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I did not know it but I was already coming up against one of the great pitfalls of the small operator—the almost insoluble problem of when to enter the market. These sudden drops immediately after he has invested his money are one of the most mystifying phenomena facing the amateur. It took me years to realize that when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling. Simultaneously with the withdrawal of the inside-track money, the small sucker money is coming in. They are not
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I continued to trade constantly. I telephoned my broker sometimes twenty times a day. If I did not conduct at least one transaction a day I did not feel I was fulfilling my role in the market. If I saw a new stock I wanted to have it. I reached out for fresh stocks like a child for new toys.
I should not follow advisory services. They are not infallible, either in Canada or on Wall Street. 2.I should be cautious with brokers’ advice. They can be wrong. 3.I should ignore Wall Street sayings, no matter how ancient and revered. 4.I should not trade “over the counter"—only in listed stocks where there is always a buyer when I want to sell. 5.I should not listen to rumors, no matter how well founded they may appear. 6.The fundamental approach worked better for me than gambling. I should study it.
I should rather hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.
thumbed through lists like: Stocks with top quality rating Stocks the experts like Stocks selling below book value Stocks with strong cash position Stocks that have never cut their dividend
High Grade stocks whose dividend payments are considered relatively sure are rated: AAA—Safest AA—Safe A—Sound Investment Merit stocks that usually pay dividends: BBB—Best of group BB—Good B—Fair Lesser Grade stocks, paying dividends but future not sure: CCC—Best of group CC—Fair dividend prospects C—Slight dividend prospects Lowest Grade stocks: DDD—No dividend prospects DD—Slight apparent value D—No apparent value
—like herds, indeed—form groups according to the industry they represent and that stocks belonging to the same industry have the tendency to move together in the market, either up or down.
Whenever a stock started to behave better than the market generally I immediately looked at the behavior of its brothers— stocks of the same industry group. If I found that its brothers also behaved well, I looked for the head of the family—the stock that was acting best, the leader. I figured if I could not make money with the leader, I would certainly not make money with the others.
What, I asked myself, was the value of examining company reports, studying the industry outlook, the ratings, the price-earnings ratios? The stock that saved me from disaster was one about which I knew nothing. I picked it for one reason only— it seemed to be rising.
It meant that if I studied price action and volume, discarding all other factors, I could get positive results.
In the same way, I decided that if a usually inactive stock suddenly became active I would consider this unusual, and if it also advanced in price I would buy it. I would assume that somewhere behind the out-of-the-ordinary movement there was a group who had some good information. By buying the stock I would become their silent partner.
They would oscillate fairly consistently between a low and a high point. The area, which enclosed this up-and-down movement, represented the box or frame. These boxes began to exist very clearly for me.
Take a stock, which was within the 45/50box. It could bounce between those figures as often as it liked and I would still consider buying it. If, however, it fell to 44½, I eliminated it as a possibility. Why? Because anything below 45 meant it was falling back into a lower box and this was all wrong—I wanted it only if it was moving into a higher box. I found that a stock sometimes stayed for weeks in one box. I did not care how long it stayed in its box as long as it did and did not fall below the lower frame figure.
This experience, as I see it, was an important turning point of my stock-market career. 2.It was at this point that I finally realized that 3.There is no sure thing in the market - I was bound to be wrong half of the time. 4.I must accept this fact and readjust myself accordingly - my pride and ego would have to be subdued. 5.I must become an impartial diagnostician, who does not identify himself with any theory or stock. 6.I cannot merely take chances. First, I have to reduce my risks as far as humanly possible.
my objectives in the stock market: 1.Right stocks 2.Right timing 3.Small losses 4.Big profits I examined my weapons: 1.Price and volume 2.Box theory 3.Automatic buy-order 4.Stop-loss sell-order
As my broker and I both knew which stocks we were quoting, we only used the first letter of the name of each stock I owned. But because these were not the normal stock-market abbreviations which are known all over the world, these constant mysterious letter-figure cables upset and bothered post-office employees almost everywhere. Before they handed my first cables to me, I had to give them a detailed explanation of what they contained. They obviously thought I must be a secret agent. I was constantly confronted with this suspicion, especially in the Far East.
I also decided not to be influenced by the tax problem. Many people hold on to stocks for six months to obtain long-term capital gain. This I considered dangerous. I might lose money by holding on to a falling stock just for tax reasons. I decided I would trade in the market by doing the right thing first— follow what a stock’s behavior commands and care about taxes later.
The period that followed I spent like a runner limbering up for the race. Week after week, while I did not have any stock and the market was in a steady downtrend, I followed the quotations in Barron’s. I tried to detect those stocks that resisted the decline. I reasoned that if they could swim against the stream, they were the ones that would advance most rapidly when the current changed.
I would select stocks on their technical action in the market, but I would only buy them when I could give improving earning power as my fundamental reason for doing so.
As I flew around the world, I was constantly searching for stocks that would climb into the stratosphere because of the vision of their future. This attitude was a preparation for what I suppose you could call high-territory trading. I looked for stocks that I thought could make new highs and I decided to give them my full attention when they had climbed on to the launching pad and were preparing to rocket up. Now these stocks would be more expensive than ever before and so they would look too dear to the uninitiated. But they could become dearer. I made up my mind to buy high and sell higher.
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The truth was that as my pocket had strengthened, my head had weakened. I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market. It was not long before I received the bitter lesson the market always hands out to those who think they can carelessly master it.
As I followed the crowd I also started to act like this. Instead of being a lone wolf, I became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for me to say “no” when everybody around me was saying “yes". I got scared when they got scared. I became hopeful when they were hopeful.
I BOUGHT AT THE TOP As Soon as I bought The stock started to drop I Became frightened AND SOLD AT THE BOTTOM As soon as I sold The stock started to rise I became greedy AND BOUGHT AT THE TOP
I bought stocks and sold them a few hours later. I knew that if I bought and sold the same day, I was permitted to operate with as little as 2 5 % margin in my account. Instead of profiting from this, I succeeded in losing several thousand dollars each time. This is how I assured myself of disaster:
