Finding support and resistance on a stock chart takes just a couple of minutes. You can make the annotations on your computer, or you can print out the charts and mark them with a pencil and ruler.

Three minutes of work can save you from making a mistake that would potentially cost you thousands of dollars.

Today, I’m going to make a few quick annotations to some of the charts you’ve sent in this week. I’ll then tell you whether I would buy or sell the stock in question.

Let’s get to it…

I purchased the Canadian stock Enerplus which is now down almost 50%…I know that natural gas is deeply depressed, probably resulting in the terrible drop of Enerplus. What I want to know is whether the stock has any possibility of recovering? Also, is it worth buying in more shares at this very depressed level?

— M.J.

Here’s a look at Enerplus Corp. (NYSE:ERF):

Sure, there’s a possibility that the stock will recover — at some point. But at this point, it’s important to get defensive. The market is falling, commodities are out of favor and this chart is terrifying. The breakdown in price accelerated in early April when ERF broke below horizontal support (blue line).

Also, I never recommend buying more shares just because a stock has dropped in price. It’s a dangerous tactic that’s more trouble than it’s worth. Don’t do it. The red line is resistance in this powerful downtrend. Even if the share price recovers to $16 from here, the downtrend remains in force. Yes, the stock is technically oversold. But it has been oversold since $21. It can easily move lower from here.

I’m thinking of buying 500 shares of Prospect Strategy Group (NASDAQ:PSEC). It’s a BDC. I believe this is a strong buy for at least the next 24 months. Could you give me your advice on this stock?

— J.P.

Prospect Capital has held up well during the recent market turmoil:

The stock has consolidated just below $11 since late February. On the chart, you can see how PSEC has registered a series of higher lows, indicating that buyers are stepping in at higher and higher prices every time the stock dips.

I can see why you’re interested in this stock. Judging by a quick look at the fundamentals, PSEC looks dirt cheap. It’s trading right at book value, its multiple is less than seven and I see plenty of insider buying recently.

In this case, the technical can provide a solid backstop to your fundamental research. Buying shares between $10.50 and $11 is not a bad price for a longer-term timeframe (you mentioned a 2-year holding time). I would also look to add a stop loss between $10 and $10.25. Look for this stock to break out if it can close above $11.25 on strong relative volume.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Reader Mailbag: Buy or Sell? was originally featured in the Penny Sleuth.

If you were paying attention to the big momentum plays this quarter, you could have pinpointed when the market was ready to turn lower.

Now, with short-term losses mounting, you might have the chance to spot the first buying opportunity by monitoring these very same stocks. When the momentum names begin to catch a bid, we could see the beginnings of an oversold bounce that would send stocks higher in the short-term…

During the first half of 2012, investors fully dedicated their efforts to Wall Street’s momentum darlings. These are the “hot stocks” in the midst of multimonth bull runs. Expectations run high with these momentum names. Valuations run even higher.

It is a ridiculous notion to wait for a correction (or even a pullback) before buying these red-hot stocks. After all, the share price will never fade. Or so the frenzied logic goes…

It’s probably no surprise to you that Apple was the de facto drum major of the momentum marching band. Apple shares shot up more than $230 between Jan. 1 and mid-April — when the furious momentum rally finally topped out.

Apple’s pullback — and the eventual pullbacks in several other overhyped stocks — was inevitable. Apple was displaying all of the classic signs of a blowoff top. The investing public was convinced shares could go nowhere but up. Analysts and the financial media joined the party with their own irrational expectations, including $1,000-plus price projections and declarations that any fund manager who didn’t own Apple should be immediately fired…

But just when the stock appeared to be completely unstoppable, shares abruptly reversed.

The selling wasn’t outright panic. As of this writing, it remains orderly. The market didn’t take an ax to the Apple tree. It only shook it a bit.

It’s how turning points are born. Shorts shake the branches to see if any weak hands fall from the tree. They’re after the low-hanging fruit. These are the folks who bought shares near the height of the rally. Their conviction is far weaker than that of the long-term investors sitting on substantial gains. So they sell. The selling puts enough downward pressure on the price to convince other longs to part with their shares.

Of course, disbelief prompts many buy-and-hold investors to hold shares of a falling stock much longer than they probably should. There are (and will continue to be) many investors who will stand by Apple — even if its decline accelerates. After all, Apple is a great company that makes interesting, in-demand products. But even if expectations from Apple faithful remain high, we doubt the stocks’ incredible performance during the first half of 2012 will be matched anytime soon…

It wasn’t just technology or high-priced stocks that caught the attention of momentum investors.

Smith & Wesson Holding Corp. (NASDAQ:SWHC) — which I recommended to my premium readers in December 2011 — was swept up in the rally that began on Jan. 3.

I didn’t somehow predict the buying frenzy would begin as soon as we recommended the stock. We knew Smith & Wesson shares had held up well during the height of the European crisis last fall. And we had multiple fundamental reasons for picking up shares when we did.

From a fundamental perspective, Smith & Wesson was improving its operations. Management had already started the process of unloading the company’s underperforming security division. Revenue and guidance strengthened as management concentrated on building the company’s core gun manufacturing business.

Gun sales were growing across the board. In fact, gun sales actually booked a one-day record the day after Thanksgiving 2011. The FBI reported a record number of background checks, adding up to nearly 130,000 gun buyers on the day. The old record was set in 2008 — at only about 98,000.

Stories highlighting record-breaking sales throughout the gun industry began to gain traction in the media shortly after our initial recommendation. Attitudes regarding firearms ownership were improving. More and more women were taking to gun ranges across the country. These tangible stories took hold with investors — and the trend that initially pushed shares of Smith & Wesson above $4 in December began to accelerate. A momentum play was born.

By early April, Smith & Wesson shares more than doubled, to $8. With the successes of high-priced momentum plays fresh in their minds, traders and investors jumped at the opportunity to own shares of this fast-moving stock.

But Smith & Wesson was not immune to the momentum sell-off. Shares gave back more than $1 in a matter of hours in early May as new concerns over the economy and eurozone surfaced. Shares have recovered somewhat. And we’re still hanging onto open gains of approximately 95%. But the warning bell has sounded. It’s time to be extra vigilant as skittish investors rush to raise cash during uncertain market conditions.

While the secret of Smith & Wesson’s potential is now more widely known, the stock has a much better chance at weathering the momentum sell-off than some of the more closely followed names on the market. Traders shook Smith & Wesson’s tree. But investors have stepped back up to the plate and bought back shares.

Only time will tell if the stock will consolidate and move higher from here. If Smith & Wesson and other momentum names catch a bid, we could get our first signal of a move higher.

Sincerely,

Greg Guenthner
for The Penny Sleuth

How to Time the Market with Momentum was originally featured in the Penny Sleuth.

It doesn’t matter if you’re a long-term value investor or a short-term trader. When you’re dealing in stocks, timing isn’t everything — it’s the only thing.

As I was sorting through the mailbag this weekend, I found that many of your questions were about when to buy into a stock or a big investment idea. Today, I want to look at some of the potential trades and investments on your collective radar. I’ll analyze the charts and tell you if you’re looking at a solid buying opportunity — or a potentially disastrous trade…

Let’s get started:

What do you think of Cisco Systems (NASDAQ:CSCO) and Silvercorp Metals (NYSE:SVM)? Is now a good time to buy shares of both?

— S.R.

Here’s what Cisco looks like right now:

Yikes. Cisco is more or less a household name. But this chart is just awful. No one wants to own this stock — and with good reason. The company issued terrible earnings just last week — as evidenced by the massive gap down from $18.50 to $17.25. This gap will now act as resistance. So even though we’re seeing a decent rebound today to the high $16’s, I wouldn’t count on this stock recovering past the mid $17s anytime soon.

Any way you look at it, this thing is toxic. I would avoid it at any price.

Next is Silvercorp:

Here we see a very similar chart — minus the big gap lower. Still, a strong downtrend remains intact. Before you pull the trigger on an investment, draw a line connecting two or more peaks in the price. That’s where you’ll find resistance. Until your stock can break out of its downtrend, chances are it will continue to move lower…

Both of these examples could be considered falling knives. Neither CSCO nor SVM has indicated that it has put in a solid bottom. The important takeaway here is that an out of favor stock needs to time to consolidate after a move lower. Unless you see legitimate signs of life, the stock will probably see additional downside/sideways action before it begins to recover.

As far as questions go, I have one that may fall into your “it’s a bad stock, run away” category. Cameco (NYSE:CCJ), the world’s largest uranium miner. It got hammered after the accident in Japan, and I bought in about a week later. So, you can see what has happened since then. Personally, I still feel that nuclear power is an important cog in the energy machine, and I expect it to return. My question is: is that a rational view, and, if so, is it smart (for the long term) to even consider adding to the position?

— M.N.

Yes, you are expressing a very rational view. Unfortunately, there is nothing rational about the stock market.

Here’s a long-term look at Cameco:

I think you’re analysis is sound. Nuclear is and will remain an important source of energy. But this sentiment is not shared by the market right now. That’s your problem. While you are able to project a stronger future for nuclear energy, the market has yet to move past the events in Japan and the reactions that followed.

Solid analysis will occasionally produce substandard investment results. This is why timing is so important. In this case, you jumped back into nukes way too early. Think of it this way: the market continues to deal with the residual effects of the 2008 financial crisis to this day. And were’ only about a year removed from the nuclear crisis in Japan…

As far as adding to your position — I generally do not advocate averaging down. However, some longer-term investors are fine with buying more shares at lower prices in the hopes that the stock will eventually rebound. It’s more about your investing personality than anything else. As long as you can sleep at night without worrying about your portfolio, you’re probably doing something right.

Keep sending me your charts, questions and concerns to editor@pennysleuth.com.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Monday Mailbag: When to Buy Stocks was originally featured in the Penny Sleuth.

Remember, this is before the company that will soon have the largest Internet IPO in history dropped the “The” from its name.

For one small investment firm, that’s exactly what happened.

Before anyone outside of a handful of university students even knew much about Facebook, a company called Accel Partners dropped $12.2 million on it.

On Feb. 1 of this year, after months of anticipation, Facebook finally announced its plans to go public. For Accel, that’s the equivalent of striking gold.

Even after selling 17% of its stake last year, Accel’s Facebook bet is still worth as much as $11.4 billion, according to Bloomberg. That’s a 934-fold return!

This makes for a great story if you’re the gambling type. But for every Facebook, there are plenty of losers.

Venture capital is a tough business. It takes an incredible amount of luck. That’s something Bahrain-based Arcapita didn’t have recently.

The private equity and venture capital-focused investment firm filed for bankruptcy two weeks ago after defaulting on a $1.1 billion loan.

This is just one of hundreds of stories about failed venture capital companies. And the vast majority of them have one aspect in common: They bet big on startups by buying equity stakes in risky industries.

Today, we’re going to show you how to be a venture capitalist without the risk.

Sure, you won’t be cashing out $11.4 billion on the next highflying tech IPO. But you won’t go the way of Arcapita, either.

I’ve pointed out before that small-to-medium-sized companies can raise money in only one of two ways: Sell shares or take on debt. But in today’s unique investment landscape, finding that funding is incredibly hard.

Raising money in the equity markets is always tough. And if you are dealing with a privately owned company, this becomes even more difficult.

Fewer and fewer private equity firms are willing to finance companies in exchange for ownership stakes. The numbers just don’t work out anymore.

Facebook is a rare exception. Most private companies don’t have the hype required to have a successful IPO. Fewer still have the ability to find backers pre-IPO…when they need it the most.

That just leaves debt. And in today’s strange debt market, no one is banking on risky companies. While that may be changing soon with the influx in junk bond investors, we’re still a long way from where we were prior to the recession. And for the companies we’re talking about, that’s simply not an option.

And forget about bank loans. Banks just aren’t ponying up the kind of small- and medium-sized business bank loans we used to see.

One of the main reasons is the collapse of the collateralized loan obligations. CLOs are basically just a way for banks to bundle these loans and sell them to investors. Investors haven’t been buying these products since 2007. This gives banks very little incentive to take bets on smaller companies.

So there is a huge credit gap globally for small businesses. They can’t find equity investors. And no bank will give them a loan.

There is a small group of publicly traded companies that finance privately owned companies. Again, they have the choice between equity stakes or loans. Increasingly, these financers are choosing the security of collateral-backed debt to the high-risk equity option.

These lenders are technically called business development companies, or BDCs.

This niche market is already showing my readers impressive gains One of my hottest plays recently is BlackRock Kelso Capital Corp. (NASDAQ:BKCC). It specializes in providing small to mid-sized cash-flow-positive companies with financing in exchange for debt or equity. The majority of its portfolio is made up of 73% secured debt, with 16% in subordinated debt securities and 11% in equity stakes.

As you can probably imagine, this relatively hidden industry has great upside.

In fact, because of an underreported budget hike by the Obama administration, plays like this could turn today’s credit gap into humongous income.

Sincerely,

Jim Nelson
for The Penny Sleuth

The Only Way to Close the Small-Business Gap was originally featured in the Penny Sleuth.

If you have been following me here in the Sleuth for awhile you already know that I think one of the best ways to profit from this growth is through small semiconductor companies. But if you have been following this technology, you also know it has been a rough month for this sector.

A number of semiconductor companies have already reported earnings so far this quarter. The general gist is that temporary weakness is holding the sector down in the second quarter of the year.

This has put some downward pressure on share prices over the past month since the run-up from last December’s lows. Apple’s record earnings report, however, snapped the losing streak this week, at least temporarily.

The general consensus, however, is that things will pick up toward the second half of the year. This is generally a busier period of the year for the semiconductor sector, as new consumer electronics are released for the holiday season.

Furthermore, ongoing resolution of the hard drive shortage — caused by last year’s flooding in Thailand — will provide a tail wind for many companies.

Among other tech companies, the current weakness is affecting TriQuint Semiconductor. Although the company reported above expectations for the first quarter, it gave lowered guidance for the second quarter. This is largely due to a slowdown from its largest customer…

You see, TriQuint is a major supplier of RF components for Apple and that Apple guided a weaker second quarter. I think it is fairly easy to see why TriQuint guided lower as well.

I think it’s a good time to look for values among semiconductor companies in anticipation of an improving environment toward the end of this year…

With the accelerating growth in the mobile market and the need for their technology, small semiconductor companies will come out on top… and early investors will be able to take profits in the process.

If you haven’t already, I’d look to add some of these small semiconductor companies to your portfolio.

Ad lucrum per scientia (toward wealth through science),

Ray Blanco
for The Penny Sleuth

Temporary Weakness Sets up Future Returns was originally featured in the Penny Sleuth.

Here’s what you need to know:

Rule 1. Write Your Own Risk Level

Understanding risk is one of the most important elements of investing in anything — from penny stocks and options to commodities to currencies — no matter what, you need to enter each trade knowing exactly what’s at stake when you trigger your trades.

Risk is inherent in all investments (don’t believe anyone who tells you otherwise). But risk isn’t necessarily bad.

You see, risk and reward are interrelated. Higher-risk investments, like penny stocks, obviously come with greater chance of loss, but they also have the potential for much larger gains if trades go our way. The trick to successful trading is managing risk intelligently…

So, how do you reign in risk? I always set mental stop loss levels and potential target prices before I trade any stock. To do that, you need to add some basic technical analysis to your investment strategy.

Stops can be very useful when they’re placed under a stock’s support level (the price level that a stock has trouble falling below). That’s because to a trader, a price level below support generally means that the stock could be breaking out much lower. Essentially, you’ll want to place stops just under where you’re likely to find a glut of demand for shares.

To avoid exceeding your comfort zone on a loss, think of your “maximum pain threshold” as a dollar amount rather than a percentage. Then, size your position so that you’re stopped out before your losses exceed that level. Trailing stops, which are typically used to lock in gains, can be used a little bit more arbitrarily.

Ultimately, your risk tolerance is up to you. But regardless of how aggressively you opt to trade, there’s a potentially lucrative option available to you…

Rule 2. Don’t Chase Trades

Sometimes, you won’t be able to act on a trade in time. Maybe you’re on vacation and away from a computer when a nice setup pops up. Maybe you’re stuck in a meeting. Whatever the case, if you miss out on a trade, it’s essential not to chase it.

Trading is exciting. Part of what draws traders to playing the market is the thrill of executing a trade and cashing in on gains — it’s that adrenaline rush that keeps things interesting.

But on the flip side, it’s all too easy to get into a trade at a bad time just because of the excitement of seeing a stock start to run up. When a trade triggers, it’s crucial not to buy into the frenzy that often comes with a breakout. Instead, set you maximum buy price ahead of time, when you’re weighing the risk/reward tradeoff of a particular setup. Sometimes that’s a tough edict to swallow — especially when hindsight shows you what would have been a winning trade. But emotion has no place for traders. Don’t fall for the irrational exuberance of a late trading opportunity.

Rule 3. Buy the Right Number of Shares

Do you know how many shares of a stock you should buy? Don’t guess — the number of shares you buy has everything to do with how much profit you take home…

With (normally) flat costs like commissions taking a bite out of your trading profits, you need to make sure that the position sizes you’re taking are enough to make up for your commission fees. If you buy a $100 stake in a small-cap stock, with a $10 commission each way (when you buy and when you sell), your break-even gain becomes 20%. That is, you’ll need 20% gains just to avoid posting a loss. That’s a sizable challenge.

If you buy a $500 stake, however, your break-even gain drops to a much more manageable 4%. If your commissions are only $5 per trade, then your break-even tumbles even further down, to 2%.

Always know what kind of gains you need to see to profit from a trade before you place an order with your broker. Again, this ties back into our first rule, writing your own risk level. By focusing on low-risk trades, you can afford to take on larger positions while maintaining the same level of risk – and as a result, you’ll take home bigger gains every single time.

I’d recommend you save this message. Then, before you click the “buy” button on your brokerage account, keep these three rules in mind. Follow them, and you’ll guarantee yourself bigger gains…

Cheers,

Jonas Elmerraji

3 More Rules That Guarantee Gains was originally featured in the Penny Sleuth.

Forget buy and hold. Trading is all about quick, repeatable profits. Forget balance sheets or income statements. Trading focuses on technical analysis instead. But just because the old rules no longer apply doesn’t mean that no rules apply to successful trading.

In fact, following a specific set of principles could mean the difference between racking up substantial trading profits — and suffering sizable losses.

Follow these three rules and you’ll quickly see bigger trading gains…

1. Paper Trade Your Way to Profitability

As with anything worthwhile, there’s a learning curve to technical trading. That’s why it’s so important to hone your abilities before you invest your first dollar in a technical trading opportunity. The best way to do that is by paper trading.

Paper trading is essentially simulated trading that uses hypothetical money instead of cold, hard cash. When you trade on paper, you get to see what your trading would have yielded without worrying about succumbing to costly rookie mistakes.

That’s because — believe it or not — there’s a whole lot more to successful trading than buying the right stock. Even with guidance from professional research services, there are variables you’ll want to get a handle on before you put your cash on the line. Lots of factors can cut into your trading profits: broker commissions and your position sizes are just a couple of them…

Paper trading also does one other important thing: It builds your confidence as a trader. When you see your hypothetical trades booking profits, you’ll become more comfortable holding out for bigger gains and cutting your losses on the odd trade that goes against you. That’s an essential part of becoming a successful trader.

So how do you paper trade?

If you’re using a broker whose trading platform has a paper trading feature (just call them to find out), I strongly recommend that you use that. By paper trading on the same platform as you’ll be trading your real money, not only will it be exceptionally easy to track your paper trades, you’ll also learn exactly how to best use your platform of choice.

Many brokers — like Scottrade, for example — let you open a paper trading account without actually having to fund it. That gives you an ideal way to test out whether or not their services are a good fit.

If you don’t use a broker that has a paper trading option, you can still paper trade. There are a slew of “simulated investing game” websites out there, and you also have the option to track your hypothetical trades yourself on paper or with a spreadsheet program.

2. Always Use a Limit Order

When it comes time to actually place your trades (either on paper or with real cash), the buying and selling terminology can be confusing. With market and limit orders, stops, trailing stops and a slew of other broker orders, pulling the trigger isn’t as simple as “buy” or “sell.”

For the most part, you don’t need to worry too much about the type of order you place with your broker to buy or sell shares of a penny stock. Complex orders (like buy stops, or market on close orders) aren’t something that novice traders need to be hugely concerned with.

But there’s one type of order you should avoid at all costs: the market order.

Market orders essentially tell your broker to “buy shares right now, whatever the cost.” While that’s not a terribly big deal when you’re buying shares of a heavily traded stock like Exxon Mobil or GE, it is a big deal when you’re trading penny stocks that have less trading volume and larger bid-ask spreads. When a stock makes a big move, it’s not uncommon for your actual execution price to happen at a less-than-attractive price.

Instead, always make sure you’re using limit orders when you buy or sell penny stocks. Limit orders tell your broker to buy (or sell) shares of a stock up to a certain price limit — they ensure that you have control over your buy and sell prices, not the market.

3. Avoid Extended Hours Trading

9:30 a.m. to 4:00 p.m. five days a week — those are the hours that make up the standard trading day. We’re talking about only 6½ hours per day, 32.5 hours per week.

For us, that’s plenty of time to take advantage of the market’s moves.

But not for everyone. That’s why the powers that be instituted extended hours trading. Extended hours trading gave investors the ability to trade stocks pre-market and after-hours (AH), making it possible to buy shares of a stock on most markets from 8 a.m. to 8 p.m…

As we all know, however, just because you can do something doesn’t mean you should.

There’s a reason that after-hours trading is called “amateur hour” trading in professional circles — extended hour investors often get their trades executed at poor prices. While extended hours trades are a viable tool for value investors looking to get into shares of a deeply discounted stock, they’re bad news for traders.

That’s because low trading volumes in the extended session mean that smaller positions can make a material dent in share prices. As a result, price swings before and after market hours are often poor indicators of how a stock will trade during the regular session.

Extended hours trading can be a good indicator of market sentiment before and after regular trading hours — but that’s about it…

Ultimately, you can’t guarantee investing success. Sometimes, trades will move against you. The key to successful trading, though, is to gain an edge to limit the number of bad trades you take on and maximize the good ones…

Following these three trading rules is just such an edge. Follow these suggestions for bigger gains and you’ll ensure that you avoid major trading missteps.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Tips That Guarantee Bigger Gains was originally featured in the Penny Sleuth.

Even if you’ve never heard the name BATS before, if you’ve ever bought or sold a stock there’s a good chance it played an important role in the transaction. BATS is an exchange that currently makes up as much as 12% of all trading volume on any given day. That’s huge.

So it’s no surprise then that BATS’ catastrophic embarrassment on Friday was equally huge…

On Friday, BATS was slated to go public in an expected $113 million deal that would have valued the firm at more than $600 million. But things went sour when a glitch in the exchange’s own computers caused an issue when the system tried to open the “BATS” trading symbol. You just can’t make this stuff up.

The glitch caused trading errors in a slew of other stocks too, including a “flash crash” in Apple that caused the world’s biggest firm to halt trading temporarily in Friday’s session. Because of the issue, BATS withdrew its offering by the afternoon, cancelling out trades by anyone who managed to buy shares during the first few trades of the day. Oh, to be a fly on the wall of the firm’s boardroom on Friday when popped champagne turned into popping blood vessels in execs’ necks.

Major media outlets have been paying a lot of attention to the story over the weekend, and in a lot of ways, that’s more telling about market conditions than the BATS embarrassment itself. Sure, BATS got some very public pie on its face on Friday, but the crash had momentary effects on the market at worst. It’s Mr. Market’s reaction that we should be concerned with — when sentiment is struggling, we’d expect traders to be actively searching for reasons to sell. Instead, the S&P 500 reversed early morning losses on Friday.

And this morning, it’s looking pretty solid with the S&P 500 pushing past the 1,400 level as I write…

BATS will likely live to see another chance at an IPO in 2012 after management answers a few more embarrassing questions from journalists and this second “flash crash” becomes a less recent memory. If the market’s current trajectory is any indication, it’ll be looking at a market filled with investors eager to forget and open their wallets…

In the near-term, the BATS debacle gives us a major cue about the market’s willingness to forgive right now. At this point, Mr. Market’s still in rally mode.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

What Wall Street’s Biggest Blunder Tells Us About the Market was originally featured in the Penny Sleuth.

That’s because sitting next to Walgreens, in the same storefront that you’d expect to find a Hallmark or AT&T store, is a shooting range. No, the display cases aren’t filled with cell phones; they’re filled with handguns. And behind the (presumably bulletproof) glass are 16 lanes of climate-controlled shooting stations.

The location isn’t the only thing that doesn’t fit stereotypes. For some, the customers may be just as surprising…

There’s the lady in her early ’30s putting holes in the paper “bad guy” target 25 feet away — she’d never shot a gun before setting up in the lane next to me. Neither had the couple who rented a pistol to try for fun on a Wednesday evening…

Not everyone there was new to firing a gun. The corporate cowboy in a polo shirt and khakis — stopping on his way back from a day at the office — was showing up for a competitive shooting match taking place that afternoon. Don’t even try shooting here on a weekend unless you’re ready to stand around. The wait for a lane runs about an hour during peak times. In fact, you won’t find the range empty even in the middle of the workday.

“It’s like this every day,” said the range’s manager, looking tired. Clearly, business was booming a bit too much. “I mean, look around — it’s a Wednesday afternoon and this place is packed!” Around the country, the stories are pretty much the same.

Yes, the gun world is changing dramatically in 2012. While Black Friday 2011 was relatively tame by most retailers’ standards, it was a banner sales day for guns. The FBI’s NICS database (which provides instant background checks for gun buyers) got nearly 130,000 hits on Black Friday, the most the database had ever received in a single day. Not much later, December set a new record for the most hits in a month. And for the full year, 2011 turned out to be a record year itself, registering more than 16.5 million hits to the NICS database, a 15% increase from 2010.

Clearly, the trend of gun buying is still accelerating at a breakneck pace. But digging a bit deeper into the demographics of who’s buying provides even more interesting results…

It turns out women are driving some of the biggest trends in gun ownership. According to a Gallup Poll from October, 23% of women personally own guns, up from just 13% in 2005. That’s a massive increase in ownership by a group that has traditionally shied away from firearms.

We likely have the media to thank, in part, for the demographic shifts that are going on in the firearms business. Gun-centric TV shows such as Top Shot and Sons of Guns are giving publicity to gun ownership for recreation and protection. At the same time, guns are becoming a less politicized topic: While Republicans tend to be gun owners at a higher rate than Democrats, Democratic gun ownership has spiked in the last decade. Today, 40% of Democrat or left-leaning households own at least one firearm, the highest level in a decade.

That’s not to say that politics aren’t still central to the gun business. With an election year well under way, the National Rifle Association is already actively railing against the Obama administration. While it seems unlikely that a candidate on either side would tighten gun restrictions given the current pro-gun climate, the political message is still likely to do quite a bit to fuel the gun-buying fires this year.

Sincerely,

Jonas Elmerraji

Why You Should Bet Big On Guns was originally featured in the Penny Sleuth.

Along with his half-sister, he performed in a dance number with Bob Hope and Judy Garland. That appearance helped ignite what would become a very successful career in show business. By 1956, the duo became one of the most popular dance acts in the world.

But this story isn’t about dancing. It’s about one of the most successful amateur investors of his generation — who just happened to be a popular professional dancer…

His name was Nicolas Darvas. As a young college graduate, he escaped Hungary with a forged visa during World War II. Putting his degree in economics to good use, Darvas began to dabble in the market in the early 1950s — right when his dance career was taking off.

But he didn’t mint his millions until 1957, when he was worlds away from Wall Street. Here’s how he did it…

Darvas spent considerable time perfecting what he called his “box theory.” Essentially, he would track a stock’s weekly movements and record (or “box”) the trading range. He would buy names that interested him when they successfully broke out above his boxes.

The technique Darvas used is very similar to other early forms of stock charting. Keep in mind this was the 1950s — long before stock charts were readily available at the push of a button on your computer. If you wanted to chart the price of a stock, you had to do it yourself.

News also moved slower in the 50s. And since Darvas’ dancing career kept him overseas for years at a time, he was consistently behind on the financial headlines.

Darvas actually credits his distance from Wall Street for much of his success. During his travels with his dance troupe, he relied on his broker to mail him copies of Barron’s so he could keep up with his stocks. Then he would send telegrams from his hotel when he wanted to buy or sell a position.

Because he was overseas, Darvas wouldn’t receive his newspapers until they were already out of date. The news was stale by the time it got to him — so he ignored it. This allowed him to focus on his box theory without the distraction of the news cycle influencing his thought process.

By isolating himself from the financial news, Darvas was able to grow his brokerage account to more than $2 million in less than two years.

However, when Darvas eventually returned to New York, he was not able to replicate his results. Word of his success has spread. And his constant contact with newspapers, brokers, and other investors took its toll. He simply couldn’t execute his trading system with the distraction of endless financial news and stock tips.

To regain his edge, Darvas again isolated himself from the Wall Street crowd. He quit reading the news again — and even went so far as to have his broker tear out the weekly stock prices in Barron’s to send to him. That way, he wouldn’t be tempted to read any news items about his potential trades.

The experiment worked, and Darvas went on to write several books about his trading experience, most notably How I Made 2,000,000 in the Stock Market.

It’s a fascinating story and a great read — one that still applies to you, even in the age of the internet, smart phones and instant news and information. The fact is, news consumption can greatly affect your trading and investing. I would even say that it could be damaging your returns.

Sleuth contributor Chris Mayer recently considered reducing his news intake. He cites an essay by Rolf Dobelli, a Swiss entrepreneur, titled “Avoid News.”

“Dobelli makes the case that news makes us distracted, wastes time, kills deeper thinking, fills us with anxiety and is toxic to our mental health. His analogy: ‘News is to the mind what sugar is to the body,’” Chris writes.

“News is mostly irrelevant,” Chris continues. “Dobelli says to think about the roughly 10,000 news stories you’ve read or heard over the past year. How many helped you make a better decision about something affecting your life? This one hit home.”

Think about how you research a new stock or trading idea. What’s the first thing you do? If I had to guess, I would say that you fire up your computer to see what the financial media or bloggers have to say about the topic. It’s an understandable impulse. After all, we want confirmation that our ideas are valid. But is it really helping you think critically?

In his essay, Dobelli recommends ignoring newspapers, TV news and internet news. And he says to delete the news apps from your iPhone.

So how will you be able to keep up with the world after you kill your personal 24-hour news cycle? Here’s a list of alternatives Chris has compiled:

• Read the shareholder letters of successful investors. I like reading Steve Romick at FPA, for instance. I also enjoy the shareholder letters of the Third Avenue family of funds. There are many others. Read any research such investment houses share

• Spend little or no time trying to guess where you think the market and economy will go. Instead, focus on finding good deals and winning teams of entrepreneurs and investors that you can invest alongside

• Listen in on the conference calls of your favorite companies and investors

• Check the stories and prices on your stocks once a quarter

• Read books written by successful investors. Then read them again. Some of my favorite authors include Martin Whitman, Seth Klarman, Peter Lynch, Ralph Wanger, Benjamin Graham and Joel Greenblatt. I’m sure I’m leaving a bunch out, but you can put together a truly awesome library of successful investors for little money

• Read books that deepen your understanding of markets and how they work. Read Louis Lowenstein and James Grant, for two of my favorites.

“Print it out. Turn off the smartphone. Stop checking email for 25 minutes,” Chris writes. “Be forewarned: It might just change your life.”

Best,

Greg Guenthner
for The Penny Sleuth

Kill Your iPhone – and Win With Stocks was originally featured in the Penny Sleuth.