Articles from 2008

Growth Investing Books

 There are predominantly two investing styles followed by investors:

  1. Value
  2. Growth

Growth investors invest in companies that are growing at above average growth rate. They are more focused on sales and earnings growth and willing to pay higher premium for such stocks.

 

Growth stock investors are high expectation investors as against value investors who are low expectation investor. The basic assumption behind growth investing is that the market will continue to reward a company growing faster than other companies. the key to success in growth investing is to identify early stage growth company and ride it till it is growing and abandon it before the growth slows down. Often growth investors are called patsies playing the greater fool game.

These are all books related to growth investing from my personal collection. Some of these I have reviewed before, but I will do a fresh review of some of the major books from this list. 

Peter Lynch 

One Up On Wall Street : How To Use What You Already Know To Make Money In The Market

Beating the Street


Learn to Earn: A Beginner's Guide to the Basics of Investing and Business


William O'Neil

HOW TO MAKE MONEY IN STOCKS: A WINNING SYSTEM IN GOOD TIMES OR BAD 


How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition 

The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses 

24 Essential Lessons for Investment Success


Mark Boucher


The Hedge Fund Edge

Jesse Livermore


How to Trade In Stocks 

Richard Love


Superperformance stocks: An investment strategy for the individual investor based on the 4-year political cycle

Nicolas Darvas


How I Made $2,000,000 In The Stock Market 

Frank Cappiello


Frank Cappiello's New Guide to Finding the Next Superstock

Louis Navellier


The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing 


Gary Kaultbaum

The Investor's Edge: How to Empower Yourself for a Lifetime of Investment Decisions


Michael Moe

Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow


Ralph Wanger

Zebra In Lion Country: The Dean Of Small Cap Stocks Explains How To Invest In Small Rapidly Growing Companies



John Boik


Monster Stocks: How They Set Up, Run Up, Top and Make You Money 

How Legendary Traders Made Millions

 

Bullish Bias

There is panic in the air and people are scared. At this stage one should look at things logically and with cool head.
If you were following Market Monitor kind of market timing model, you were anyway out of market during the drop. So you have now luxury to play it cool. Think through your options and the opportunity ahead.
What does MM going green on primary indicator tell you:
When the number of stocks up 25% or more goes below 200, it indicates an extreme oversold level and is a bullish signal. Rallies that start from such extreme levels tend to be very powerful.

So we are currently at a stage which you will seldom see every year. It is extremely rare phenomenon. It tells you there is extremely high probability of a rally and any such rally will be very powerful.

My interpretation of that signal is :

We have high probability of a 20% or more rally starting in October lasting up to January in USA market and a rally of 30 to 40% in the emerging markets.

Does it mean it will start today, no. But we are in a zone from where a rally will start in next couple of days or weeks. Any rally of 20% and lasting 2-3 month will have lot of EP opportunity. As of now there are only 16 stocks up 100% in a year (DT) if you take out ETF. That number will expand to 300 plus in a 20% plus rally.

The most important thing required at this stage is cool mind and optimism.

A bearish bubble is developing

Alcoa is first large company traditionally to announce its earnings. Its earnings will be out on 7 th October. That will be the official start to the earnings season. Once the earning season starts the market will be focused on it.

 

In spite of the overall bearishness there will be companies which will do exceedingly well and market would still focus on them. Also investors would be keen on hearing about future earnings expectations of management. Typically market looks 2-3 quarters ahead and as a result the bad things are already priced in at this level. 

 

One of the temptation currently for most investor is to start believing in all the bearish propaganda. I will take a bet that 80% of the worst thing being predicted by the bears will not come true. You can go back and see history, you will always see that during panics and crisis , mass media and few pundits compete to create scary scenarios. Most of them never come true. 

 

 

By becoming excessively pessimistic you will have cognitive dissonance when market starts rallying. The biggest problem to watch for in analyst or in investors  is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.

Cognitive dissonance, refers to our desire to avoid believing two conflicting things. Whereby the brain attempts to find support for the belief that carries the greater attachment or emotional involvement by finding a way to ignore or discount the conflicting belief.

In the classic study of this characteristic, researchers found that once a person had purchased a particular automobile, they would avoid advertisements for competing models and seek out those for the model purchased, so as to avoid the pain of regret that was bound to follow if they were to realize they had made the wrong decision. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Similarly, people tend to minimize the importance of subsequent information that might call their original decision into question.

The upshot is that we resort to various subconscious mechanisms to defend our existing beliefs, even where the desire to maintain these beliefs has a less-than-rational basis.

Knowing this, how do investors adjust their behaviour to compensate for the tendency to avoid or deny new, conflicting information? The answer is to seek out contrary opinions; to realize that research doesn't stop once a decision is made; to strive to identify mistakes as early as possible and take pride in the ability to do so.
 

 

 

Historically periods of panics and bearishness have been brief. Government, regulators, entrepreneurs, investors, consumers all react to panic and make several adjustment to their behavior and choices. That does not get reflected in most current extreme bearish scenario.

As a  investors/ traders you need a  psychological make up to avoid such cults and be ready for a possibility of bullish scenario.

The art of swing trading

In 100/200, Double Trouble, Modified Double Trouble, and Top 20 Sector methods the concept is same. We want to capture a slice of a pre existing trend. Understanding that concept thoroughly is the key. If you understand that then the questions about stops will have context.


The concept of swing trading is to trade an upward swing in a stock experiencing a strong uptrend as defined by relative strength or sector stregth. Relative strength is a measure of price trend that indicates how a stock is performing relative to other stocks in the market.

The best points of entry in such stocks are not in the middle of an upward trend, but instead on fresh breakouts after a period of weakness or consolidation. The following figure illustrates this concept:

where 10%w represents periods of weakness where the gains in price were less than 10%, while the thick line shows period of more than 10% price gain.The idea of swing trading is to try to trade only the trending periods and avoid the non-trending periods.


A % breakout after 10% or less weakness indicates a probable start of a new upward swing. If your entry is successful, you will have a profitable trade.The problem with entering mid-trend  is that your entry might be too late in a swing, and it may turn in to a non trending period. Also, if you study relative strength, you will find that long-term relative strength (1 year or more) is good. However, short-term relative strength (4-6 weeks) often leads to reversal.
In short, we want to enter a trading vehicle moving 100 miles per hour, but we want to enter it when it slows down a bit before accelerating again.

So where should we put stop. we put it somewhere closer to start of the thick line swing. Two day low is one option. It might be at low of % breakout day. Now how do we exit. Our objective is to capture part of the swing represented by the thick line. We should exit before the swing becomes another consolidation or weakness.

Now when selecting the vehicles, we have selected vehicles with high probability of making 20% plus moves after breakout from such consolidation. We are not buying a breakout on any random stock with % breakout. We are buying on stocks which have in the past exhibited a propensity to behave in certain manner.

So 20% is guideline, it also depends on your entries. So one operates with a target zone of 16 to 20% profit. You have to exit in that zone, while the swing is still going on. Exiting on strength is better. Because swings end with final strength.

Now how many days should it take to get to 20% is next question. Nature of swings are such that consolidation periods are longer and trend periods are shorter (ideal situation). So approximately the stock should make the move of 20% in around two weeks as we are selecting consolidation period of 4 weeks prior to entry. This is based on my experience and study of past trades. But market circumstances affect this. That is why if a trade does not move at intended speed, even if the stock has not hit the target, you should close and replace it.

Bottom line in these methods you should take profit at around 16 to 20% on strength. If you do not take it, in a day or two the stock can pullback or reverse and that profit vanishes. Trying to capture lots of 20% moves as against one big move is what these methods are all about.  These are high frequency methods. These are for traders. not for investors. If you do not enter immediately on signal day, or hesitate to take profit, you should not trade these things.

To trade these things, you also need to keep focused on next breakout and not worry so much about missed opportunities or what might have happened if you have not exited. By using a combination of method, there is a constant flow of new breakouts and everyday, you have to come prepared to look for next 20% opportunity. You might often be wrong, miss good breakouts sometime, sometime judgement might prove wrong, that is all part of the game. All you have to think of is the next breakout.

Market Monitor

  • Rally is running in to some trouble. It might be time to close non performing positions and tighten stops in general.
  • 300 plus down day is 3rd in last 10 days or so.
  • The stocks up 50% in a month readings had been elevated for some time and looks like lot of stocks which ran up fast in last few weeks are now due for reversal or correction.
  • Stuck in a range is the theme of this market for months.
  • At the same time new sectors are breaking out, but as yet there are few signs of wide scale new leadership emerging.

Top 20 Sector breakouts

ABP ACI ALY ARD BBL BQI CIR ENT FCL FDG GSI HAS ICO JRCC KOG KUB MCZ MDTL MMR NGA NOA SGY SOL SUTR TNH UEC USEG WGOV WSCI YZC 

You can look for opportunities in these.

Two possibilities to shortlist candidates:

  • Sort by Efficiency Ratio

(C - C60) / (ABS(C - C1) + ABS(C1 - C2) + ABS(C2 - C3) + ABS(C3 - C4) + ABS(C4 - C5) + ABS(C5 - C6) + ABS(C6 - C7) + ABS(C7 - C8) + ABS(C8 - C9) + ABS(C9 - C10) + ABS(C10 - C11) + ABS(C11 - C12) + ABS(C12 - C13) + ABS(C13 - C14) + ABS(C14 - C15) + ABS(C15 - C16) + ABS(C16 - C17) + ABS(C17 - C18) + ABS(C18 - C19) + ABS(C19 - C20) + ABS(C20 - C21) + ABS(C21 - C22) + ABS(C22 - C23) + ABS(C23 - C24) + ABS(C24 - C25) + ABS(C25 - C26) + ABS(C26 - C27) + ABS(C27 - C28) + ABS(C28 - C29) + ABS(C29 - C30) + ABS(C30 - C31) + ABS(C31 - C32) + ABS(C32 - C33) + ABS(C33 - C34) + ABS(C34 - C35) + ABS(C35 - C36) + ABS(C36 - C37) + ABS(C37 - C38) + ABS(C38 - C39) + ABS(C39 - C40) + ABS(C40 - C41) + ABS(C41 - C42) + ABS(C42 - C43) + ABS(C43 - C44) + ABS(C44 - C45) + ABS(C45 - C46) + ABS(C46 - C47) + ABS(C47 - C48) + ABS(C48 - C49) + ABS(C49 - C50) + ABS(C50 - C51) + ABS(C51 - C52) + ABS(C52 - C53) + ABS(C53 - C54) + ABS(C54 - C55) + ABS(C55 - C56) + ABS(C56 - C57) + ABS(C57 - C58) + ABS(C58 - C59) + ABS(C59 - C60) + 0.001)

  • Sort by 10 day growth offset by one day

100 * (C1 - C11) / C11

and look at stock with below 10% growth in last 10 days.

Sorted by 10 day growth

To further reduce look at distance from 52 week high and volume surge.

Possible candidates to consider using above:

HAS

ARD

NOA

CIR

FDG

You can research them further at Moneycentral to see earnings trends, margin, ROE, news, insider buying, fund holding etc.

Low volume

Market Monitor: Bullish

  • Yet another negative day based on breakout ratio. Rallies are characterised by occasional negative days, but a  string of negative days is not a good sign.
  • There has been steady deterioration of the numbers on 65 days ratio in last few days. While it is still positive it is showing erosion in breadth.
  • All this is accompanied by low volume. Many are reporting yesterday was lowest volume day in this year. Which indicates lack of conviction.
  • As I have said many times before since January, we have been stuck in a range. The worst breadth figures were in January (look at 5 days ratio 1/22/2008) and since then then have fluctuated up and down but never approached those extremes.
  • The range bound action and lack of broad based momentum has reduced the number of profit opportunities in the three basic methods traded.  The average swing length is lower than normal and hence 20% profit in many cases is a problem.

Market Roundup

Market Monitor: Bullish

  • Another  300 plus down day in last 5 days is not a good sign.
  • This market has had tough time breaking out of range since January.
  • The GE news and other world market reaction (Japan, Hongkong, India down big) will test the market. If the market can rebound from these repeated selling bouts , it will show resiliency.
  • The earnings season will continue to be volatile and lighter commitment and more watchful approach.

Economist cover indicator

MTL up 347% in 52 weeks



The steel sector has been leading sector for last 5 years. Many steel stocks were stuck at single digit levels when the 2003 market rally started. Doe 5 years the sector has maintained its leadership.MTL the Russian steel maker is one of the start performer in the sector with a 347% move in last one year.

The top 20 sector stocks continue to attract buyers. Some of the stocks witnessing higher buying pressure from this sector are:

ACGY,Acergy S.A. Ads (Google Yahoo Earnings Chart)
AEZ,American Oil & Gas Inc (Google Yahoo Earnings Chart)
BEXP,Brigham Exploration Co (Google Yahoo Earnings Chart)
CXG,CNX Gas Corp (Google Yahoo Earnings Chart)
CXZ,Crosshair Exploration (Google Yahoo Earnings Chart)
KOG,Kodiak Oil & Gas Corp (Google Yahoo Earnings Chart)
LNG,Cheniere Energy Inc (Google Yahoo Earnings Chart)
MTL,Mechel Steel Group OAO ADS (Google Yahoo Earnings Chart)
NOG,Northern Oil and Gas (Google Yahoo Earnings Chart)
PKD,Parker Drilling Co (Google Yahoo Earnings Chart)
PLLL,Parallel Petroleum Corp (Google Yahoo Earnings Chart)
PRC,Petro Resources Corporation (Google Yahoo Earnings Chart)
RIC,Richmont Mines Inc (Google Yahoo Earnings Chart)
SD,SandRidge Energy (Google Yahoo Earnings Chart)
TMR,Meridian Resource Corp (Google Yahoo Earnings Chart)

Archives

Tags

Categories