Stock Cents

How do you decide when it is time to buy and sell your stocks?

The first time I really started to question the various strategies behind buying and selling stock came about 8 years ago.

It was in the mid-to-late 1990’s and I had a great job with IBM Global Services that had me flying all around the country playing the character of a Big Blue consultant. I just happened to be in town for a few days when I received a phone call from an entrepreneurial friend of mine who offered me an opportunity to take over the role of Chief Technology Officer for his small Los Angeles based ISP.

The money offered paid much less then what I had been earning with IBM, but for what it did not pay in cash it paid in stock. To make a long story short, I joined the ISP and after a year or so we ended up being acquired by a larger ISP and through a series of multiple M&A’s the stock I owned ended up being traded on the open NASDAQ.

It was a very exciting time for everyone as we were all watching the values of our stocks rise on a daily basis. There was this sense of euphoria in the air as everyone around had become rich overnight. Stories of new start up high tech companies and venture capital money were permeating in everyone’s minds. Companies appeared to be going public left, right and center and somehow we all seemed to be in the day trading business as if we were professional stock brokers.

This was first time in my life when I was forced to pay attention to Wall Street and I really had no clue as to what I was doing. I decided I should get a better understanding of how stocks worked by picking up a few basic books on the topic.

At the height of the dot com boom things were going really well as I started to place buy orders in other emerging areas such as Global Crossing, Ibeam and several other infrastructure and media companies.

For a while things looked really good but the tides started to turn. Interest rates were on the rise and we were seeing many of our dot-com clients closing shop. Panic started to set-in as many of us were checking our online portfolios incessantly.

Months went on to pass and we came to realize we had come to an end of an era. Companies were dropping off NASAQ at a rate faster then many of us could comprehend and I was rushing around trying to figure out what the hell was going on.

I had bigger concerns as well. There were restrictions placed on my ISP stock preventing me from selling it for a few more months. As I was witnessing the bottom falling out of the market all I could do was watch the value of my stock dwindle down to nothing. It was a horrific experience for me and most of my buddies at that time.

This all came to fruition in about 2001. It was around about this time I decided I would not buy another piece of stock until I had a more thorough education.

I took such a nasty beating that it took about a year or so for me to open and discuss my stock trading experience with anyone. I was really quiet about the whole thing until I met this gentleman who was in his mid 80’s and had nearly 50 years experience as a stock broker.

We slowly got to know each other and after talking with him for a few months we really found we could talk for hours. For the first time I found a mentor who could teach me a few things related to buying and selling stocks that I had not learned my self.

Over the course of the next several months this man had showed me his collection of 100’s of books documenting 1000’s of stocks trends going back nearly 50 years. I began to take a real interest again and he was very willing to show me how he analyzed stocks before buying them.

He told me, that it took him several years to really get good at perfecting the method he used and the educational curve was very difficult. But he said the rewards had been amazing for him. He had outperformed everyone in his brokerage firm utilizing these methods and if I was serious, I should pick up a book called Technical Analysis of Stock Trends by Robert Edwards and John Magee.

The ideas behind their methods were based on the fact that an investor could look at past trends of a stock by analyzing the company’s high’s and low’s on its stock charts. This is referred to as Charting.

This method is really famous for folks who have technical minds and are comfortable with the notion of having a methodology they could rely on a daily basis. Once becoming proficient with charting, an investor should be able to look at the stocks performance over its 5 to 10 year span and feel confident with making a proper assessment.

I picked up the book and I won’t lie, the study was quite difficult. It took me hours to understand the most basics of concepts and I completely felt like I had been reading a foreign language.

Another couple of years had passed and in about 2003 I had been talking with a good friend of mine who was a huge Warren Buffett fan. We sat around late one night talking about Technical Trends vs. Warren Buffett’s methods and I was really blown away with what my buddy had learned from following Warren Buffet.

I told him about some stocks I had been eyeing and he asked me straight-out if I was willing to invest a large percentage of my money into it. I sat back and said, “Bro, the wise thing to do is to diversify, everyone knows that”. He said, “Bro, Warrant Buffett, probably the greatest investor of our time says that if you believe a company is going to be good then don’t dick around. Go Big… Only invest your money in companies that you understand and when you find a winner, put a significant percentage of your money into it. If you are not sure, then hang on to your money until you have a clear picture.”

I thought to myself this way of investing was very risky. We spent the remainder of the evening going over the various way Buffet analysis a company before buying stock in it.

Buffett uses a method based on his mentor’s formulas (Benjamin Graham) and it all has to do with the principle of focal investing. Treat buying any stock as if you were planning on buying the whole company.

I decided to pick up a few books on Buffett and Graham and I had learned that their methods for finding the right stocks were completely different to the methods of Technical Analysis. They based their decisions of buying and selling on simple business fundamentals.

They would look at the financial statements; they would study the competitive markets. They would look at the company’s management team and they would only buy stock in a company for the long term.

For them, it makes no difference if they waited a month or a year buy stocks because they know when they do buy it’s for the long term.

They don’t care about fancy charts and mathematical gobbledygook. They only buy stock in companies who operate in industries they understand and their long term future looks good.

In one of Buffetts books it discusses 10 principles to follow when evaluating a company and there is one principle I have taken to heart. Never invest in anything unless you’re willing to commit to it for the long term.

So now I have a basic understanding of two investment methods to follow and I am eager to start perfecting one of them. I figure it will take me a bit of time to really become proficient so I want to be sure I choose the right one.

Is Technical Analysis the way to go or follow Buffett’s methods and study the fundamentals?

This entry was posted on Sunday, June 4th, 2006 at 4:02 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.