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Stock Picks Bob's Advice
Sunday, 29 July 2007
A Reader Writes "I have 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 remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

One of my favorite things about blogging is receiving letters from readers about what I write and trying to figure out the best way to respond.  All of you are more than welcome to drop me a line at bobsadviceforstocks@lycos.com or just leave your comments right on the blog.  I read all of the letters I get, and try to answer as many as possible, often on the blog!  Of course, I am an amateur, so before acting on my personal opinions, I would once again suggest you consult with professionals to make sure that my approach is appropriate, timely and likely to be profitable for you.

Anyhow, I had a wonderful letter from Mark F. who wrote:

"Bob,

Not sure how I found your blog but I've been reading
it lately... I like your ideas... sounds like your
having a lot of success. I'm a beginning trader and I
think your ideas are pretty much in line with most
successful traders. I have a few questions, maybe you
could answer one of them or all?

1) Is your basic strategy shaped by ideas from Darvas,
Livermore, O'Neil? What books on trading do you
think influenced you the most?

2) How long did it take you to get to where you are?
Did you always have this strategy or did you have to
stumble along the way?

3) What percentage of your total trading assets do you
commit to the strategy on your blog? Is this the bulk
of your assets and if not, what strategy do you use
for that (or do you let a broker manage other
assets)?

4) What has been your average return over, say, the
last few years or so?

Thanks. Obviously the market looks dangerous now. I
hope you don't get too many stops hit as it seems you
are maintaining your long positions. I am in cash and
reevaluating my ideas after a mediocre year of trading
full-time."

Mark, thanks so much for writing!  I hope that I may contribute to your own understanding about investing and you are more than welcome to learn from my own experience as I have also learned from others.

Let me try to answer your questions in order.

1. I am the first to give credit to all of the famous traders and authors you have mentioned.  There is little in my approach to investing that hasn't been adopted from somebody else in some form or another.

Jesse Livermore:   One of my favorite books is "Reminiscences of a Stock Operator" by Edwin Lefevre.  This is allegedly a fictionalized biography of Jesse Livermore.  Livermore was able to make large fortunes in the 1907 and 1929 crash.  Some of his lessons were to "follow the tape" closely in observing the activity of the market.  

Nicholas Darvas: Another classic text: "How I made $2,000,000 In The Stock Market" also sits my bookshelf at home.  Darvas was a professional dancer who developed his belief of a technical approach to investing utilizing price "boxes" that stocks seemed to trade within.  More of a technician, the book is a great read for an investor wishing to read about how another non-professional approached the market.

William J. O'Neil: Probably the strongest influence on my investing, the publisher of the Investors Business Daily as well as the author of "How To Make Money In Stocks: A Winning System in Good Times or Bad", O'Neil set out with a vast computerized investigation into the characteristics of stocks that later went on to make large moves higher.   The creator of the CANSLIM system, O'Neil inspired me to think about stocks similarly, looking for characteristics that might be predictive of future price gains.  Rather than looking at stocks at 'new highs', I have chosen to look at stocks moving higher on the top % gainers lists.  I also have been sold on O'Neil's discipline of selling losing stocks quicklyat 8% losses.  However, O'Neil relies more on technical charts on timing purchases and making sales than I do.

I would also like to add at least two additional authors who have inspired me in my own thinking and deserve as much credit as possible for any success I may achieve in this process.

Gene Walden:   Mr. Walden, who I do not believe is as well known as some of the others discussed, is the author of "The 100 Best Stocks to Own in America".  Unfortunately, I believe the last edition published was back in 2001.  Walden had a point system with different numbers of 'stars' for each stock in different categories in terms of dividends, earnings, etc.  This objective system for evaluating stocks inspired me to think about the specific criteria that I believed were important.

Robert Lichello: The author of "How to Make $1,000,000 in the Stock Market Automatically".  I was pointed towards this book by my good friend Pete F. who practiced medicine and was also an avid investor.  Lichello believed that an automatic system of responding to the stock market might be possible establishing two funds, one a mutual fund, and the other a money market fund (simplifying his more complex system), and then utilizing his AIM system to determine when to be transferring money between those two funds in response to market action.  My own portfolio management approach borrows from this concept as I try to respond to market action by either looking for signals from my own portfolio to be buying new positions or moving proceeds into cash equivalents.

Over the years, I have read as many articles and books on investing as I have time for.   Currently I am reading Practical Speculation by Victor Niederhoffer and would recommend that book to all of you interested in additional insight into investing. 

I believe this answers your question on books that have influenced my trading.

2. You have asked me about my own journey to where I am.  Elsewhere I have commented on the fact that I started investing in 1967 when I invested my first $300 in the market buying 5 shares of Global Marine.  At that time, I purchased shares near the peak, only to see them slide down into the teens.  

I also purchased shares through high school and college in very small amounts using a Merrill Lynch 'sharebuilder' account that I do not believe still is available.  However, an independent ShareBuilder service is now in existence that serves the same purpose of allowing small investors to buy small dollar amounts of stocks and reinvest fractional amounts as well.  I do not have any personal experience with them, but it recalls my own approach.

My own journey has been a bit irregular.  In fact, my blogging has helped me develop the trading rules and discipline that I attribute to my current success.  But I am humble enough to know that failure is only a trade or a market correction away.

Previously, I have 'shot from the hip' at stocks.  Going with my gut.  Buying and selling without much rhyme or reason.  About 12 years ago I lost quite a bit on Jefferson Smurfit options.  I was buying options and not writing them.  I don't trade in options anymore.

Some time in early 2003 or late 2002, I started realizing that it was possible to buy stocks off the top % gainers list and make a profit.  I worked that approach and started screening them for fundamental information that would help me identify stocks that might have an increased chance at success.  I credit another friend, Dean W., who pointed me to the Morningstar.com website, where I learned how to use the "5-Yr Restated" financials page.  I have incorporated that particular page and the information therein into my stock selection approach.

Robert A., a broker who had been advising my current stock club, introduced me to Point & Figure charting.  After some time, I started really appreciating this approach to graphing price movement which now gave me the ability to appreciate the bull and bear movements in a stock price. 

I learned the hard way about reinvesting stocks after selling them for losses only to see them lose again that I needed to have some timing device about when to be buying and when to be selling.  I recall reading William O'Neil talking about the M in CANSLIM, the Market to determine when to be buying stocks.  He commented somewhere about how it was important to observe that your own portfolio might be telling you that it was a bad Market when your own stocks were hitting sale points shortly after purchasing them.  

This struck me as quite important in the process.  So I learned to 'sit on my hands' after a sale on a loss, what I call "bad news".

But I needed a signal to be buying.  Logically, if a sale on a loss was a good signal to be avoiding the market, it seemed that some sort of appreciation measurement might also signal me to be buying.  I have used sales at gains to give me that signal.  Initially I sold only 1/4 of my positions at each point, figuring that 1/4 of 4/3 would be 3/3 after a 33% appreciation. But continued 1/4 position sales started eroding the size of my positions.  I reduced this to 1/6th and most recently down to a 1/7th position sale at targeted gains.

3. Percentage of my trading assets using this strategy?  All of them.  All 20 positions.  But I also have some mutual funds in retirement accounts and also employ professionally management to handle other retirement assets.

I am seeking to learn from this account.  Currently I am not willing to assume management over all of my assets.  But this account is completely managed by this approach.

4. My average return?  I have done well.  But I do not know the exact numbers.  And more recently I have been participating on Covestor, where you can check my Covestor Page which is usually linked along the left side of the blog.  Unfortunately, I haven't calculated my return until my participation on Covestor.  I would encourage you to go through the entries and about every month or so I have been writing up my holdings and valuation and gains and losses.   Hopefully, with my Covestor participation, I shall be able to get a better handle on my actual % performance.  This should be helpful to me as well as my readers.

Thanks so much for writing!  I hope that I have responded to your questions in as complete and direct fashion as possible.  Remember that I am an amateur investor, even though I have been investing for many years now, and also am still learning about how to go about this process.  If you have any other questions or comments, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.

Bob 


Posted by bobsadviceforstocks at 1:20 AM CDT | Post Comment | Permalink

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