Learning How to Invest in Stocks for the Long Haul

by DiamondRN

I am a pharmacist by trade, but I make my living trading stocks. I have been trading stocks for twenty years or so. I traded options and futures, but they are just not my cup of tea. I will share some of the things that I have learned with you. It's not about trying to get rich quick. It's about making some extra money and keeping it.

Why would you buy stocks at a bargain basement sale? Paraphrasing William O'Neil, Editor of Investor's Business Daily, if you buy for price alone you usually get what you pay for--an item that didn't sell at the higher price. You should be the discriminating buyer. For the best results, it would prove better for you to buy your stocks from companies that exhibit the best earnings, performance and quality.

The biggest reason that you don't want to buy stocks at current lows is because of momentum in the wrong direction. Supply and demand for a stock can only be exhibited in its price. A stock is not a true market. It is not a commodity. It is hard to measure underlying value. If the stock you have chosen has just pulled back for some reason, it is just possible that it may keep on pulling back-all the way to zero. I had one of those. It turned out that the CEO had been lying about the profit his company was making.

If the stock that you have just chosen is going higher and continues to do so, it is just possible that it may keep on going higher. Momentum is working for you.

One of the most important maxims of Wall Street is that price follows earnings. Earnings can be and are measured regularly. If a company is exhibiting higher earnings, then its price should follow suit.

The flip side of that coin is that if your target company's earnings are falling, then its price should follow suit also.

Another part of momentum is the notion that a stock must catch the eye of more than one investor in order to have its price go up. There are ways to measure how much interest there is in buying a specific stock and how its earnings compare to other companies. It is information that is easy and inexpensive to obtain.

Stocks have three actions that they can go through that would be of interest to you as an investor. The can go up, they can go down and they can do nothing. If either of the latter two are occurring, you would be better off finding better uses for that money than to be tied up in stocks that are languishing or declining. Remember your target is stocks that are going up and are likely to continue doing so.

Along with the notion of momentum is the physics adage that what goes up must come down. If you are investing in stocks that are barreling along like a freight train, the train must eventually slow down to obtain fuel and let off a couple of passengers, possibly taking on a couple of new passengers as well. At that point, you should sell the stock and take the profit and look around for another freight train to hop on.

If I have kept your interest up to this point, I should show you exactly how and why it is done.

Unless you already have more than enough money to meet your needs forever, you would probably buy stocks in order to make more money. A good gambler who is making a living off of his gambling would never bet all of his equity on a single hand, --unless he knew exactly what cards the opposition had and that he had them beat with no uncertainty. That is usually called cheating.

The point here is that you never want to bet more on an individual stock or position than you can afford to lose. In order to play the game you must have enough money to see the next hand. It is better to make many small but well-chosen decisions, than to risk every thing you have on one decision, whether well chosen or not. There are several schools of thought here, but the general consensus is that you should never risk more than two to five per cent of your nest egg on a given position on a given day.

I used to plot charts of stocks that I was interested in by hand on a daily basis. Since I usually follow twenty or more stocks, it can be tedious. I found out that you can have your charts plotted for you for about a dollar a day. Needless to say, I no longer do charts by hand. The reason that you should chart stocks is so that you can pinpoint the exact day that everything falls into position; and, to establish that the necessary momentum has been achieved. If you wish, you can wait a couple of days to see if you were right, but if you wait too long you may miss out on some of the best profits.

Generally speaking, you can't tell exactly what day a given stock will pick up momentum, but when it has, you definitely want to be on board the next day in order to glean the maximum results-profits--from that information.

The buy signal that you are looking for is for the stock to achieve a price that is higher than it was for a given period of time. If the price has just become higher than it ever has been before then you have a clear-cut signal-buy. If the price is higher than it was ten weeks ago, then you have a very strong buy signal. If the price is higher than it has been for four or more weeks, that is another buy signal, but not quite as strong. The four week high works well in a bull market, but it suffers a little in a sideways market.

OK, so you have made the right decision. You have bought a stock with a stop order that has risen in price. How long do you hang on to it? After several years and plenty of trial and error I have discovered that Russell Sands, who espouses the Turtle System, has the simplest, easy-to-follow rule. He says that you should sell if the closing price drops lower than it was ten days ago. There are other options, but they usually cut into your profits.

I have followed his advice and have been able to achieve a more than forty percent gain on my positions in my cash accounts this year. Even though the market has done well, it hasn't done quite that well. As of today my brokerage accounts contain several positions with unrealized gains of more than thirty percent. None of these positions is older than two months. One of these accounts has more than $100,000 in it. That may sound like a lot of money to some and not much to others. Just a few years ago I was putting $100 a month into mutual funds.

If you follow a system like this you will be making lot of transactions--buys and sells--over a years time, so you should be dealing with a discount broker, who has good paper work, to keep your trading costs down and your tax preparation headaches to a minimum.

I trade on-line with a discount broker for $8.95 a trade. Charles Schwab: Investment and Financial Management Services Their statements are ready for the taxman. I get my end of day stock prices for less than thirty dollars a month. The software to support that system is included in the cost of the data. The stock prices-open, high, low and close-are imported daily after the close. Any new orders are placed before the opening of the market the next day.

The stock candidates are gleaned from the Investors Business Daily from the Friday edition's Your Weekend Review and the daily New Highs and Lows article. I look for stocks that have earnings per share and relative strength ratings of ninety or more. They must also have an accumulation rating of A or B so that can be bought or sold rather easily.

I used to limit my purchases to stocks that cost less than ten dollars per share because of limited funds, and because I felt it was easier for a stock to go from ten dollars to twenty dollars per share than it was for a stock to go from fifty dollars to a hundred dollars per share. In either case, you would double your money, but you can buy five more chances at $10.00 per share than you can at $50.00 per share.

I have bought the more pricey stocks, but I still find that I do best at an initial price range of five to twenty dollars per share. Another reason for keeping your share price down is that you can participate in gains more readily by owning more shares.

I hope that my experience will help you to look at investing a little differently. I want you to be able to see that a stock that is reaching new highs could be offering you a timely and profitable buying opportunity.

DiamondRN