“I am a long-term investor. How do I handle the market
volatility?” This is the question I am asked most often these days.
I will illustrate with three stocks from one of The Arora Report
portfolios, including where to buy them, how to buy them and where
to take profits.
This portfolio has over 50 positions. Out of these positions,
the top 10 are the core of the portfolio, are meant to be held for
three plus years, and partial profits are taken on up spikes and
additional quantities are bought on down spikes. This way we are
always taking some profits when the market is high and always
buying when the market is low.
American International Group Inc.AIG, -1.66% is a large
insurance company that would have gone bankrupt during the 2008
financial crisis if it was not for the bailout by the Federal
government. AIG was one of the preeminent and most well managed
insurance companies in the world. It just had a small rogue
division that caused the havoc. Ever since the bailout, I was
patiently waiting for the right time when there would be enough
hard data to know that majority of the risk was behind us and only
rewards were ahead.
The chart linked above shows the initial entry. It also shows
various times when additions to the position took place and when
partial profits were taken. From the chart, just make a note of the
buy zone shown by a rectangle on the right-hand side. This buy zone
is derived by proprietary algorithms of The Arora Report and has
about 70% probability of the stock falling into this zone over the
next three months. Please note that the midpoint of the buy zone is
16% below the price as of the time of this writing and the low
point of the buy zone is 21% below this price.
The foregoing plan takes the emotion out when the market dips
and/or AIG dips because the investor is ready to buy at a much
better price than the current price. Now notice the target zone
shown on the chart. The high point of the target is $85; this is an
over 100% gain from the midpoint of the buy zone in about three
years. This target may prove conservative. The book value of AIG is
$77.35. The book value of AIG should continue to rise. In good
times, it is common for insurance companies to trade at 20%-30%
over the book value.
Walgreens Boots Alliance Inc. WBA, +0.18% is a major drug-store
chain. I had concluded earlier that Walgreens would be a major
beneficiary of Obamacare. I was patiently waiting for an
opportunity to buy. Near the peak of the European sovereign debt
crisis, Walgreens decided to buy a major stake in a European
drug-store chain, Alliance Boots. Wall Street analysts uniformly
condemned the buy. Their thesis was that Europe was falling apart,
why invest such a big amount in Europe? To me, Walgreens had made a
brilliant move. Irrespective of what would have happened in Europe,
I felt pretty confident that Europeans would continue to visit drug
stores. Wasn’t the best time to make a major purchase when the
price was low? My answer was a “yes.” To me, Walgreens’ move was a
brilliant one.
The stock fell due to analysts downgrades. This provided an
opportunity to buy the stock as shown on the chart.
Last year, bad earnings due to temporary factors gave another
opportunity to add to the position. The chart shows the new buy
zone and the target zone. Any bad news in this stock is likely to
be temporary in its effect and thus is likely to provide a buying
opportunity.
The portfolio held U.S. Air, so when U.S. Air bought American
Airlines Group Inc.AAL, -0.29% out of bankruptcy, AAL came to the
portfolio. There are significant merger synergies still to be
realized. For this reason, dips in this stock will be buying
opportunities.
The chart linked below shows the zone to buy on a dip and the
target zone.
The biggest expense of airlines is fuel. The dip in oil prices
has provided a tailwind for airline stocks. However, oil is not
going to continue to go down in a straight line. Oil will often
have countertrend up moves. During such up moves, Wall Street will
sell American Airlines providing opportunities to add to the
position. Conversely, during down spikes in oil, Wall Street will
buy American Airline and thus providing opportunities to take
partial profits on strength in the stock.
Disclosure: Subscribers to The Arora Report have positions in
AAL, AIG and WBA. Further, buy zones and target zones are reviewed
daily and may be revised without any notice.
Nigam Arora is an engineer, nuclear physicist, author, and
entrepreneur and the founder of two Inc. 500 fastest growing
companies. He is also the developer of theZYX Change Method
to profit from change by investing. Arora is the chief
investment officer atThe Arora Report
and the editor of four newsletters that track the ZYX Change
Method.