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Stock Picks Bob's Advice
Wednesday, 11 April 2007
A Reader Writes: "I have some 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 remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I had the pleasure today of receiving a very nice email from Eric N., a 25 year old graduate student, who wrote:

"Hi Bob,

I really appreciate your website and the information you
provide. I a 25 year old, married, graduate student and I am new to the online
trading game, but not to the investment scene altogether. I have decided to
give the stock market a try and begin by investing $2,000 and possibly more as
time goes on.

I have some questions that I was hoping you would be able
help me with when it comes to understanding trading.

1) What are your general criteria for you to buy, hold or
sell stock?

2) How many stocks do you have? And is this collection of
stocks considered your ‘portfolio’?

3) Do you do online trading? And if so, what platform do you
use?

4) Do you use a particular kind of software?

5) How much did you initially invest?

6) How often do you buy more stock? From what I read on your
blog it sounds like it is once a week or so that you evaluate what is going on
with your stocks and make judgments then. Do you ever do ‘day trading’?

7) You mentioned in your blog on April 10th that
you rated CVD as a ‘buy,’ at about $63 a share. But, when I went to go buy it I
saw that the asking price was around $100 a share. Does that mean in order for me to make a profit the stock would have to go up 60%?

Isn’t it uncommon for a stock to increase by that much? How
did you determine that in that situation it would be a good stock to ‘buy’?

8) Do you have a limit that you do not go over when the
asking price is significantly different than the actual value of the stock?

Going back to CVD, it seems like a $37 difference is quite a
bit to me.

I have more questions, but I will leave you with these. I
really appreciate your time and help. It is very inspiring to read your blog,
but also wonderful to be able to relate with someone who is in the trenches
putting his money where his mouth is.

Thanks for what you are doing and thank you for time and
advice.

Best wishes,

Eric N."

Eric,

Thanks so much for writing!  Let me try to respond to your questions in order.  Please let me know if you have any further questions or comments, and if anyone else has comments, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  Of course, please remember that I am an amateur investor as well!  I can share with you my perspective, but I would encourage you to visit with a professional investment adviser.

1. "What are your general criteria for you to buy, hold or
sell stock?"

My first goal in this blog is to identify a pool of acceptable candidates for investment.  I sometimes refer to these stocks as my "vocabulary" for investing.  That does not mean in any fashion that I plan to buy any or all of these stocks.  Just that they are acceptable to me at the time I review them.

There really is nothing magical about what I am looking for.  I find them on the list of top % gainers where they are moving higher faster than other stocks in the market on that particular day.  I insist that on the latest quarterly report that they have increasing earnings and increasing revenues.  It is even better if they have beaten expectations of the analysts who follow these companies.

I am looking for consistency of results.  I am hopeful if a company has had consistently good results for several years, then maybe that company will continue to have good results.  I review the Morningstar.com "5-Yr Restated" financials to determine this.  I am looking at the past few years in revenue, earnings, number of shares outstanding, free cash flow, and even dividend growth.  At the same time, I check the balance sheet looking for an acceptable current ratio; the ratio of current assets over current liabilities with a ratio of 1.25 or greater preferred.

I spend some time looking at valuation of the stock, looking at the p/e, PEG, Price/Sales, and return on equity.  If the stock has lots of short-sellers, I consider this a potentially good sign, especially if the stock just moved higher on the back of good news.

Finally, I look at a "point & figure" chart, just hoping that the graph looks like the stock is moving higher.  I do not consider myself a technician, but simply look at a chart to see if the general direction is higher.

In determining when to buy a stock, I use signals from my own portfolio to indicate to me whether it is a good time to be adding equities or moving from equities into cash.  I do this by first of all establishing a pre-determined size to my eventual 'trading portfolio'.  I have chosen to use 25 positions as my eventual goal.  I have a "neutral" exposure to stocks of 1/2 of the maximum or 12 positions.  My minimum number of positions is 6 (1/2 of the neutral exposure to equities), and my maximum of 25 positions (slightly more than twice the neutral level).  My portfolio size is planned to drift between the minimum of 6 positions and my maximum of 25.

My "signal" to buy a stock is a sale of a portion of an existing position on "good news" as long as I am under my 25 position maximum.  On sales on "bad news", I do not replace these stocks unless I am at my minimum level or 6 position portfolio.  

The strategy of selling losing stocks quickly and completely and selling gaining stocks slowly and partially is responsible for my bias towards gaining stocks within my own portfolio.  Currently, I am planning to sell 1/7th of my existing holdings (instead of the 1/6th previously employed) as a stock hits appreciation targets.  I have been using targets, that are at 30, 60, 90, and 120% levels, then increasing the intervals by 30% to 60% intervals: 180, 240, 300, and 360%, then again increasing the intervals by 30% to 90%: 450, 540, 630, and 720% intervals, etc.  These are what I call my sales on "good news" and give me the proverbial "permission slip" to add a new position to my portfolio.

On the downside, when I sell a stock on "bad news"  I sit on my hands so to speak to avoid compounding losses.  My targets for sales are a bit complex, but include an 8% loss after an initial purchase, break-even after a single partial sale at a gain (at the 30% level), otherwise if a stock that has hit more than one appreciation target (at 60% or higher), I set the sale point at 1/2 of the highest appreciation level which had triggered a sale.  In other words, for example, if a holding hit a sale at a 120% appreciation target, then I would sell all remaining shares if the stock declined to a 60% appreciation level.  The only time I use a sale on "bad news" as a signal to add a new position, is when I am or should be at the minimum number of positions--six stocks.  In that case, I shall replace the stock sold with another purchased with the same strategy.  Finally, I always reserve the right to sell a stock on whatever fundamental reason I find significant regardless of the price of the stock. 

2." How many stocks do you have? And is this collection of
stocks considered your ‘portfolio’?"

Keeping this answer simple, I have 19 stocks currently in my holdings and yes I consider them my "porfolio" or my "Trading Portfolio" as I like to refer to them.

3) "Do you do online trading? And if so, what platform do you
use?"

Yes, I do virtually all of my trading online and I use Fidelity.com for this purpose.

4) "Do you use a particular kind of software?"

No.  I do most everything 'manually' without software. 

5) "How much did you initially invest?"

Lately, I have been trying to invest $5,000 in a new position.  The size of these positions can certainly vary with what you have to invest.  I probably wouldn't want to have much of a smaller size for a position than this with my own aggressive selling techniques of portions of each position.

6) "How often do you buy more stock? From what I read on your
blog it sounds like it is once a week or so that you evaluate what is going on
with your stocks and make judgments then. Do you ever do ‘day trading’?"

I generally buy stock when I have received a "signal" from my own portfolio.  I generally evaluate what is going on in my portfolio every trading day.  I try to write up a review of a different position in my own portfolio every two or three weeks.  I also review past stock picks on the blog on a weekly basis.

I do not do day trading as such.  I did make a "trade" last year on a "hunch" and it didn't work.  So I am back to my "disciplined" approach.

7) "You mentioned in your blog on April 10th that
you rated CVD as a ‘buy,’ at about $63 a share. But, when I went to go buy it I saw that the asking price was around $100 a share. Does that mean in order for me to make a profit the stock would have to go up 60%?"

Hold on a second.  Here is the link for Covance (CVD). I am not sure where you got the idea that Covance was $100.  It currently is $60.67, actually under what I recently wrote it up for.  So if you go to buy it, it shouldn't cost you much more than this depending on what the stock trades at when you go to purchase the stock.  But the $100 price isn't correct.

"Isn’t it uncommon for a stock to increase by that much? How
did you determine that in that situation it would be a good stock to ‘buy’"

Is it uncommon for a  stock that I own to increase 60% from its purchase price?  I believe that is your question.  Let me refer to my own portfolio, and I will share with you how many of my holdings have actually appreciated 60% or higher.

I currently have 19 positions in my Trading Account.  These are real holdings that I really do own.  Of these 19, 9 of them currently are at 60% or greater appreciation points.  These stocks are Bolt (BTJ), Coach (COH), Cytyc (CYTC), Kyphon (KYPH), Quality Systems (QSII), ResMed (RMD), Starbucks (SBUX), Meridien Bioscience (VIVO) and Ventana Medical (VMSI) which all have 60% or greater unrealized gains.   So Yes, I do believe that stocks can appreciate to this level, and in fact, I expect them to do so after I purchase them!

8) "Do you have a limit that you do not go over when the
asking price is significantly different than the actual value of the stock"

In general, there is always an ask price and a bid price in the stock market. Usually, the gap between these is miniscule, usually a matter of pennies.  Thus, when I decide to purchase a stock, I simply buy the stock 'at the market' which usually directs my brokerage house to purchase shares at the ask price.  I do not bother setting limits on purchasing stocks which many others successfully employ.  I simply don't do that.

Eric, you have asked lots of great questions!  I hope that my blog is helpful to you as you learn about investing.  Go out and read other writers, find other investing books, listen to Jim Cramer, read the Wall Street Journal, the Investors Daily, read Kiplinger's and Money Magazine, and Smart Money, and Fortune and Forbes and loads of other books.  And make up your own mind about how you should be investing!

Good-luck and keep me posted.

Bob


Posted by bobsadviceforstocks at 8:27 PM CDT | Post Comment | View Comments (5) | Permalink
Updated: Wednesday, 11 April 2007 8:28 PM CDT

Wednesday, 11 April 2007 - 11:47 PM CDT

Name: "Sunder"
Home Page: http://www.sunderiyer.com

Bob,

I just found your site a couple of days ago and I am very impressed. Your style of writing is very transparent. Thanks and keep up the great work!  

Thursday, 12 April 2007 - 4:29 AM CDT

Name: "Diego"

Hello Bob and readers,

I was reading this post and I got to the final question, or rather the final answer, where you say you place your orders "at market", without limits. I realize that this is the way you've been doing this forever and you're apparently happy and never had a problem. However, I would like to point out that the bid/ask prices are often WAY off the last price, especially when trading thinly traded stocks, and even more so during the first minutes of trading after market opening. I've seen ~$30 stocks with an ask price of $1000 and bid price of $1. An inexperienced trader might place a market order and have it fill at that price, even if the bid/ask price shows something different when he places the order. Using limit orders is generally good practice, in my opinion. It is very simple anyway, and usually the default order type.

Cheers! :) 

Thursday, 12 April 2007 - 7:24 AM CDT

Name: "anonymous"

"Diego" wrote:

Hello Bob and readers,

I was reading this post and I got to the final question, or rather the final answer, where you say you place your orders "at market", without limits. I realize that this is the way you've been doing this forever and you're apparently happy and never had a problem. However, I would like to point out that the bid/ask prices are often WAY off the last price, especially when trading thinly traded stocks, and even more so during the first minutes of trading after market opening. I've seen ~$30 stocks with an ask price of $1000 and bid price of $1. An inexperienced trader might place a market order and have it fill at that price, even if the bid/ask price shows something different when he places the order. Using limit orders is generally good practice, in my opinion. It is very simple anyway, and usually the default order type.

Cheers! :)

Diego,

I have seen that happen as well.  So in that particular case, I would agree that a limit order would be appropriate.  I haven't had this problem with my Fidelity account, but they do preview the order and anticipated cost.  So I guess that is how I avoid this kind of disaster.  Thanks for reading and writing!

Bob

Thursday, 12 April 2007 - 11:49 AM CDT

Name: "JM"

"Diego" wrote:

I was reading this post... you place your orders "at market", without limits....bid/ask prices are often WAY off the last price.... and even more so during the first minutes of trading after market opening.

Bob - excellent website!!
That an interesting point Diego. Bob, when in the day do you review the top % gainers? morning? midday? or doesn't matter to you?

Saturday, 14 April 2007 - 8:49 AM CDT

Name: bobsadviceforstocks
Home Page: http://bobsadviceforstocks.tripod.com

"JM" wrote:
"Diego" wrote:

I was reading this post... you place your orders "at market", without limits....bid/ask prices are often WAY off the last price.... and even more so during the first minutes of trading after market opening.

Bob - excellent website!!
That an interesting point Diego. Bob, when in the day do you review the top % gainers? morning? midday? or doesn't matter to you?

JM,

Quite frankly, whenever I get a chance.  Sometimes in the morning, sometimes after the close of trading.  When I do have a sale at a gain and am in the market to add a new position, I look at that time to find a new position.  Otherwise, I am very un-systematic with this.  No particular time.  Not every day.  Doesn't seem to matter.

In fact, sometimes I have written up stocks only to find that they 'fall off' the list later in the day.  

Being on the 'list' is a good start.  It is everything else that really matters in line with this evidence of strong daily momentum.

Bob 

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