A Reader Writes "I was wondering about your entry method...."
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 advisors prior to making any investment decisions based on information on this website.

I always enjoy getting email from my readers. It makes everything I do worthwhile knowing that there are people out there who enjoy reading what I am writing! (Remember that first paragraph :), I am truly an amateur investor, so considers these answers as part of a discussion rather than individual advice!)

Anyhow, Eric L. writes:

Bob,

I was wondering about your entry method when taking a position in a stock. From you blog, is it correct to say when taking a new position that you buy the day that the stock reports earnings if the earnings report is favorable? Do you buy at the close or just as soon as you can?

There's a stock that I'm interested in, ESRX, which reported earnings on 10/27, and then it closed up 17%. I was hoping for a pull back today, but it closed up another 2.5%. How do you take a position in a stock like that?

Also, what do you do with a stock that has a great earnings report but sells off sharply? I like CRDN, which also reported earnings on 10/27 and I thought the earnings report was pretty good. Notwithstanding, the stock closed down 15% that day. The next day it recovered partially and closed up 6%. Would you take a position in a stock like that?

Would really appreciate a reply if you can spare a few minutes to answer. By the way, I very much enjoy your blog. I wish I was as capable as you at investing.

Regards,
Eric

First of all thanks for writing and especially thanks for the kind words! I do not think that I do anything magical that anyone else couldn't figure out....so hang in there.

Let me try to answer your questions in order. First of all, I often do purchase stocks when they are announcing great earnings. But that is not the criterion that I use to make a decision on purchasing a stock.

There are two things that I use to make a purchase. First of all, assuming I am under 25 positions, my personal maximum number of holdings, I only am in the "purchase mode" if I have "permission" from my portfolio :). Now you might think that is a peculiar way to approach things. But I use my own portfolio as an indicator on the health of the overall market. That is, I require a sale on "good news" to "entitle" me to purchase a stock. A "good news" sale is a sale of a portion of a holding, that is usually a 1/4 position, of one of the stocks I already own.

Assuming I have made a sale, I often will purchase a stock, in fact usually, that very day. If you read through my blog, you will hear me writing about nickels "burning a hole in my pocket". That is my attempt at humor, explaining that when I have "permission" to make a purchase, I usually have loads of stocks that are candidates for purchase.

What makes a stock "eligible", assuming that I am "entitled" to purchase a new position? As I have reviewed on many different entries, I am looking first of all on the list of top percentage gainers. This is my first screen and I generally purchase a stock the same day it is on that list. This is my way of finding a stock which has the best momentum that particular day when I am purchasing a stock.

It is a bit of an arbitrary rule, but it seems to be working for me! Now about earnings, I have found that many of the stocks that I like are making the top % gainers list on the same day that good earnings reports are issued. That makes a stock attractive to me as well. But the earnings portion of the indicator isn't necessary, just that it made the list.

After that, I check Morningstar for steady revenue/earnings/free cash flow/ and balance sheet. In addition, I require that the latest quarter shows increasing profitability as well as revenue growth over the prior year's results.

You asked about ESRX, and without reviewing that particular stock, you comment on how you observed the stock moving up 17%, you waiting for a pull back, and then the stock moving higher another 2.5%. And you ask me how I would take a position in a stock like that.

I do not believe I can predict future stock movement. I am just not that good ;). However, I wouldn't be looking at ESRX with my peculiar approach, unless the stock made the top % gainers list and I was entitled to make a purchase. Lots of coincidences I guess :). Thus, if I had sold some stock on the day that ESRX was making a big move higher, I would go ahead and purchase some shares that day. If I had my "indicator" the following day, and ESRX wasn't on the list, well I would just pass on that stock.

Will I miss lots of investment this way? Most definitely. But on the other hand, if my approach works, well, that's enough for me!

You probably are shaking your head figuring I am nuts or something :). However, what I am trying so hard to do is to remove my emotions from my trading activity. I want to be a good observer of the market. To listen to my own portfolio. To buy when the buying is good, and to pull in my horns, so to speak, when things are negative. I try to respond to the market, to listen to what the market is telling me, and not to "think" or speculate too much.

You mentioned Ceradyne (CRDN), a stock that I have owned in the past, and that my stock club has also owned. You ask about the stock moving lower 15%. And the next day it going higher 6%. Would I take a position in a stock like that. O.K., back to my same old answer. If I had sold a stock that day on a gain, was below my maximum number of positions, and the stock that day was on the top % gainers list, and it passed the rest of my screens, well yes I would. Hmmm...I hope that answers your question.

In summary, I have removed my own intuition about stocks, except when I have the opportunity of selecting from among several stocks that are available for me to purchase among the top % gainers...then I try to make a guess :). Otherwise, I don't chase stocks, I don't outthink the market, I don't speculate that the stocks are great values, I simply buy stocks that are moving higher and have the characteristics that I feel will help them continue to appreciate in price!

Thanks again for visiting. Please let me know if my explanation is at all helpful to you! My approach is not the only, nor do I claim it is the best approach to buying stock. In fact, it is a bit peculiar even from my view. But it seems to be working and I shall continue to share with all of you my continued experience in its application.

Bob