A lifetime goal for me as a trader is the ability to recognize – – and hold on to – – stocks which experience gigantic gains over the long haul. These are the stocks on which fortunes are made, since the real winners can climb thousands of percent over a period of years.
In retrospect, it's pretty easy for a technician to see excellent basing patterns for stocks which have already enjoyed such gains. Take MMM, for instance, shown below. This stock climbed thousands upon thousands of percent over the past few decades, and you can see the oh-so-perfect saucer pattern which preceded the entire move. With hindsight, it's a cinch to see what a winner this chart was on a technical basis.
If we zoom in to that basing pattern when it occurred, however, it isn't nearly so clean. Since you know what happened next, it might still seem very obvious to you, but I am highly confident that most people, when looking at a chart like the one below, would consider it simply on the high end of a multi-year range and not a particularly good thing to purchase.
This topic was brought to mind this evening, since I own Cavium Networks (CAVM), and it had a good earnings report after hours. The after-hours quote shows a gain of about 8%, so tomorrow should be a good day for CAVM. But who is to say that, ten years from now, this isn't a $500 stock on a split-adjusted basis? That seems absurd, but all huge gains seem absurd before those gains are actually enjoyed.
What I'm trying to say is that it takes vision to see a chart and imagine what that same chart would look like when it constitutes only 10% of a long-term chart in the future. There are probably only a small number of people who bought MMM who own it to this day, but those people haven't paid a penny of taxes on those gains, and they are sitting on a fortune of profits. What I want to develop for myself is the ability to hang on to select long positions over the very long haul, exiting them only when the violate an up-to-date stop price. As nice as it would be to bounce out of CAVM tomorrow for a quick 8% profit, I will instead just update the stock and let it ride.
