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“You cannot go broke taking a profit.”
1. 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.
7. 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.
I always read them in industry groups.
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.
For the first time in my stock-market career I refused to take a quick profit.
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.
I could be lucky once, maybe twice—but not constantly.
Yet I assumed from its continuing rise and high volume that some people knew a lot more about it than I did.
the purely technical approach to the market was sound. It meant that if I studied price action and volume, discarding all other factors, I could get positive results.
I decided not to concern myself with the reasons behind a rise. I figured that if some fundamental change for the better takes place in the life of a company, this soon shows up in the rising price and volume of its stock, because many people are anxious to buy it.
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.
Stocks did not fly like balloons in any direction. As if attracted by a magnet, they had a defined upward or downward trend, which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call “boxes”. 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.
No bouncing, no movement, meant it was not a lively stock. And if it were not a lively stock I was not interested in it because that meant it would probably not rise dynamically.
the movement I was constantly watching for was an upward thrust toward the next box. If this occurred I bought the stock.
there is no such thing as cannot in the market. Any stock can do anything.
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.
I already knew that I would be wrong half of the time. Why not accept my mistakes realistically and sell immediately at a small loss? If I bought a stock at 25, why not at the same time order the stock to be sold if it returned below 24?
I decided to give “on-stop” orders to buy at a certain figure with an automatic “stop-loss” order on them in case the stock went down. This way, I figured, I would never sleep with a loss.
I knew that many times I would be “stopped out” for the sake of a point just to see my stock climb up immediately after. But I realized that this was not so important as stopping the big losses. Besides, I could always buy back the stock—by paying a higher price.
my most difficult problem was to discipline myself not to sell a rising stock too quickly.
hold on to a rising stock but, at the same time, keep raising my stop-loss order parallel with its rise. I would keep it at such a distance that a meaningless swing in the price would not touch it off. If, however, the stock really turned around and began to drop, I would be sold out immediately. This way the market would never be able to get more than a fraction of my profits away.
I realized that I would not be able to sell at the top.
When to sell then? Why, when the boxes started to go into reverse! When the pyramids started to tumble downwards, that was the time to close the show and sell out. My trailing stop-loss, which I moved up behind the rising price of the stock, should take care of this automatically.
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
There was bound to be a lot of guesswork in the operation. My estimate that I would be right half of the time could be optimistic. But at last I saw my problem more clearly than ever. I knew that I had to adopt a cold, unemotional attitude toward stocks; that I must not fall in love with them when they rose and I must not get angry when they fell; that there are no such animals as good or bad stocks. There are only rising and falling stocks—and I should hold the rising ones and sell those that fall.
My selections were high-volume stocks anyway
I could not hear what people said, but I could see what they did.
Sometimes some of my stocks made inexplicable moves, which had no relation to their previous behavior.
the inexplicable moves in my stocks usually coincided with some violent move in the general market.
To try to fit the market into a rigid pattern was a mistake. It seemed quite impossible to do it. Each stock behaved differently. There was no such thing as a mechanical pattern.
keep watching the Dow-Jones Industrial Average, but only in order to determine whether I was in a strong or a weak market. This I did because I realized that a general market cycle influences almost every stock. The main cycles like a bear or a bull market usually creep into the majority of them.
I knew now that the word “value” cannot be used in relation to stocks. The value of a stock is its quoted price. This in turn is entirely dependent on supply and demand.
it was impossible for me to assess great historical turning points in the market when they began to happen. What fascinated me, as Wall Street prices continued to fall, was the gradual realization that my system of ducking out quickly with my stop-losses made such an assessment unnecessary.
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.
Certain stocks began to resist the downward trend. They still fell, but while the majority dropped easily, following the mood of the general market, these stocks gave ground grudgingly. I could almost feel their reluctance.
the majority of these were companies whose earnings trends pointed sharply upward. The conclusion was obvious: capital was flowing into these stocks, even in a bad market. This capital was following earning improvements as a dog follows a scent.
while there may be many reasons behind any stock movement, I would look only for one: improving earning power or anticipation of it. To do that, I would marry my technical approach to the fundamental one. 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.
On the general theory of the buoyant future, stocks, which promise dynamic future development, should behave better than others. A sound stock, which is in tune with the jet age, might be worth 20 times as much in 20 years.
I knew that in this kind of stock there were definite fashions just as there are in women’s clothes, and if I wanted to be successful it was important to search for fashionable stocks.
What I had to do was to find stocks that would be hoisted up because they stirred people’s imagination for the future.
All a company report and balance sheet can tell you is the past and the present. They cannot tell the future.
I was constantly searching for stocks that would climb into the stratosphere because of the vision of their future.
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.
I diligently attempted to find these expensive-but-cheap, high-velocity stocks. I searched constantly for them because I felt sure that they would move up at the first sign of a better market.
I closely observed their price action, and I was on the alert for any unusual activity as well. I had not forgotten the importance of volume.
it was cheaper to invest $10,000 in a $100 stock than in a $10 stock.
my mistakes would be much less costly if I bought higher-priced stocks.
Bear markets were always followed by bull markets. The educated art was to watch for the first signs, be sure they were real, and buy in before everyone else noticed and the prices began to rise too high.
