWM $LULU $PCLN $QQQ $RIMM $SPY

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1) Don’t marry ANY stock because at the end of the day, they ALL disappoint. Trust me, if you don’t know this, study history or you will learn the hard way.

2) I have no problem riding trends and trading stocks all the way up. In fact, one of my favorite quotes is: “Just when you think a stock can’t go higher, it usually does.” What I do have a problem with is when people say: “I am NEVER, EVER selling the stock!” People said the same thing about the big cap tech stocks in the late 1990′s ($DELL $CSCO $INTC $WCOM $MSFT $EMC $YHOO), and rode them all the way up…only to ride them all the way down.

3) Apple is a PHENOMENAL company with earnings and sales that are off the charts. However, it’s not exactly an undiscovered story! The company will grow its $100 billion in revenue next year, but it CANNOT sustain +80% sales growth. Again, it will grow, but the growth rate will eventually slow.

4) Don’t ever say “This time it’s different.” Those are very dangerous words.

5) Sorry for the reality check, but the current big cap growth stocks ($GOOG $PCLN etc.) will eventually become dead money…just like the prior big caps.

6) For those of you who think Apple is immune to a market selloff, let me remind you that it corrected -60% (from $200 down to $80) during the Bear Market of 2008.

7) I spoke to a few people today who have owned Apple since it traded in the single digits. I asked them when are they going to sell, and they replied: “NEVER!” This worries me because the same mentality that causes you to ride a stock up, also leads you to ride it down.

Again, I have absolutely nothing personal against Apple. I am simply trying to remind people to eventually think of an exit strategy or at least lock in SOME profits along the way up. You are more than welcome to send more hate mail, but it doesn’t matter because people are going to do whatever they want anyways. I sincerely hope you make a fortune with all your trades, just keep in mind that ALL stocks eventually disappoint, which is why you should NEVER marry a stock.

$AAPL $CSCO $DELL $EMC $GOOG $INTC $MSFT $PCLN $WCOM $YHOO

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