Don't Be Afraid of Heights

 | May 11, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

aapl

,

tsla

The first thing most people learn about investing is the old saying, "Buy low, sell high." You definitely aren't going to lose money if you follow that advice, but you will never have any big winners either. The best way to own the biggest winners in the market is to buy them at the highs and keep buying them as they go even higher.

Look at this chart:

Source: TCNet

If you bought this stock at the lows in December 2003 at around $10 and sold it the following October as it hit the highs at $23, you had a very solid 100% gain in less than a year. That seems like a classic application of a good "Buy low, sell high" trade, especially since the stock looked extended both technically and fundamentally. But let's look at what happened to this stock after it made that high.

Source: TCNet

Obviously, the stock is Apple (AAPL), and it traded to more than $700 over the next eight years. This is an exceptional situation but it shows how you can easily be out of a great trade if you are too quick to "sell high." If you stuck with the momentum and kept buying it every time it made a new high, you were in one of the biggest winners of the past decade. A stock that looked like a smart sale at $20, $40 and $100 went above $700 before it had a major correction.

Some might see a stock like AAPL as a great argument for a buy-and-hold approach, but many traders caught much of the move by aggressively riding the momentum when it was strong. The key is not to fear buying stocks at their highs. One of the most difficult things for traders to do is overcome their aversion to buying stocks that are making new highs. We all want to buy bargains, and our natural inclination is to think that a stock at its highs is not going to be bargain.

The important thing to keep in mind is that the best performing stocks over the long term are those that are consistently at their highs. You don't have to buy-and-hold them to make money. You can trade them and do quite well, but you have to be willing to hold on to them at times when they may seem to be quite extended. Don't be scared to be bullish on a stock that is at its highs and has already made a huge move.

One stock that might be a particularly good example of this idea is electric-car maker Tesla (TSLA). The stock has doubled in a very short time and looks very extended, but it has had very good news and is an exceptional story. This company's level of innovation can attract attention for a very long time. The fact that it is already executing above expectations financially provides a way to grow into very aggressive valuations.

Source: TCNet

The stock may be volatile but you can't be afraid to own a name like this as it hits new highs and becomes extended. That is the only way you'll be able to reap the really big gains over time.

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