Signs of Progress

My previous discussion of my investing history dealt with the time leading up to and including the November '07 through March '08 correction. I had subscribed to the IBD premium services of Daily Graphs Online and the Custom Screen Wizard. By this time I had some growing confidence in my ability to read charts, and felt it was worth paying $91.50 a month for accurate information to work from. I believed then, and still do, that I will easily recoup this cost if it helps me to improve my investing as I expect it will.

The Custom Screen Wizard can by difficult to use at first. When I tried to put in all the criteria I've read about in 'How to Make Money in Stocks' and see discussed in IBD, it wouldn't return any stocks. This was an important lesson to learn - almost no stock is 'perfect.' If it were that easy, anyone could put this screen together and buy whatever stocks it returned. As I've said before, trading stocks is as much an art as a science.

So, with little experience under my belt, I had to try to weight criteria and decide which to jettison and which to loosen up a bit. I made a strict CAN SLIM screen just in case it returned any hits (so far the only stock it's returned is CLR - well after it made it's big run). I made a few more relaxed screens as well, one that focused on accelerating earnings, one that focused on big earnings growth in the most recent quarter, and one that focused on just the top twenty industry groups.

I also built one screen looser than all the rest, based on the Pitbull system that had introduced me to IBD and CAN SLIM so many years ago (I still have the original Pitbull document I ordered for $50 back then). This screen was targeted mainly at stocks nearing a 52 week high on volume at least 50% higher than average, along with a few basic criteria to return only fundamentally sound companies.

One of the first stocks that came up on several of my screens was (BRKR). This stock had outstanding fundamentals and was a member of the same industry group as (ISRG), a huge winner last year. The group was in the top 40 and I had wanted to stay in the top 20 industry groups, but the fundamentals on (BRKR) and big volume breakout lured me in. I traded the stock several times to a net of zero - I risked a great deal of capital for no return. Looking back on it, the industry group was not necessarily too low, but it was trending downward. (BRKR) ended up lowering guidance due to currency exchange rates and falling apart shortly after I stopped out of it in early April. I had sold half of my position just prior to this, a good move that preserved some gains. I want to remember in the future that it never hurts to take some profits off the table. I'm often hesitant to sell. It's also an excellent reminder that the sell stop is my friend - I stopped out even the remainder of my position, the stock proceeded to quickly drop another 20% or so.

After (BRKR) I resolved myself again to stick with the top groups, and next (MOS) caught my eye. I knew the fertilizer play was extended, but I'd had success with solar and steel last year when they were extended too, and I thought the fertilizer group had at least one more run in it. I thought (MOS) looked the best in the group based on past performance and future earnings estimates. What I was just beginning to play around with was forward PE, and I didn't really apply it when I looked for a fertilizer stock to go with - otherwise I might have chosen to buy (CF) instead of (MOS).

I believe what 'How to Make Money in Stocks' teaches, that I don't want to avoid a stock due to a high PE ratio. However, I think the book understates (or ignores) the value that a forward PE can offer when trying to compare group mates to see which has the best growth prospects. I won't base a buy decision entirely on forward PE, but I do include it in my evaluation.

I had as much as an 18% gain on (MOS) and let it come back, selling for just a 2% gain. Honestly, I just wasn't paying attention to it well enough. It got up and I felt pretty good about it, when it came back I remained a bit too calm on it, until finally it stopped out just above my buy point. This was another good lesson for me. Since I believed this group was extended, I should have placed a stop loss to lock in a 15% gain once I had it. This was not the kind of trade to relax and let ride for the long run.

It was an expensive lesson, but I had reason to be optimistic. Throughout the previous year, my mistakes cost me capital. In 2008, my mistakes were costing me unrealized gains. I felt this was a big step, and my confidence began to grow.

Boy, did I miss the oil trade though.

-Geoff