Why Was I Selling Visa and MasterCard Shares Yesterday?

credit cardsIt was late in yesterday’s trading day that I glanced up from my 10 trading screens to the TV that sits above.

Usually CNBC is broadcasting on mute for most of the day (I turn it up when I think there might be someone important to listen to).

There was an image of what looked like some very important people and then I saw our good friend Helicopter Ben Bernanke, with the headline at the bottom of the screen reading:

“Fed Limits Credit Card Fees”

Normally, I would turn up the volume, but I knew exactly what was happening and immediately I looked at my trading screen to find Visa and MasterCard both up over 10%.

I was enjoying the moment and then the phone rang…

A friend of mine who trades stocks in NYC called to tell me the news and inform me that he is buying more Visa and Mastercard shares. He wanted to get my opinion on the purchase; I asked him if he reads Smart Investing Daily. He started laughing and then said, “You were already in, weren’t you?” I told him I’d add his name to our list.

In all honesty, I had already taken most of my profits in both names. Investors who subscribe to WaveStrength Options Weekly were positioned in MasterCard back when it was trading around $240 a share in March. I brought the idea to all of you here in Smart Investing Daily (SID as we call it) back on April 1, 2011, when the shares were trading $253. I’m not saying all this to gloat (OK, maybe a little shameless self promotion), but rather to show you a couple different styles of investing and why investor types are different.

Investor Type #1: The Reactor

Many traders and investors are reactionary, like my friend in NYC. They react to news, earnings, data, charts, etc. For many beginners, this is the most common way to invest. You hear something and then act on what you hear.

An example of a reactive investor is someone who bought Visa or MasterCard shares on yesterday’s news thinking that this new rule may restrict credit card companies, but still allow them to make money and grow, and clear the air of further regulation.

Reactive investors may jump into a stock after hearing a favorable earnings report where the company offers strong profit growth estimates.

Don’t get me wrong — reactor investors can make money as well, but usually it’s less than the other two types of investors that I am going to outline.

Reactive investors are usually moving with the herd and come in at the END of a trend.

Investor Type #2: The Trendsetter

Just like in fashion, there are people who follow trends and people who “set” them. Trendsetters look ahead to catch the next cool idea.

In the investing world, you really can’t force masses of people to buy a trendy stock that’s already surged 10% in a day. What you can do is look at underlying changes that aren’t in the headlines today, but could be in the headlines tomorrow.

We do a lot of this type of analysis here at Smart Investing Daily. Many of the ideas that we bring you are not yet making headlines or perhaps are linked to the headlines in a unique way.

For example, when I heard that Dick Durbin wanted to slash credit card fees down to 12 cents, I thought about the real benefit of this action. I thought about all the players involved — the banks, the credit card companies, the retailers and the average Joes.

In this case, the American consumer had little to gain, the banks and credit card companies had a lot to lose and the only one that would really make out in my opinion would have been the retailers. Even though politicians do some dumb things, I couldn’t see it passing.

I didn’t think that this rule made sense at all and the average consumer really wouldn’t see much of a benefit.

These thoughts and sound company fundamentals are what prompted me to look into MasterCard back in March. It paid off well and my analysis became reality yesterday.

I believe that the most successful investors use this method and combine it with some other analysis, like fundamental analysis, to reap the most rewards.

Investor Type #3: Bottom Fisher (and Unrealized Potential)

The third basic type of investor out there is the bottom fisher. This investor type knows a great deal about a company and buys a stock because it has been so battered and bruised that he believes it has only one way to go… up.

Bottom fishers believe beaten-down stock will either recover or get acquired by a bigger company.

But bottom fishing can be dangerous, because you never know how far a failing stock can fall.

An example of this would be Nokia (NOK:NYSE). I remember sitting at the Fast Money desk on CNBC in Times Square this time last year and listening to Tim Seymour recommend buying NOK shares. (I have a great respect for Tim, by the way.)

He thought the stock was cheap on a price-to-earnings basis — a good argument. But Tim also thought NOK was very cheap dollar-wise. It was trading just below $10. Unfortunately, Nokia still had room to fall and given the size of the company, it was a tough one to acquire. Nokia has since seen its shares slide to $5.80.

Stocks can be cheap for a reason.

That said, unrealized potential can create huge gains in a stock. But you must do your homework and know a great deal about a company and its sector.

An example of a stock with unrealized potential is Universal Display Co. (PANL:NASDAQ). I was the first to talk about this company on CNBC back in October of 2009.

Jared on CNBC
Watch Jared on CNBC

I saw potential because PANL holds many patents when it comes to high-efficiency lighting technology like OLED and AMOLED used in computer, phone and TV screens.

I saw its technology entering the smartphone, home theater and advertising markets, and the stock was only trading around $11.50 at the time.

There was high risk here, but again the payoff was HUGE! Over the course of the next 16 months, the stock jumped over 450%.

If you are looking for unrealized potential, it will usually be in a stock that NO ONE has ever heard of. Discovering these diamonds in the rough is almost as hard as pulling the precious stones from the ground themselves.

While this last style of investing can be very lucrative, the risks are also elevated.

Smart Investing Daily’s Investment Style

Here at Smart Investing Daily, instead of following one mindset, we try to blend styles together and mix in some helpful tips to uncover both opportunity and dangers in the marketplace. Sara and I both have very diverse backgrounds and methods that keep our ideas unique, fresh and most importantly, profitable if we can.

(Sign up for Smart Investing Daily and let me and fellow editor Sara Nunnally simplify the market for you with our easy-to-understand articles.)

In the past, many of our investment selections have been right on point. Please let us know what you think about our service and if there are any topics you want us to explore!

And don’t forget to tell your friends about us. I’m sure my friend in NYC would have loved to have been on our list back in March.

Publisher’s Note: As Jared wrote, his WaveStrength Options Weekly readers were in and out of MasterCard with strong profits long before yesterday’s news. It is a prime example of how his system works. Jared prides himself on consistently banking 15%, 20%, even 50% gains.

It is not a shady get-rich-quick program. Jared’s faithful subscribers are getting rich with safe, reliable profits. To get his latest advice, click here.

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Other Related Sources:

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  • How I Navigate Trades In a Tricky Financial Market
  • Stock Investors Bid Up Shares of MasterCard, Up 1.4%