A Step in the Right Direction

I've covered my foray into penny stocks and 'story' stocks, and suffice it to say that they resulted in the loss of all my capital - I think around $10,000. I didn't know what to do at this point, but I was adding to the list of what not to do.

I can't remember where, but I stumbled across an ad for an investing system called 'The Pitbull Investor.' Although it sounds pretty silly, several features in the ad caught my eye. First of all, they promised my money back if I wasn't satisfied. Of course they could've been lying, but if not I always appreciate a money back guarantee. Secondly, the system was mechanical. That's what I was looking for. I wanted something that took the guesswork out and told me what to buy. Finally, it was based on sound fundamentals. It would filter through the best stocks in the market and then show me which one to buy. The system cost $50, a sum I was willing to lose if this was a hoax - so I put in an order.

It was not a hoax, and in fact it was another step toward the method that I use today. I say another because I believe even my first bonehead failures were a useful part of my trading education. Some folks get everything right the first time, I need to break a few eggs to make an omelet.

The Pitbull Investor arrived - it was a home-made looking, cheaply bound 30 page manuscript. It was however well written and, in my opinion, delivered on it's promise enough to warrant the price. I don't believe that this or any other 100% mechanical system can really work. What makes investing such a fantastic challenge is that it's as much art as science.

To summarize, the Pitbull Investor takes the CAN SLIM method from How To Make Money in Stocks, by William J. O'Neil, and distills it into a mechanical process whereby one scans Investor's Business Daily once a week applying a set of criteria to produce a list of buy candidates. Investor's Business Daily, or IBD, was founded by William J. O'Neil and offers CAN SLIM (and all other) investors an excellent resource. It includes proprietary rating information such as an EPS (Earnings Per Share) and RS (Relative Strength) rating that compare each stock to all other stocks in the market.

So the Pitbull system has the investor look through the paper once a week for a stock making a new 52 week high, having an RS rating of 'x' or better, EPS rating of 'x' or better, average daily volume 'x' or higher, etc... This system really does produce a decent prospecting list, and in fact I use it as one of my screens now and it's produced a potential big winner in SOL for me a couple of weeks ago.

The problem for me at the time was, I still didn't find it to be truly mechanical. For one thing, you still have to know the overall market direction - the system wouldn't tell me that, at least not explicitly. You could gauge the health of the market to some degree by the length of the list of stocks that met all the criteria each week. If the list was short for a number of weeks in a row, chances are the overall market was struggling.

Nonetheless, even if the market was healthy, I couldn't seem to produce consistently positive results. I paper traded the system for some time, but the percentage of stocks that made it through the criteria and stopped out for a loss was still too high. There were some big winners too - but I could find no means to determine which of the stocks selected in the system would succeed, and which would fail.

I communicated with the author and he suggested that the final piece in the puzzle was chart reading - more commonly known as 'technicals.' He recommended that I pick up the source material, 'How To Make Money in Stocks,' and pay particular attention to the section on chart reading. I did, and couldn't make anything of it.

I read and re-read the section on charts, and I'd stair at the charts in my broker's office, and I just couldn't make any sense of them. I couldn't see patterns as they were forming, I couldn't understand what the book was telling me.

At this point, I became frustrated with the whole thing and resigned myself to mutual funds. I became convinced that I could not produce any better returns than the 10% or so that I could expect to get from the funds that mirror the S&P 500 index. So that's where my money went for just about the next 10 years.

-Geoff