A New Beginning

When I last left off the story of our intrepid investor, I was flailing about like a drowning man looking for a life preserver. I was down almost 19% in just six months, and desperate for a winning stock that would get me even. I was using a service designed to provide buy and sell signals based technicals, and if the fundamentals met CAN SLIM criteria I would consider buying.

It wasn't working for me.

Looking back on my trading those first six months, it's embarrassing. I read my trade logs and I want to go back in time and tell myself to calm down. I had no patience, and little discipline. Fortunately, I never violated the 8% stop loss rule, and that prevented me from really ruining myself.

I can clearly remember the sick feeling I had with each new loss. I'd dug the hole a little deeper, and would now need an even bigger winner to climb back out. That was my mindset. I think I probably was trading like a gambler who gets behind - and we all know how that story ends.

However, at some point just before the brief rally of November last year, a small bit of sanity began to emerge. As emotional as I was about my situation, I forced myself to evaluate my trades and think about what I was doing wrong. I tried to recall what I'd read from the book's by Livermore and Darvas, as they were a bit more simplistic than How to Make Money in Stocks. In particular I looked at Livermore's 'top down' approach. I thought maybe I was making things too complicated, and I decided to start reviewing the best industry groups and looking for the best stocks in these groups that were near a buy point.

I believe this was a key step in my investing career. I previously made a habit of 'making excuses' for stocks - I would forgive their flaws and try to find a reason I should by them. However, I had now suffered enough losses that all stocks began to look bad to me. Instead of opportunities for gains, every stock looked like an opportunity for a loss. I was skeptical of them all. If I was going to put my money on the line with a stock now, it had to have a pedigree. I wanted it to prove to me why I should risk my hard earned capital on it. I think this is the way it should be.

My perusal of the top industry groups led me to two stocks: (STP) and (MTL). The former was a solar power company that had made a nice run, the latter a vertically integrated Russian steel company that had also been on a tear. Both were near a buy point, both were top ranked in their groups, and both industry groups were in the top five out of 197.

As simple as this was, it worked fairly well. Despite the fact that both stocks had already had large advances and the rally was a difficult one, I made a small profit. For me at that time a small profit was a big deal. It confirmed for me that no matter what, I should look for and buy only the very best stocks - no matter how long it took them to come along.

The November rally failed fairly quickly, and I tried some shorting a few times as the market corrected. If I ever short again, it won't be for a very long time. It is much more difficult that being long a rally, and with my lack of experience not worth the risk.

We were in this correction as the New Year came, and this yielded the next step in my progress. I keep very detailed records of my trading activity and my returns. I use Google Docs and would recommend it for anyone. I have access to my records from any Internet connected PC, and it's free. For tax reasons and clarity I decided to 'retire' my 2007 trading activity, so I copied the spreadsheet to a new tab for that year, then took the original tab and made it my overall return. Finally, I created another new tab for 2008, and put in the starting capital numbers as the ending capital from 2007. Obviously, this meant my returns were zero.

That zero looked great. No negative, just a zero. If I didn't do anything, didn't buy or sell, I would not be negative. I didn't have to catch up. I wasn't behind. I was even - zero. My mind shift was tangible. I was going to preserve this capital - 2008 would not be a repeat of 2007. Patience and discipline.

As the correction continued, I spent more time evaluating my past trading behavior and began reading 'The Battle for Investment Survival' by Gerald Loeb. I find this book slow going, and I still haven't finished it. I cancelled my subscription to the Market Edge service, and got a subscription to Daily Graphs Online and Custom Screen Wizard - both premium services from O'Neil + Company. They are expensive - I pay $91.50 a month for them - but I could not find consistent and accurate financial information for free on the Internet, and I believed if they improved my investing the tools would easily pay for themselves. I felt more confident reading charts by now, and I believed in my ability to learn and grow more than any recommendation service.

I began building different screens and tweaking them. I didn't know when a new rally would come along, but I wanted to be ready. I had a nervous anticipation - now that the fog had cleared I wondered if I would see the new industry groups moving in strength, or if I would miss them. I wondered if my screens were too tight, or too loose. I listened to a series of interviews William O'Neil did on the Tiger Financial News Network, took notes, and tweaked my screens based on what he said. Just nine days after his last interview on the show, when no one was expecting it, Bear Stearns nearly collapsed and the market found it's bottom.

It was time to see if I'd really learned anything.

-Geoff