No Easy Way Out

As I began studying and preparing myself to trade stocks, I created an account at Charles Schwab. They were recommended to me and have given my great service and fair commission prices. In their research section they included a variety of ratings services for stocks, one of which was Market Edge. It caught my eye and I took a closer look.

This service gives Avoid, Neutral, or Long rankings on stocks based on their technical action. I looked at their performance record and it was good. They had a trial deal and special price for Schwab customers, so I decided to look into it further. I still figured if I had some help on the technical end of things I could make the CAN SLIM system work for me.

Market Edge provides a market posture which the designate as 'bullish' or 'bearish' and then ranks around 2,000 individual stocks, I believe. They have a lot of services which I won't bother to go into. I began looking at the rankings for stocks that had done well recently and Market Edge seemed to upgrade them to Long before the CAN SLIM buy point. This seemed to be what I was looking for.

I decided that each night I would go through the Market Edge upgrade list, find all of the stocks upgraded to Long, and evaluate the fundamentals of each one. I would let the service determine if the timing was right for the buy, and I'd determine if the fundamentals met the CAN SLIM criteria.

It was only a day or two before I came up with two stocks that I thought were worth buying: (HOS) and (RIMM). (HOS) is Hornbeck Offshore Services and (RIMM) is Research in Motion. At that time, I didn't even know that (RIMM) was the maker of the Blackberry. I planned to buy one of the two stocks, and thought that (HOS) would be a better choice (I can't remember why). However, (RIMM) met every CAN SLIM criteria perfectly, and so I ended up buying both of them on Monday, May 21st.

As it turned out, (RIMM) ended up being a model for how I should try to invest in the future. At the time I bought it, it was a leading stock in a leading industry group. The earnings and sales growth were outstanding and had been accelerating for six quarters (at the time I'm writing this the streak is eight quarters and counting). The ROE was huge, institutions loved the stock, and consumers loved the product - even referring to it as the 'Crackberry.' I didn't understand at the time how all of these factors converged to make this exactly the kind of stock the CAN SLIM method is meant to lead me to.

I continued checking the Market Edge upgrade list nightly and in a couple of weeks found a stock I thought had more potential than (HOS). This stock was (ICE), or Intercontinental Exchange, an electronic futures trading platform. It had been a big winner the year before, still had great numbers but there were some technical reasons I could've avoided it. Still, I sold (HOS) and bought (ICE). The day I did this (ICE) went up about 5% and I thought I was a prodigy.

It is hard now to describe my emotional state when I began trading (mainly because it's embarrassing). I've always been more emotional than I would like, and with the trading I would just get on top of the world with a 5% pop and then stress out over a drop of the same amount. I have to battle against this still, though I'm far more even-keeled today than I was a year ago.

Having no frame of reference I just didn't know what a stock was supposed to do once I bought it. I didn't know if I should give it two weeks or ten to take off, and really I didn't even know what 'take off' was. I stopped out on (ICE) in June for a loss and went on a frenetic tear buying one stock after another, the great majority of which I stopped out on for losses. Really the only thing that saved me losing my entire capital in 2007 is the 8% stop loss rule.

During this time I still held (RIMM) which had a huge earnings beat and went up 20% in one day. I couldn't believe it. Again, I thought I was destined for greatness. I had added on to my initial buy and had a good position in the stock.

My coworker kept asking my why I was buying more stocks. I didn't understand the question at all. He said I had found a winner in (RIMM), why not just wait to add more shares to that position? The question made no sense to me - the way I saw it was if I had cash, I should be looking to buy stock. He knew what I didn't - the first rule of investing is don't lose money and it's hard work to find a great stock. Once you do, it's wisest not to expose yourself to other, unproven stocks, but instead to ride that winner for all she's worth.

I had no patience and little discipline. I ended up banking 30% gains in (RIMM) in just a few months, yet finishing up 2007 down almost 19%. I did have some other winners, (OTEX) was big for me, but I squandered any profits with many other poor choices.

I tried ultra-short ETF's when I thought the market was going down, I jumped on almost any stock that met my criteria when I thought it was going up. I think I made some 70 trades in 6 months. As I lost money in each trade, I became desperate to find the next big winner. I was terrified that I would pass on a stock and it would go on to big gains. I should've been afraid of losing more money, which is exactly what would happen.

The way I was doing things was not working, and I didn't have the discipline to pull out and re-evaluate - something critical for traders to do if they hit a slump. It took the start of a new year and a bull market to give me pause and perspective.

-Geoff