February 11, 2015

How I Got Started In The Stock Market

How I Got Started and How I Evolved
The year was 1996 and my mother told me my grandfather was giving my sister and I each $500 as an investment. He had to open the account in his name as I was only 15 at the time. He took me on the appointment to set up this investment account. We drove downtown to meet his stock broker in one of the city's few skyscrapers. The office suite was like one of those scenes from Oliver Stone's 1987 Wallstreet. We went to the stock brokers lush corner office and he and my grandfather talk a little. My grandfather emphasized he wants this to be "for the long-term." They talked a bit more and we were jettisoned to another office where his secretary took our information. My first stock broker has just split my $500 between two mutual funds. The first fund is called The Alliance Bierstein Technology fund and the second is the MFS Emerging Growth fund. Remember this is the mid 90s and the historic stock market gains from internet technology has barely even started. This is not a bad fund to be in at this time. Infact it couldn't have been a better industry.

My grandfather explained to me how I need to keep track of the ups and downs of these funds and you can check it in the newspaper. I didn't realize it at that time but what he was doing was teaching my sister and I a valuable lesson. The lesson was to start nvesting at an early age. I had little interest in these investments at that time. I guess he knew that didn't matter because simply being exposed was all that mattered. My parents sure would never have thought to teach me about investing. It might have even missed me my whole adult life.

Time passed. I checked the statements from time to time and my $500 turns into roughly $1000 in the bubble in 99' and 00.' I had taken some of this money out before this and eventually after the stock market crash of 2000 there wasn't much in the account. The question I asked is how did this happen? How did my broker let my account crash? I didn't know much of anything about stocks and investing but this was obviously a bad thing. So, I took it upon myself to learn some basics about mutual funds. I end up learning that all the stock broker did was pick a mutual fund on a best guess. Whoops! They were load mutual funds with high expense ratios. At this point I figure I can be a better investor than my stock broker. I have access to the same information on the internet and can see the same mutual funds in the newspaper. Little did I know then that brokers are salesmen. There is a fiduciary responsibility they uphold but they and their firm have to make money. 

The stock market has crashed and I'm getting interested in stock picking from reading all about it on the internet and seeing the ebbs and flows of stock and mutual fund prices in the daily newspapers. I'm reading great free beginner articles on this cool site called the Motley Fool. I spent hours and hours a week learning the basics of stocks and investing in companies. I'm learning everything about fundamental analysis on the income statement, balance sheet and cash flow statement. Those Motley Fool articles and website taught me a lot. I started learning about these great stock pickers like Warren Buffett and Peter Lynch. I'm hooked. I buy my first investing book called Beating the Street by Peter Lynch.

In 2001 I bought my first individual stocks. My first stock investments are purely contrarian plays. I see Lucent Technologies and Kmart's stock prices hammered. I understood their businesses and figure these two companies are going to weather the storm and recover. Things got worse before they got better though. Both Lucent and Kmart enter into bankruptcy. My investments become virtually worthless. It turned out later my thesis was good because after Kmart came out of bankruptcy they listed their stock on a new exchange. Kmart's stock went on to be a huge success. Very huge. It was a multi-bagger. The stock went up over 100%. The only problem was I was still holding the worthless shares on the old exchange.

 I started reading books on Warren Buffett. I became a big student of his. I probably read five Buffett books. This led me to Ben Graham and Fisher. I never cared much for reading about Fisher. I definitely preferred Graham. I read Graham's Intelligent Investor a few times. Around this time I took a financial accounting class in college and a couple other business classes which helped cement my understanding of basic analysis. In 2002 I read one of the investing newsletters my grandfather gave me from time to time when I would go over to his place. One of the authors liked this company called Fortune Brands. This powerhouse conglomerate sold alcohol, golf, home and office equipment. The big brands were Jim Beam, Masterlock, Titleist and Swingline staplers. The stock had a low PE and obvious stable growth prospects. I held onto Fortune Brands for over 4 years and the stock did well. The 2006 real estate collapse really hurt their home products. They would eventually spinoff the office products and the liquor business got bought recently. Some other companies I held for long periods of time were International Game Tech and Stryker.

 I called myself a value investor and solely used fundamentals. I figured that was the only way to go. I picked some bad stocks like Movie Gallery and a value trap financial. With Movie Gallery I had a gain at one point that turned into a loss. I guess after some of these bad choices I realized crunching the fundamentals of a company wasn't good enough. When do you sell for a profit? When do you cut a loser? Most value investors have no idea of risk management or managing a position. There can be a level of arrogance in simple value investing. The other question I asked myself is what is good investing? Peter Lynch called it an art and a science. Well if something is as much art as science I'm sorry that is pseudoscience and not predictable. Trading in stock markets has to be moderately formulaic and predictability is important. A lot of reasoning for stock investments is "a story." The story is they did this in the past and this is happening in the future. What about economic externalities? Government intervention? Unforseen bad management? Basic contrarian investing is probably better than most peoples definition of value investing. I'm getting off on bit of a rant so I'll continue were I left off. It was 2007 and I had made what appeared to be great value investments in Movie Gallery and this deep asset value financial. Movie Galleries stock fell apart and the financial didn't move up or down for a year.

I kept scouring the internet looking for new information. In 2007 I came across this blog by Tim Sykes. Tim turned $12,000 into over $1 million by the time he was 21. He had run the top short-biased hedge fund in one of the years he ran the hedge fund. He had just started the blog before I found it and he was re-creating his success by trading a small account of less than $30,000 with the goal of turning it into $1 mil again. He was transparent and posting all of his winners and losers on his blog. He was mostly using technical analysis and was winning roughly 80-90% of his trades. That caught my attention. Before that I was sure technical analysis was worthless. All the mainstream media and investment industry chicanery pointed to investing as the best approach in stocks. Warren Buffett even wrote that paper The Superinvestors of Graham-and-Doddsville!!! And Tweedy Browne's What Has Worked in Investing! What's going on here??

Seeing technical analysis work before me quickly changed my mind. Through Syke's site I stumbled onto another traders site. This guy had a daytrading chatroom. His name was Muddy and his wife Laura traded with him everyday. Also in the chat were some other great traders like Greg Simmons. I started following the chatroom during market hours in the Spring of 2008 in college. They only traded volatile equities. I watched and these people were making money everyday. During the summer I started trading a very small account, got a data feed and decent enough software platform to daytrade. I was using a Tradeking and Zecco brokerage account and DTN IQ Feed run on Quote Tracker. 2008 was an incredible time to be a day trader. During the summer and fall the banks were collapsing along with the market and the VIX was sky high.

Muddy would scan every night for stocks with the highest day range. You type this into Stockfetcher.com "show stocks where the average day range(10) is above 7 percent and close price is between 1 and 10 and volume is above 300000." The top day rangers would be down 30% and up 20% everyday. Very high beta stuff. I would look at my watchlist of 30 stocks at the end of the day and literally all of them would be up or down atleast 10%.  A monkey could have traded those. I'll never forget those stocks like Newcastle NCT, Ambac Financial ABK, General Growth Properties GGP, GFI GFIG, Fortress Investment FIG. As soon as a dayranger went to a new low of the day or red on the day from the previous close it was easy to ride for a gain. The trick is waiting for the momentum. You simply buy when it is going green and short when red. Nine times out of ten if it went green on the day it would keep going green and red would continue red. Just this knowledge was enough for about anyone to trade successfully in late 2008.

Armed with the knowledge that technical analysis worked I read some books on it. I read Darvas' How I made $2,000,000 in the Stock Market and Schwager's Getting Started in Technical Analysis. I read some other basic technical analysis stuff on the internet. Learning from a 30 year veteran trader Muddy was the best thing that could have happened to me. He described his trading style as "like a caveman." I was now more of a trader than an investor. I started another blog on my domain DynamiteStocks.com where I just put up charts and watchlists. I kept StockPursuit.com going with the deep value theme and would find some pretty cool value stocks with good technicals. A lot of these reader reviews on my blog were from around that time. My main focus had shifted to trading but I never abandoned contrarian value investing. You can combine fundamentals and technicals but they are just different. Today I call myself a discretionary momentum trader who also does contrarian and value investing. With fundamental investing in stocks I always prefer small and micro-cap deep asset values.

After all that in 2012 I started a career in sales in financial services with a top 10 financial company. I had to shut down all of my blogs. I got my series 6, 63, life and health insurance licenses. I did that for just over a year. Before I had to shut this blog down I was averaging 50 unique page views a day and bringing in a part-time income from affiliate advertising. I was getting a lot of Google "juice" in the search engine results pages and using search engine optimization very effectively in the discount online brokers niche. My passion for trading and investing led me into a lot of other ventures like working at the financial company and online marketing. I've come a long way since the 1990s and am very excited about the future.