Isaac's Law

Tuesday, May 10 2011 by
2

I've said it many times on these boards and on TMF. When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time. This principle held true for Dana back in 2008 when it went to £20 on the back of the Rinnes discovery. It went up from £12 to £20 in a matter of weeks, at the time on TMF I was saying Dana got ahead of itself. In fact it never got back to £20 & got taken over.

Rockhopper (LON:RKH) went from approx 50p to £5 in the space of 6 months and now down to about £2.30.

Xcite Energy (LON:XEL) from 50p to £4 in 4 months & now back to £2.40

Caza (LON:CAZA) from 4.5p to 67p in 6 months.

Red Rock (LON:RRR) 6p to 16p in one month and now back to 8p.

Sterling Resources $2 to $4.5 in 6 months & now back to $2.75.

Encore from 15p to 150p in 9 months & back to 95p

Heritage from £1.8- to £6 in 9 months & back to £2.50

It also held true for SOCO International (LON:SIA) when it went from £3 to £6 in 9 months back in 2007.

I can find countless examples of situations where something has gone up a lot in a short space of time and a year or two later it has dropped back.. And pretty much in all those situations you have the same crowd & 'experts' telling you it is going much much higher and have blue sky valuations and all that nonsense.

Sure you won't get that ASOS (LON:ASC) by following Isaac's rule, but an Asos is perhaps one in a billion whereas a drop back like the above is very common. It is not easy to sell up when everyone else around is bullish because it is more comfortable to sit in the same boat with the herd. And I think it is at this point where reading bulletin boards can be costly.


Filed Under: Investing, Isaac Wisdom,

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Red Rock Resources plc is a mineral exploration and production company primarily focused on the discovery and development of gold and iron ore. The principal activities of the Company have been gold exploration in Kenya, gold production in Colombia and iron ore exploration in Greenland. The Company’s other iron ore interests are held through its holding in Jupiter Mines Limited and its royalty interest in an iron ore project in Australia. The Company owns 50.2% of local operator four points mining (FPM), which owns the mining licenses to the El Limon mine. It owns 60% of NAMA Greenland Ltd which owns the 1,570 square kilometer license. The 1,570 square kilometer license area is located in north-west Greenland, 150 kilometers south of the town of Qaanaaq. more »

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Rockhopper Exploration plc (RKH) is engaged in exploration and exploitation of its oil and gas acreage. RKH has discovered oil in the Falkland Islands. Its Licences include Licences PL023 & PL024, which represents the southern acreage that it holds within the North Falkland Basin and RKH holds these licences 100% and is the operator; Licences PL032 & PL033, which represents the northern acreage that the group holds within the North Falkland Basin and holds these licences 100% and is the operator, and Licences PL003 & PL004. The Company has a 7.5% working interest in licences PL004a and PL003 and is not the operator. The Company also holds a 25% working interest in licence PL004c. In August 2014, acquisition of Mediterranean Oil & Gas Plc by RKH has completed. more »

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Caza Oil & Gas, Inc. (Caza) and its wholly owned subsidiaries are engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves. Caza explores, develops and produces hydrocarbons in the Texas Gulf Coast (on-shore), south Louisiana, southeast New Mexico and the Permian Basin of west Texas regions of the United States of America through its subsidiary, Caza Petroleum, Inc. The Company’s subsidiaries include Caza Petroleum Inc., Caza Operating, LLC, Falcon Bay Operating, LLC, and Falcon Bay Sutton County, LLC. In July 2012, the Company sold its San Jacinto Property in Midland County, Texas. more »

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44 Posts on this Thread show/hide all

marben100 10th May '11 5 of 44
10

In reply to Isaac, post #4

Issac

Look at Encore... three directors sold shares within a couple of weeks in in late 2009: Eugene Whims @ 14.45p; Alan Booth also @ 14.45p and Graham Dore @ 14.625p - and where are the shares now (or a few months later)? ;0)

As djp says, it ain't that simple. My rule is to monitor the news, make your own evaluation of risk/reward by looking at prospective upside vs downside that you assess, decide on the position size you want (taking account of the impact of the downside risk on your overall capital), based on that evaluation, and buy or sell accordingly.

I sold XCite long ago, but that decision was based on my assessment that the risk/reward looked unfavourable to me (it was/is my view that risk was/is higher than some posters were assessing). Encore, OTOH, I really liked below 15p and bought a lot of, even though directors were reducing their holdings for reasons that I felt I understood. ;0) I sold most of it "too soon" - but that was largely because the value of my holding had grown too big for my comfort and the risk had also become uncomfortable (though some other investors thought otherwise - and the drillbit subsequently proved them right).

Cheers,

Mark

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thebuffoon 11th May '11 6 of 44
6

I can find countless examples of situations where something has gone up a lot in a short space of time and a year or two later it has dropped back

When I first saw the heading I thought I was going to have to delve into the old testament...but no! It's the modern day Isaac handing down a law. Well, not even a law, just a theory based on using the trusty retroscope. Sadly, using one of these reliable devices will throw up lots of stats.

The problem, as has been implied, is discovering a workable system that you can use in real time. Isaac's law, or more correctly, theory, is to wait for a rise (how much, how quickly?) then wait for a 20% drop(over a minimum or maximum period?) and then sell. Then you just move on to the next one. Simples!

Let's see what happens. We may not have a fantastic number of candidates going forward, but who knows. Why don't you call them Isaac, and we'll keep score....

Buffy

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kenobi 11th May '11 7 of 44
1

funny enough I was thinking about this just the other day, and I'm starting to wonder whether the best policy isn't to top slice gradually as a share goes up, of course this does mean that maximum profit isn't taken, but doesn't every strategy?

I guess it depends on what you are going to do with the cash, if there are other opportunities with high potential growth, then taking some out of rockhopper or encore can seem a sensible strategy. Inevitably all companies have good luck and bad luck, take soco, after a lot of good results on cnv an tgt, we've had quiet a lot of disappointments particularly in africa, and on tgd.

It is human nature when something has gone up lots to find reasons why it should go up further, and for prices to get a bit ahead of themselves but people to explain why it's still a buy, we all convince ourselves of this.

So when to sell is the question, it's often harder to answer than when to buy !

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thebuffoon 11th May '11 8 of 44
3

On a more serious note, one's strategy will depend on one's personality, personal circumstances, attitude to risk, and the number and liquidity of the shares in the portfolio.

If the price has got way ahead of itself, should one get out completely if they can, rather than top slice? Could one then get back in.

Soco is a case in point. The number of times I was told I should top slice/get out completely. I may never have got back in, and that would have possibly left me a lot poorer than I am. Of course, I should have listened when it reached £23 plus. :^{

If you are on to a good thing, should you ride out the wiggles on the chart? Can you keep finding new stars to replace the existing ones?

Questions, questions. I wonder what the answers are?

Buffy

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Isaac 10th Nov '11 9 of 44
3

I've said it many times on these boards and on TMF. When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time. This principle held true for Dana back in 2008 when it went to £20 on the back of the Rinnes discovery. It went up from £12 to £20 in a matter of weeks, at the time on TMF I was saying Dana got ahead of itself. In fact it never got back to £20 & got taken over.

Fwiw CEO is worth a top slice here, up 60% in the last 6 weeks - Very good in current markets.

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Isaac 13th Feb '12 11 of 44
2

When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time

GKP doubled in 2months, Sell & Buy Soco imo.

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Fangorn 13th Feb '12 12 of 44

Disagree. The OIP in Kurdistan is just so significant that the major Oil companies will be rushing to get a foothold, one that GKP has already established. Whilst I agree Soco is currently undervalued it doesn't offer the short term rewards that GKP does. I will of course be reinvesting my winnings in Soco that's for sure but remaining significantly long Kurdistan for now.

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thebuffoon 13th Feb '12 13 of 44
4

Isaac 10th Nov '11

Fwiw CEO is worth a top slice here, up 60% in the last 6 weeks - Very good in current markets.

FWIW it closed that day at 857.  Now 1127.

Buffy

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Isaac 13th Feb '12 14 of 44
1

In reply to thebuffoon, post #13

Buffy,

Fully aware of your post & I did consider it before posting my comment. on GKP. CEO is about 30% higher since my comment....This is to be expected as I pointed out in the header :

 

I can find countless examples of situations where something has gone up a lot in a short space of time and a year or two later it has dropped back.. And pretty much in all those situations you have the same crowd & 'experts' telling you it is going much much higher and have blue sky valuations and all that nonsense.

Sure you won't get that ASOS (LON:ASC) by following Isaac's rule, but an Asos is perhaps one in a billion whereas a drop back like the above is very common. It is not easy to sell up when everyone else around is bullish because it is more comfortable to sit in the same boat with the herd. And I think it is at this point where reading bulletin boards can be costly.

...However I don't consider 30% increase since my comment to be that significant. Especially when you take into account the likes of GKP has doubled in that period & other shares have outperformed too..:-)

It is worth reviewing after a longer time frame IMO i.e. 1-2 years out.

GKP has

 

-Hundreds of posts on ADVFN  daily & quite a few on TMF so certainly quite a lot of interest already

-Bullish Analyst/Broker notes

-M&A Activity rumoured

-Considerable success with Shaikan

Basically it has all the ingredients in place for the markets to be ultra bullish and exaggerate the price upwards...But at somepoint something will go wrong & Investors realise the company does'nt walk on water and the price could drop significantly as the share goes out of favour, hence why you get situations like Soco.

Maybe GKP will find millions of more bbls, MAYBE - Just like quite a few here thought Soco MAY strike it big with TGD & start to price in the hope. I don't know if GKP find more Oil & neither does anyone else, but I'd rather be a seller when there is hope & excitement priced in rather then when there is gloom and doom

I think more often then not it is worth selling hope that is built into the price, because more often then not companies tend not to deliver what many hope for.

Just my views. Let's see how it pans out.

 

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thebuffoon 13th Feb '12 15 of 44
2

I was originally in GKP at 8p. I got out far too early. Back in well below £3 and holding on this time.

Your retroscope will give different results at different times.

You have to have a coherent strategy. You suggested getting out after a 20% fall. Maybe that works; but you must be consistent. If you're not, you end up getting lost in a labyrinthe of your own making!

One thing's for sure; you won't have a multi-bagger if you get out when something gives up a fair bit in a short period.

Just saying...

Buffy




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Isaac 12th Mar '12 16 of 44

In reply to Isaac, post #11

When something goes up a lot in a short space of time, more often then not it is worth selling up and finding the next share that is likely to go up a lot in a short space of time

13th Feb 2012

GKP doubled in 2months, Sell & Buy Soco imo.

 

6 Month chart. Click to open a chart window
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Edward Croft 12th Mar '12 17 of 44
2

In reply to Isaac, post #16

Nice timing Isaac. Certainly whenever something goes parabolic it's always time to lighten the load.

The best signal I've found for selling is that when a stock is more than 70% above its 200d MA you should start preparing for a significant reversal. The 70% line is pretty arbitrary... but I pulled it from Bill O'Neil's How to Make Money in Stocks which has a great list of technical sell rules outlined in better detail here - http://j.mp/w7FnKO

You can see how at danger GKP's been in recent months... it's been hovering far above the 200d MA for a long time /

 

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emptyend 12th Mar '12 18 of 44
2

In reply to Edward Croft, post #17

it's been hovering far above the 200d MA for a long time

Of course, if it had stayed there, then the 200 day moving average would eventually have (more or less) caught up.......

I refer you to Mark Twain, amongst others. Had he been writing today, he would certainly have included TA in his list.

If one takes a random walk in the real world, every so often one will bump up against a vertical cliff or fall down one. One could also spend time walking down very long corridors without any obvious exits or suddenly find oneself in a small room, walking round in circles apparently aimlessly.

Statistics are a wonderful thing - provided one always remembers to use them in context, rather than as an abstraction that bears no relationship to events in the real world!

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Edward Croft 13th Mar '12 19 of 44
3

In reply to emptyend, post #18

Of course, if it had stayed there, then the 200 day moving average would eventually have (more or less) caught up.......

That's exactly the point though.  When stocks get over-extended, it doesn't mean they are necessarily a sell or that they are going to fall precipitously, its just that the probability is enormous that they won't travel much further for a while.

It's behavioural more than statistical.  The point is that humans can't cope with large gains in a short period of time - we get anchored to previous price levels  - and that results in a natural levelling off period even if the real value is far far higher.  It gets there eventually, but not without acting in a predictable stepwise fashion.

Thats also why there's so often a big opportunity in stocks making 52wk highs and why momentum works.

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emptyend 13th Mar '12 20 of 44
1

In reply to Edward Croft, post #19

It's behavioural more than statistical.  The point is that humans can't cope with large gains in a short period of time - we get anchored to previous price levels  - and that results in a natural levelling off period even if the real value is far far higher.  

I'd agree with that, in that there is anchoring going on from both buyers and sellers. However, even behavioural anchoring will be overcome if the news is big enough!  My point with TA is that it is OK providing that there isn't much by way of material new information. In the absence of new information stock prices will wander around in a manner which is subject to macro market influences and behavioural constraints....but those can be dominated in turn by newsflow.

My particular beef is that people frequently look to misapply TA to "newsflow stocks" and then seek to justify this at some convenient juncture with the benefit of hindsight. Gulf Keystone Petroleum (LON:GKP) is an excellent example of such a stock, though one might fairly argue that much of the up and down movement is being engineeered by rumour-mongers rather than by being the consequence of hard, clear new information!

It gets there eventually, but not without acting in a predictable stepwise fashion.

There is nothing "predictable" about it - and it is utterly misleading to suggest otherwise (except, as previously stated, in the absence of new information - which one can only establish ex-post). One cannot PREDICT when new information will emerge, especially when dealing with oil companies that are actively exploring and that may or may not be subject to takeover bids.

I see much of this TA stuff as like running an insurance company. Most of the time things are pretty quiet, nothing much happens and you pocket the insurance premiums from playing the behavioural/statistical game. But once in a while there is a major event - and if you happen to be on the wrong side of it then you get big losses or missed opportunities.

I refer you to Nassim Nicholas Taleb,  Harold Macmillan ("Events, dear boy, events") and Donald Rumsfeld ("known unknowns and unknown unknowns").

ee

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emptyend 13th Mar '12 21 of 44
3

In reply to Isaac, post #9

Fwiw CEO is worth a top slice here, up 60% in the last 6 weeks - Very good in current markets.

Isaac posted the above on 10th November, when the Coastal Energy Co (LON:CEO) share price was around 830p.

Share price now?   1298p.......which is a FURTHER gain of 56% in only the last four months in more or less a straight line.

QED, IMO !!

They don't ring a bell when shares make a top.

ee

 

ps...FWIW I would have agreed with Isaac at the time.

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Edward Croft 13th Mar '12 22 of 44
1

In reply to emptyend, post #20

The fact is that investors need yardsticks for the sell side of the trade otherwise they can get stuck in under-performing stocks - there's a big opportunity cost to leaving capital in over-extended stocks which lack future catalysts. Without sell rules people spend an inordinate amount of time grieving in slow death situations while their money goes nowhere.

Everyone needs a system to preserve their capital and figure out how to manage risk- the market is incredibly smart at figuring out how to take people's capital - its much smarter than anyone gives it credit for and bites back in the end.

The best place to manage risk is on the buy side - with a fat margin of safety - by executing that part of the trade well the upside volatility can be rendered less emotionally trying. But probably most investors who discuss stocks on the big bulletin boards aren't necessarily executing that side of the trade so well making the sell side all the more important. Those kinds of circumstances make technical trading rules invaluable.

Blog: Follow @edcroft on Twitter
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Edward Croft 13th Mar '12 23 of 44
1

PS - Coastal is a good example that illustrates the 70% rule above. It's not been that far overextended in this uptrend - unlike GKP. I think many followers of that rule would have continued to hold beyond 830p. Each to their own as they say.

Blog: Follow @edcroft on Twitter
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emptyend 13th Mar '12 24 of 44
2

In reply to Edward Croft, post #22

I think we can agree that the sell side of the equation is under-discussed. One always needs to have an eye on what might prompt one to sell and (in stocks where one knows one has no edge) some form of mechanical rule isn't a bad idea.

However, in the example of Gulf Keystone Petroleum (LON:GKP), I suspect that there will be many who are rightly believing that Gulf Keystone Petroleum (LON:GKP) will eventually be taken out by a major at a biggish premium. The questions that are more difficult to answer are when, who and how much? Accordingly it is perfectly reasonable to accept that the price of being in when the final whistle blows is being buffetted around by the market in the meantime - so I don't see Gulf Keystone Petroleum (LON:GKP) as a "slow death situation" at all!   If there is any truth in the idea that someone may pay £6-8 per share at any time in the next few years, then a buyer at £2-4 is likely to enjoy an above-market rate of return whenever a deal is finally done.

Of course if it should turn out that the assets are relatively worthless and cannot be monetised at a fair price, then that would be different - but you aren't arguing that, even when you are suggesting that people should "take profits because it has gone up a lot"....which is therefore just anchoring, pure and simple.

ee

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