***The following is excerpted from the “commentary” section of the July issue of Nate’s Notes, which was dated 7/11/14.  All numbers shown below are as of that date***

Well-Positioned (for now)…

While it was fun reporting double-digit gains from issue to issue there for awhile, I have to admit that I am actually glad to see some more realistic returns posted in the “since last issue” column in the table above for the simple reason that cooling-off periods are an essential part of sustaining bull markets over the long haul… and with our Model and Aggressive Portfolios currently up 28% and 65%, respectively, for the year, they are more than due for a breather!

That being said, with so many of our stocks up so much over the past 12 months, I have noticed a sizable increase in the number of emails from readers lately (especially newer subscribers) wondering “do you ever take profits, or how do we know when to sell?!”… and since it is a very reasonable question, I figured it couldn’t hurt to answer it here for anyone else who might be wondering the same thing!

In addition, as part of the discussion, I thought I would also try to answer another related question that comes in fairly often, namely “you seem to have a fairly good sense of stock movements, so why don’t you try to trade the market more frequently than just once a month?”

However, before I give my intentionally short answers to both these questions, I thought it would be useful to share a bit of literature with you in order to help put my responses in context… as well as perhaps encourage you to check out a copy of the book at your local library next time you’re looking for a book to read on investing!

Despite the fact that it was written in 1923, not only is the following spot-on in terms of being quality educational material related to investing in general, I also find it particularly appropriate to share in this month’s issue since those of you who have been following the MannKind story via all the usual internet message boards (Seeking Alpha, etc.) will surely recognize the “be smart and sell your shares now so you can buy them back later” theme that has been around since the beginning of the stock market… some things never change, eh?

Anyhow, without further ado, the following is excerpted from my all-time favorite book on the stock market, Reminiscences of a Stock Operator, by Edwin LeFevre (1923)… enjoy!

Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, “Mr. Partridge, I have just sold my Climax Motors.  My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper.  So you’d better do likewise.   That is, if you’ve still got yours”…

“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully.

“Well, now is the time to take your profit and get in again on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man…

“No! No!  I can’t do that!”

“What?” yelled Elmer… “Didn’t I give you the tip to buy it?… and didn’t that stock go up seven points in ten days?  Didn’t it?”

“It did, and I’m much obliged to you, my dear boy.  But I couldn’t think of selling that stock.”

“You couldn’t?” asked Elmer, beginning to look doubtful himself…

“No, I couldn’t.”

“Why not?”  And Elmer drew nearer.

“Why, this is a bull market!”  The old fellow said it as though he had given a long and detailed explanation…

“My dear boy,” said old Partridge, in great distress – “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper.  “I ask you!”

I didn’t say anything.  So he went on: “I give him a tip on Climax Motors.  He buys five hundred shares.  He’s got seven points’ profit and I advise him to get out and buy ‘em back on the reaction that’s overdue even now.  And what does he say when I tell him?  He says that if he sells he’ll lose his job.  What do you know about that?”

“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in Old Turkey.  “I said I’d lose my position.  And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.  I hope that the stock reacts and that you will be able to repurchase your line at a substantial concession, sir.  But I myself can only trade in accordance with the experience of many years.   I paid a high price for it and I don’t feel like throwing away a second tuition fee.  But I am as much obliged to you as if I had the money in the bank.  It’s a bull market, you know.”  And he strutted away, leaving Elmer dazed.

…I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements – that is, not in reading the  tape but in sizing up the entire market and its trend. [my emphasis]

So, getting back to the questions at hand…

With regards to the first, as long as the uptrend that is currently underway remains intact (see the Eyebrow Levels table below to better understand how we’ll know when it might be ending), the only selling we are likely to  do in our Portfolios will be to lighten up on one position in order to add to another; beyond these occasional portfolio adjustments, as is mentioned often in the newsletter, our job is to simply remain as fully invested as we can comfortably be while still sleeping easily at night… and then let the stock market work its magic for us.

Once the trend comes to an, however, our job will then be to move a substantial portion of our Portfolios back into cash (i.e. we’ll sell a bit of “almost everything”) and then sit on that cash until the downtrend seems to have come to an end.  I will be the first to admit that it took me many years to finally start practicing this approach about being patient when it comes to buying cheap stocks, but as I started to become more comfortable with it, the newsletter’s returns started to get better (and success always helps to breed confidence… which in turn often leads to even more success!)

And, with regards to the second question, though I definitely understand the idea that if I could maybe scalp a few points here or there on some of our positions, the returns of the newsletter might be even better.

However, taking the MannKind (MNKD – $10.07) situation as a perfect example, as those of you who may have seen my tweets related to MannKind (yes, I’ve finally joined “the conversation” and am finally doing a bit of tweeting – if you’re on Twitter, please feel free to follow me (@NatesNotes)!), in my mind, I’m planning on seeing MannKind somewhere north of $25 “down the road” (and it doesn’t matter if it is a year or five years from now)… and while I will admittedly be slightly better off if I manage to successfully sell some of our position at $10 and then get lucky enough to buy it back at $8 before it eventually gets to $25, there’s a chance it will never pull back to $8 and I will have missed out on 15 points because I wanted to play for 2 “extra” ones…

Sure, buying and holding stocks is nowhere near as fun as trading them… but I’ve got subscribers who tell me they still own Cubist (CBST – $67.81) under $6, Apple (AAPL – $95.22) under 80 cents, and Celgene (CELG – $89.19) under 50 cents per share, for example, and they are as pleased as punch that they simply bought those shares and “put ‘em away” rather than trying to trade them through all the ups and downs those stocks have experienced over the years.

And, speaking of ups and downs (and getting back to the sort of commentary you’re used to seeing in this section of the newsletter), I want to quickly point out that we are still in a bull market (so you should be buying rather than selling strength right now!), but I continue to be especially concerned about where the biotech sector might head next.

Given the age of the bull market for the sector, it would not be surprising at all if it is close to running out of steam… and if it does, as mentioned before, our job will be to lighten up our positions and then remain on the sidelines with that chunk of cash until the downtrend has run its course (no averaging down!).  On the other hand, if there is, in fact, another leg up, history suggests it will likely be a doozy, and even stocks like Celgene and Illumina will have the potential to rise another 50%-100% from current levels!

In addition, now that the uncertainty surrounding Afrezza’s fate at the FDA has been removed, I want to pound the table yet again for those of you who don’t yet have positions to finally start nibbling at the stock.  I believe the negative sentiment that has been drummed up by the large contingency of short sellers in the stock has kept the current turn of events from being fully factored into the stock price, and if the biotech sector does decide to head north rather than south from here, I believe the Afrezza story has the potential to turn MannKind into one of the stocks that ends up fueling the rally and leading the sector higher… so, if you’ve been waiting on the sidelines for me to say “it is now less speculative,” please go ahead and pull the trigger (and then put your stock in a shoebox that you can give to your grandkids in 20 years!).

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Apple (AAPL) – while there is always a chance that the reality won’t live up to the expectations, for now, this is a stock headed the right direction with a number of potential catalysts for further price appreciation on the horizon…

MannKind (MNKD) – with the uncertainty of the FDA now out of the way, risk has been greatly reduced for holders of this stock… and all subscribers should seriously consider starting a position if they have not yet done so.

NXP Semiconductors (NXPI) – to be honest, I’m not sure if I have ever seen a more textbook example of a stock that just keeps on climbing in a slow but steady fashion regardless of what the rest of the market is doing… and this sort of relative strength is almost always worth owning in your portfolio!

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase 300 (1,000) Cirrus Logic, 100 (400) Cubist Pharm., 400 (1,355) H&Q Life Sciences Fund, 250 (2,500) NVIDIA, 200 (1,000) Perry Ellis, and 50 (200) SPDR Gold Trust ETF.  We will use the closing prices on Monday, July 14^th, for all transactions.

“Eyebrow Levels”

(used to help us gauge the overall health of the market*)

	current	one eyebrow	two eyebrows
DJIA	16,944	15,900	15,400
Nasdaq	4,415	3,900	3,750
S&P500	1,968	1,825	1,740
BTK	2,794	2,375	2,175
SOX	644	580	540

*As long as all five indices are trading above their “one eyebrow” levels, it is a sign that the current uptrend is still intact; however, if the indices start to dip below those levels, it will cause me to raise an eyebrow and wonder if the trend my be coming to an end… and if both eyebrows go up, it will mean that things are deteriorating in a hurry (and you should start looking for a “Special Alert” from me in your email box).