Originally posted September 14, 2018. Last Updated April 18, 2021.
Buy on Red Days, Sell on Green Days
Baron Rothschild – the famous real estate investor known for his shrewd tactics and ruthless investing style – once said “When there is blood in the streets, it’s time to buy.” (Source: Investopedia).
You may have heard the adage around investing principles, but what does it mean to “buy when there’s blood in the streets?”
Basically, it means you need to be a contrarian or think the opposite of everyone else. When everyone is panic-selling their stocks, you need to keep your calm, survey the landscape and consider whether there’s a legitimate reason to sell or if everyone’s just following the pack.
If everyone is jumping off a bridge for no reason, this may be your perfect buying opportunity as your opponent traders sell the price down.
Here’s an example of a contrarian trade that took place when everyone else was panicking in September 2018.
Canopy Growth and the German Weed Contract
After news broke on September 13, 2018 that Tilray (TLRY) would be the first cannabis company to gain rights to sell into Germany (the European market is as big or bigger than the U.S. market when it comes to cannabis), its stock price skyrocketed while its competitors, including Canopy Growth Corporation (CGC), plummeted.
It’s easy to say that you will buy the dips, but when you see the market sell off 10%+ in a day, your stomach WILL flip. No matter how long you’ve been doing this, it’s common to get a little nauseous, but you need to program your brain to be excited that your stock is “going on sale.”
On the 13th, CGC collapsed from $51.48 to a low down to $44.07 at close, a 14.39% drop. As epic as that drop was, CGC continued to trade even lower in after-hours trading – people panicked to get their profits from the high-flying (pun intended) cannabis trade even though the news wasn’t significant enough to cause this kind of damage. Traders were taking advantage of the opportunity by shorting the stock – causing its price to drop even further.
Canopy Growth is one of our long-term plays as we believe the cannabis market will see significant growth for years to come – not just months. As a long-term investment, a “sale” of more than 14.39% is too much to pass on. After some research, Get Irked determined that there was no reason for the dramatic sell-off of this magnitude.
Jim Cramer from CNBC’s Mad Money and others recommend never trading in the after-hours because the liquidity is so low that volatility can “rip your face off” with the stock going the opposite direction than what you want very, very quickly. This is very, very good advice if you’re considering jumping in without research. However, this is why you should always have a plan: “Plan your trade and trade your plan.”
For Get Irked, although we’re certainly enjoying the short-term gains in CGC, we believe this is going to be a growth market (pun intended) for years to come, not just months. Sub-$42 prices on CGC after a high of $56 are just too good a deal to pass on so we went to work.
After looking at impossibly low support levels, we set buy positions a bit higher – specifically targeting $40.76. Our limit-buy order cleared during after-hours trading on the morning of September 14, 2018.
In reviewing the trade, we discovered the absolute low was $40.68 – making our buy price off the low by $0.08 or just 0.0019%. CGC proceeded to rocket higher as the market opened and other buyers decided the price was too good, closing at $47.19 – a daily profit of $6.43 per share or 15.78%.
The Moral of the Story
This story serves to support two trader adages – when everyone is selling, be greedy and sometimes it’s better to be lucky than good.