China shut down a multibillion-dollar industry nearly overnight last week...
The news came without warning. And the top stocks in the space fell more than 70% on the announcement... wiping out billions of dollars in market cap in a single trading session.
Beijing announced it was forcing the entire private-tutoring industry to operate as non-profit organizations. This was a complete shock to just about everyone... And it was a huge shock to me since our team recommended one of the top players in the industry back in 2019.
Our readers didn't suffer a 70%-plus loss, though. Instead, we sent out a sell alert months before the news came out, allowing readers to sell for a profit.
Today, I'll show you how we avoided this major loss... and how you can do the same with your portfolio.
Let me explain...
How did we avoid one of the worst days in history for any group of stocks?
Simple... We always invest with a trailing stop.
A trailing stop is your maximum pain point. It trails a stock's price as it climbs higher. When the stock falls, it's the point where you get out to prevent any further damage.
We use a trailing stop to cover our downside risk... no matter how much we believe in a stock. And that's exactly what our team did when we recommended New Oriental Education & Technology (EDU) to our readers in 2019.
EDU is one of the top private-tutoring companies in China. It was growing revenue at 20% or more in 2019. The company also had strong profit margins... around 11%.
Importantly, China's education system is stringent. In order to climb the ranks through high school and get into college, students have to take high-stake entrance exams.
If you fail... you can't progress to the next education level. You go on to trade schools instead. That's how life-changing these exams can be.
So while tutoring in the U.S. isn't that common, it's a must have in China. Families in China depend on private tutoring to pave their kids' way to higher education. And that means high demand for EDU's services.
When we recommended it, EDU possessed the characteristics of a good investment opportunity. It was a rapidly growing industry leader that was profitable and enjoyed high demand for its services.
But just because it was a fantastic opportunity didn’t mean we could ignore our downside risk. That's why we recommended using a 35% trailing stop on our position.
Our trailing stop saved us from the worst day in the industry's history. It got us out months ahead of Beijing's recent announcement. And we were able to take gains instead of a 70%-plus loss because of it.
There's nothing magical about using a 35% trailing stop. It's what we were comfortable risking given our upside potential in EDU. A general rule of thumb is to use a 25% trailing stop, but the percent is not as important as having a stop in the first place. Find what percentage you're comfortable with and stick to it.
You never want a small loss to turn into a catastrophic one for your portfolio. You need a plan to limit your downside risk. And trailing stops are a great way to do it.
Good investing,
Chris Igou
Further Reading
Even though we're in the midst of a bull market, the good times will eventually come to an end. And the crash will be slow and prolonged. That's why right now is the best time to get ready for it... Learn more here: The Most Important Financial Event of Our Lifetimes Is Approaching.
"It's too easy to fall in love with your stocks in times like these," Steve writes. And when the Melt Down arrives, that can lead to major losses if you're not careful. Make sure you have a strategy to protect your gains... Get the full story here: What to Do When You Hit a Stop.
A lot of amateur investors make the mistake of ignoring this strategy entirely. But it's a crucial part of a successful investing career...
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Alphabet (GOOGL)... tech "World Dominator"
Cloudflare (NET)... network security
Dropbox (DBX)... cloud storage
Facebook (FB)... social media giant
Automatic Data Processing (ADP)... payroll giant
AbbVie (ABBV)... pharmaceuticals
Bristol-Myers Squibb (BMY)... pharmaceuticals
Novo Nordisk (NVO)... pharmaceuticals
ResMed (RMD)... medical devices
Thermo Fisher Scientific (TMO)... life sciences
American Homes 4 Rent (AMH)... rental properties
Invitation Homes (INVH)... real estate "landlord"
CBRE Group (CBRE)... real estate services
NVR (NVR)... homebuilder
American Tower (AMT)... 5G infrastructure
Floor & Decor (FND)... flooring
Costco Wholesale (COST)... membership-only stores
Dollar General (DG)... discount retail
L Brands (LB)... beauty and apparel
McDonald's (MCD)... burgers and fries
Coca-Cola (KO)... beverage giant
NEW LOWS OF NOTE LAST WEEK
Not many... It's a bull market, you know!
