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Stock Picks Bob's Advice
Friday, 19 August 2005
A Reader Writes "A few questions...."
Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any investment decisions based on information on this website.

One of my favorite activities around here is to answer the occasional letter or comment that gets sent in. If you have any other questions or comments, please feel free to email me at bobsadviceforstocks@lycos.com.

Checking the "mailbox" I came across this letter from Willy who writes:
Sir,

I found you on Gordiandata.com and am impressed by your articles !

I use TC 2000 and Metastock as chartingprograms and have access to Internet

A few questions :

Which stockcharting program do you use ?

Which stockscreening program do you use ?

What are your buy criteria ?

What are your sell criteria ?

Hoping for an answer, I thank you and say Good Luck with your trading !

Willy
Since it has been awhile since I have gone over some of these points, let me try to answer these questions for Willy.

1) Regarding the stockcharting program...I don't use any stockcharting program. I do use Stockcharts and simply enter the names into the box for a "point & figure" chart.

2) Which stock screening program? Again, not wishing to disappoint you with my low tech approach, I do not use any stock screening program. I do have an approach which is fairly disciplined to identify what I consider to be stocks likely to appreciate, but I am not using any software beyond easily available internet websites like Yahoo "Finance" or Morningstar.com I also have been using research from my Fidelity brokerage account.

3) What are my "buy criteria"? Well, these are the same as the criteria that I use to select a stock for this website. First, daily momentum: the stock should be on the top 50 of the highest % gainers list for the market (NYSE, NASDAQ, or AMEX). Next the latest quarter: the company should have reported positive year-over-year earnings and revenue growth. Assuming this is acceptable, I look for a longer period of steady growth using the Morningstar "5-Yr Restated" financials. On Morningstar, besides the growth in revenue and earnings, I like to see growth in free cash flow, a solid balance sheet, and reasonable valuation. (reasonable valuation generally means a P/E not in the stratosphere, a PEG close to 1.0, a Price/Sales midway in its industrial growth, and a chart that looks solid.

4) What are my "sell criteria"? Mostly this is based on price action. However, if there is anyt piece of fundamental information that appears to be significantly negative, I shall use this as well as a rationale for selling. Such as an SEC investigation, significant lowering of guidance, or other bad news.

In general, I like to sell the stocks that I own quickly on a loss (at 8% for a first-time purchase), and slowly at increasingly high levels of price appreciation. In other words, after my initial purchase (I try to get similar $ amounts with each investment), I plan on selling 1/4 after a 1/3 gain...that is I sell 1/4 of my stock when it has appreciated to 4/3 value. Thus returning it to 3/3. Sort of selling my winning shares.

After my first sale, I continue to have targeted sales at 60%, 90% 120%, then by 120%: 180%, 240%, 300%, and 360% levels. I haven't made any sales at this time beyond the 300% appreciation level, but my next targeted price would be at 360%, 420%, 480%, and 540%. Thereafter, by 90% (x4), etc.

However, what about a stock that I have sold a portion at a gain, and then goes on to decline...do I plan on waiting for an 8% loss? No. If I have sold a stock once at a gain (presumably at the 30% appreciation level) then I sell at break-even or close to it on the declining stock price. I do not wait for a large loss to unload my shares.

And if a stock has been sold more than once at gains? In that case, I allow the stock appreciation to decline to 50% of the highese appreciation sale point prior to unloading my remaining shares. In other words, assuming a stock has appreciated adequately to justify two sales, with the last at 60% price gain, then I would allow the stock to drift back to a 30% price gain level before selling all of the remaining shares. The same would go for three sales with the last at 90% gain level, I would allow a 50% retracement of the gain to a 45% gain level before selling.

Unfortunately, I do this manually, but there are automatic trading mechanisms to perform this in your portfolio.

5) A question you didn't ask, but which needs to be addressed, is "How do you respond to market action, that is, do you stay fully invested, or are you able to move into and out of cash vs. equities as market conditions change?" This is a question that I added to your inquiry :). (As author of this blog, I have that prerogative.)

Basically, I believe that one should establish a goal for the number of different holdings within a portfolio. For instance, in my own account, I have a 25 stock goal (I am currently at 24). I would suggest starting at 50% cash and 50% equities. After that I would either drop to 25% equities if trading "rules" dictate (and thereafter replace sales of stocks even on "bad news") or continue to add new positions in different stocks until I am invested at 100% equities. (Currently I am in margin, a condition I am working to extricate myself out of; and a condition which I do NOT recommend to any of my readers.)

Here is the simple part. I wait for a sale on a gain to add a new position (considering this a "signal" based on good news within my portfolio), and do not replace sales on losses or bad news until such time that I have either sold a stock at a gain (good news) or I have reached my minimum investment level. This is my "investing gyroscope" that keeps me upright :).

That was a lot of explaining and I hope I didn't gloss over my approach nor did I make it too difficult to follow. Please let me know what you think.

Please remember that I really am an amateur, that I own actually a very small number of all of the stocks that I discuss, and that I do try to share with you when I actually own some shares and I try to keep you posted when I actually sell or buy shares!

In the meantime, thanks for dropping by, thanks for the kind words, and thank you for taking the time to write!

Bob


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