NWHS INVESTMENT CLUB <ul><li>-Terms and Strategies </li></ul>
Cup with Handle Bullish Charts -includes a short period of consolidation of 1-2 weeks in duration, which tends to be downtrending Relative Inactivity LONG-TERM (7-65 weeks) Investors want to buy it at the point of relative inactivity (low cost) but it is very risky
Double Bottom -Two Distinct Lows -Most Common FAILURE RATE: 64% -But if you wait for a valid breakout 64% 3% Pay Attention to: Volume during formation of pattern Amount of increase between the 2 lows Time the pattern takes to develop in the market
BEARISH CHART PATTERNS HEAD AND SHOULDERS Neckline-the price at which recent sellers had been unwilling to go any lower What price do investors aim for in this scenario? Reversal of upward trend
DOUBLE TOP -Uptrend -Often forms in active markets that experience heavy trading Monitoring volume is a key aspect of determining whether or not a double top is valid. How to calculate target price? If double top is 230 and the highest high is 260, the height will be 260-230=30. Divide height by 2 and subtract it from the breakout point 230-15= 215
INTRINSIC VALUE Ben Grahams Formula: Intrinsic Value = “normal” earnings x (8.5 + (2 x expected 5yr growth)) x (4.4/20yr AA corp bond) *- Normal earnings refer to earnings over a period of years. Not just the previous year. YOU NEED TO UNDERSTAND WHAT YOUR BUYING and NOT THROW MONEY AT RANDOM STOCKS
MERGER ARBITRAGE(TAKEOVERS) -When the stocks of two merging companies are simultaneously bought and sold to create a riskless profit -Hedge Fund Strategy -To conduct merger arbitrage, one must purchase the stock after the announcement and hope to sell the stock after the stock approaches the offer price Annual Return= CG-L(100%-C)/YP C is the expected chance of success (%). • P is the current price of the security. • L is the expected loss in the event of a failure (usually original price). • Y is the expected holding time in years (usually the time until the merger takes place). • G is the expected gain in the event of a success Example: XYZ trading at $15. Company decides to take over company for $25 and XYZ goes to $24 (not $25 because there is chance of deal falling through). Probability of takeover is 95% and time until takeover is 1 month. Strategy is to buy at $24 and wait until takeover takes place and stock goes to $25. C= .95 P=$24 L=$9 (24-15) Y= .0833 (1/12) G=$1 (25-24) Indicated annual return = [1 x .95 – 9 (1.00 - .95)] ÷ .0833 x 24 Indicated annual return = [.95 – .45] ÷ 2 Indicated annual return = 25%
CURRENCY CARRY TRADE - A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate Example: US interest rate at 1% and Brazil at 10%. Buy Brazilian currency and short US currency to gain the 9%.