Technical Difficulties

A couple days ago I wrote about how the Pitbull Investor system I purchased in the early Nineties led me to the book 'How to Make Money in Stocks,' by William J. O'Neil. I want to cover that some more today and reflect on how I viewed the content the first time I read it.

I think my investing methodology early on was not unlike most folks - I felt I needed to find an 'under-valued' stock, buy it 'cheap' and wait for the fireworks. O'Neil's book, 'How to Make Money in Stocks,' flies in the face of this so-called 'convential wisdom.' It outlines a method called 'CAN SLIM' - I described it in my post two days ago - which is an acronym for some basic investing principles. The method goes beyond what fits neatly in the acronym, nonetheless it works well as a simple name for the system.

The method was developed from a study of winning stocks from the past, and much of it made obvious sense - demanding stocks have outstanding earnings, for instance. All things being equal, earnings (present or future) are what drives a stock's price higher. It stands to reason that bigger earnings growth would drive bigger price appreciation.

Another one of the key tenets of CAN SLIM is technical stock action, particularly buying at the right time. This is usually at or near a new 52 week price high, something that seems counter-intuitive to many investors who feel you need to buy low and sell high. When you think about it logically though, how does a stock that's traded at a high of $50 double? Making new price highs all the way up - that's how. Stocks making new highs tend to go higher, and those making new lows tend to go lower.

The CAN SLIM method teaches an investor to find a stock that is not only fundamentally superior to most others, but also has strong institutional sponsorship. Missing either of these traits (and of course there are more than just these two) would make it very difficult for a stock to perform well.

I was quickly on board with the fundamental philosophy that How to Make Money in Stocks outlined, and was anxious to begin trying to apply this method. The problem was I couldn't understand how to determine market direction or read a stock chart. Direction of the overall market is the single most important factor in trading stocks, and one has to be able to read a stock's chart to know if it's formed a healthy correction and is near a buy point.

I read the chapter on market direction and paged through the section on stock charts over and over and I just couldn't understand the terms or see the patterns in the charts. I didn't understand a 'distribution day,' nor what the first day of a rally attempt meant, nor numerous other terms that were used. It was like a foreign language to me.

As much as I liked the CAN SLIM approach, I eventually decided that I could not learn the technical side and therefore I could not apply it to good use. I think this was around 1997, so for 10 years I resigned myself that mutual funds were the best option for me. Every once in awhile I would get the Pitbull Investor back out and take another crack at paper trading it, but I couldn't produce any positive results, so I'd give up again stick with the mutual funds. This was hard to do because it was a dream of mine to make a living investing, but I just decided I wasn't capable.

I guess I never really surrendered though, because here I am 10 years later, committed to becoming a full time speculator.

-Geoff