US investing championship contender Ryan Pierpont returned an explosive 287% through June. He breaks down his 4-step weekly process for identifying high-upside trades — and the secret to finding 'plenty of 5-to-1s.'
By: Business Insider
August 26, 2021 at 04:02 AM EDT
Ryan PierpontSummary List Placement
"I think you have to get creative in the market," said Ryan Pierpont. "If you're a follower in the market, you're not going to win in the long run. You have to put in the work."
For Pierpont, that meant 11 years of hard work and dedication in understanding how to trade successfully.
Now it's paying off as he's achieving explosive returns in the legendary US Investing Championship that was a milestone for many leading names in the industry from David Ryan to Paul Tudor Jones and Mark Strome.
With 287% returns, Pierpont currently sits in second position for the first six months of this year's championship in the general stock division, which is only open to accounts holding between $20,000 and $1 million. Monthly Fidelity brokerage statements viewed by Insider confirmed Pierpont's returns from January through June, and also showed no additional deposits or withdrawals were made during the six months.
His gains were atypical on several fronts: They far outpaced the S&P 500's 14% rise and even this year's top-performing US stock fund, which gained 65% through June per Morningstar. An investor who presciently put all their money into Moderna, the S&P 500's top performer, would have been up only 129%.
Last year, Pierpont came third in the competition with returns of 448%, according to rankings from the championship. Since he competes in the stock division, he's not allowed to use derivatives such as options or futures.
In fact, Pierpont owes his trading success to his vow to never trade options again following an experience that resulted in a dramatic loss of significant gains.
After being "smacked around" in the options market, Pierpont desired to turn his performance around. He picked up William O'Neil's book, "How To Make Money In Stocks", and learnt the CANSLIM method, a seven-step investing process.
After spending six to seven years diving deep into learning fundamentals and technicals and paying his market tuition, Pierpont is now able to get creative with trades and put his own spin on strategies.
"Every spare minute I have at night before bed, I'm combing through charts and looking up historical patterns from years, decades ago, trying to find new patterns for my arsenal," Pierpont said.
A particular focus area is human psychology.
"I look for certain patterns that repeat in the stock market and these things repeat over and over again due to the fact that one thing never changes and that's human psychology," Pierpont said.
However, only 10% to 20% of success in the markets is driven by understanding fundamentals and technicals, Pierpont said. The rest is you versus yourself.
Since Pierpont works full-time in the enterprise software industry, his strategizing and learning take place on the weekends and evenings.Weekly process
Every weekend, Pierpont logs on to the charting program TC 2000 to create his master stock list. He looks at every stock in the market over $10.
Occasionally he considers single-digit stocks, but most of the best movers are the higher priced stocks, he added.
Ordered by the highest-priced stock, Pierpont then scans the chart of every individual stock, spending a few seconds on each.
"My eyes are trained now," Pierpont said.
When one meets his criteria, he stops to investigate with a simple focus on price and volume patterns. If the stock seems promising, it joins the list.
The process of going through the entire market takes around six hours on the weekend.
Once the master list is set up, Pierpont tries to narrow the master list into a more refined selection of 10 to 20 names to focus on during the week.
First, he looks at technicals, searching for stocks with a really good pattern or a "huge" base, a point where the stock typically consolidates before climbing higher. This could involve stocks that have just had a shake out of investors then end up holding above a support level, or where there is a tight price action, a sign institutions are supporting the stock.
Once the technicals are strong, Pierpont digs into fundamentals, looking for companies with strong revenue or earnings growth as they've typically made the biggest moves, he said.
Heading into the week, Pierpont evaluates the refined list, drilling into daily charts to find buying opportunities.
One of the most important things for new traders to understand is that each stock has its own personality, Pierpont said. Just because a company is "firing on all cylinders" with strong earnings and sales growth doesn't make it a good buy, he added.
"You want to make sure that the technicals align and there's a solid price chart," Pierpont said.
In particular, Pierpoint likes to find stocks with a strong linear trend pattern with a "nice" three-to-six-month base. Often those will be the ones that break out and go, he added.
One of those trades was genetic diagnostics company Fulgent Genetics (FLGT). Pierpont said he bought at $52 and sold at around $80, making a solid 53% gain.
The stock had a strong base for around six months then tried to break out in December, unsuccessfully, Pierpont said.
The stock consolidated at the base once again and "faked up" in early January, causing a lot of investors to lose interest especially as it traded sideways for weeks, he said. It then jumped to $80 and continued all the way to $190 in February before dropping back down to around $70.
"You want to buy when things are really tight, quiet price action and then things explode out of those tight patterns," Pierpont said. "You want to buy them tight and sell them loose."
Pierpont isn't looking for home runs, instead, he's looking to compound a collection of stocks with between 10% to 50% gains, typically holding stocks from between a week to a month. He also remains consolidated. Last year, his max number of positions at one time was around seven.
In the case of Fulgent, Pierpont doubled his return over 3 weeks, however, the stock then soared to reach $190 after he sold. This is now a focus area for Pierpont, who is aiming keep a small percent of an original position in a successful trade to capture those scenarios.
He also looks to find under-the-radar names that big institutions might struggle to rapidly invest in because of liquidity challenges.
"I like to find, some of the lesser known [stocks] because they can make some really spectacular moves," Pierpont said.Secrets to finding 5-to-1s
A key to Pierpont's strategy is being picky.
That means sitting out the market when it isn't going in his favour and moving back to cash to wait for the ideal setup. Sometimes that can occur only two to three times a year, he added.
"You gotta have that sit-out power, as Mark Minervini calls it," said Pierpoint, referring to the legendary trader and US Investing champion.
Sitting out of the market might not be fun, Pierpont said, but traders need to ask themselves whether they want action or want to make money.
Also, there's always the risk of overtrading, which Pierpont says is his "biggest weakness." While he's found success, frequent in-and-out trading can be extremely costly for most non-professional traders.
Pierpont is currently watching from the sidelines as little is happening in the market following earnings season.
He uses his watchlist to judge the market's health. The list is currently very small, telling him it's not a great market.
"There's just a real lack of proper setups out there right now," Pierpont said. "I'm throwing up the flag for now and just waiting for better action."