New subscriber Carl O asks: Can you please clarify once more for the dummies the use of the 3PTL?
You don’t have to be a dummy to be confused about using the three-point trend line. After a year of listening to Tony talk about it, I still have trouble articulating it clearly. Here’s what I have come up with for the upcoming “Getting Started With QAV” guide (that I’m waiting on Tony proofing):
- Remember to use a FIVE YEAR chart of MONTHLY prices (which shows what the price is at the end of the month).
- If we don’t own a stock, and the sentiment is generally positive (eg price is going up over time), it’s a buying signal.
- If we don’t own a stock, and the sentiment is generally negative (eg price is going down over time), the trend line through the highest prices indicates when to buy (ie when the price goes above / breaches that line).
- If we do own a stock, and the sentiment is generally negative, the trend line through the lower prices indicates when to sell. If the price drops below that line for a stock we own, we sell it.
Here’s an example using FMG.
And check out our video page for some demonstrations of how this works.
We really need a catchy mnemonic to make this easier to remember and use. But I haven’t thought of one yet. If you can think of one, let me know!
Here’s another chart to confuse matters.
Tony says BPT has positive sentiment because, even with the recent decline, the general trend of the price over the last five years is UPWARDS. So this would pass the sentiment question on our value investing checklist.
The Falling Knife
One more thing to remember. In times where the price has been declining, like during the current correction, Tony’s view is that while a stock might be cheap, and bargains can be found, one should never try to catch a falling knife. In other words, it doesn’t make much sense to buy something today if its price will continue to drop for weeks or months. He feels like he can do better things with his money during that period, ie put it into something that is growing. Just because something is a bargain, doesn’t mean you have to buy it today. There might be better options. Tony would rather wait until a stock shows signs that it is on the rise. He won’t always get the timing right – but at least there’s a strategy behind it, and he’ll get the timing right more often than he gets it wrong. He doesn’t need to be right every time, just enough times.