A New and More Dangerous Direction

January 1, 2014

I’ve proven to my satisfaction that the average investor can make a living from the stock market.

And., I’m not basing that on the outsize gains plain vanilla indexes made during this past year.

DJIA         + 26.5% – best year since 1995

S&P           + 29.6% – best year since 1997

Nasdaq     + 38.3%

I’m thinking that very few individuals achieved these gains because most people were still wary of being 100% invested, including me.

What I did prove is by combining Index investing and Trend Trading,  I can say I made a living from the stock market during 2013.  I was  only 50-60% invested most of the time because I was testing the market mechanics I am now confident in.  I ended the year just a little short of covering my entire household expense budget.

Going forward I have three choices:  1) Invest more -( 100% or zero depending on the trend direction ) ,   or… 2)  Cut back on my household expenses.

The third choice is to take on more risk by investing in equities.  Compared to the mundane market risk of purchasing an Index ETF, investing in equities is comparable to handling poisonous snakes. In my opinion, not for the average investor.  But, based on my education, work and market experience, who says I’m the average investor ?

What I need to do, with you watching, is eliminate the danger from handling poisonous snakes.

I’ve given it quite a bit of thought and here is some of the thinking underpinning how I intend to proceed….

I don’t have sufficient time to wait for opportunities to buy great stocks at great prices.

What I want are equities that are in strong positive motion.as they break from the starting block.

Just as a crocodile’s curiosity  is aroused by activity  at the water’s surface , my hunting –  water hole should be the Market Data section of newspapers which record daily  positive price action.

I’ll find that in daily published lists of ” most up in price ” NYSE and NASDAQ.. Normally five or six symbols are listed.

Then I’ll need to see whether this activity based on conviction or hot air by determining volume compared to 90 day average volume .  And, I’ll need to see some follow through for a few sessions.

WHY a stock is in strong positive motion is only important for determining chances of whether the ride will be long or short duration and how dangerous..

CROX ( Crocs ) is a case in point.  On the 30th CROX  closed at $16.14 ( + 21.08% )..on 10 times normal volume.  Lets go back to October when ZACKs picked CROX bear of the day twice and awarded it a #5 rank ( stay away ). In November, buy out rumors began to circulate.  And now, we learn that Blackstone has purchased 30% of the company and been awarded two Board seats.  The investment by Blackstone is in convertible stock with a nice interest rate and an exercise price below $15. The company has no compelling organic growth story.  This sounds like a ” flip “.

If I consider investing in individual equities similar to handling poisonous snakes, I consider an investment based on arbitrage hopes ( selling the company to a third party or doing a levered buyout ) somewhat similar to handling a black mamba.  I don’t see an organic growth story here.  The story here presents the high possibility of sudden lethal action with no time for me to react.  Not for me. But,  this is the elimination work I’d need to do every day instead of doing a crossword puzzle !  I would need to screen 12 stocks every day for acceptable price volume action.   Then,  follow the top three for several days before investing more of my time in WHY ?  It may mean I’m tracking 15 names at any one time.  That is work.  The question is how rewarding versus the reward of doing nothing.  Example: VTI has just arrived at 502 days ( December 31, 2011 ) without a sell signal.  Total return for 24 months is 55.41%.

To be determined… how much better can I do than the VTI trade with all the additional work and added risk

To be continued…

Richard Maurice Gore

 

 

 

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