Stock Buying Strategy (图)

Stock Buying Strategy

            It was just recently that I realized there was a big mistake in my stock buying strategy.  After reading James Cramer’s “Real Money” twice, it hit me about the “buying low for stocks for investment” and “never confuse investment with trading”.  I have noticed that my buying points for “hot” stocks are always too high in the short term.  In other words, there is a confliction in my stock trading that I confuse trading with investment for some stocks.  Based on my stock picking method which is modified from O’Neil’s method, the stocks I picked are usually investments.  These are usually good companies in hot sectors, such as basic materials, mineral stocks now.  In this case, I should buy them when they are correcting, and should buy them stepwise instead of all at once.  Based on O’Neil’s method, I should put down money within 5% of the breakout point.  But based on Cramer, I should start to buy them at the bottom of the cups, and cumulate them on the right side of the cup. 

            So which is the better buying strategy?  I really don’t know.  Based on my pass experience, I think that Cramer’s way makes more sense.  If I am looking for a medium to long term capital appreciation (one month and beyond), buying on the breakouts may not be the best way if I am certain that these hot stocks are going to be hot for at least a couple of years.  Besides, it is very difficult to execute O’Neil’s buying strategy unless I set up a limit buy order on them ahead of times on the stock candidates.  So far, I seldom do that.

            But sometimes, some hot stocks will not correct for quite a while, nor will it form any cup patterns.  IIIN is a typical case.  I jumped in at $37 on its uptrend and ride it all the way to high 50s, which only took 5 weeks.  It topped at $60 and have been correcting back to $54.  If I had waited for hot stocks like IIIN for any correction, I would have missed this run.  IIIN almost never stops until it hits $50 and $60.

            IIIN would not fit O’Neil’s criteria: its revenue score is only 33 instead of 80 or above.  I found it on 02/28/20006 when I did the top 5 in top group search.  Metal Production & Fabrication Group ranks #6 at that time and IIIN is ranked #5 in that group.  It disappears from that top 5 list later, probably due to its low earning score.  This maybe the reason for its super strong uptrend: it did not show up in IBD’s screen.  Its fundamentals are not that good based on IBD’s rating but its stock abstractness is always A+.  Looking at what IIIN does in Yahoo/Finance, it is one of the largest steel wire reinforcing producers in US.  The steel wires certainly has a good use when you consider Kertrina and Federal $$ using for the building projects in New Orlean and other places.  I am planning to cumulate it back when its correction hit some bottom.

            RAIL, on the other hand, was a perfect execution using O’Neil’s method.  I bought it at $50.80 on 1/11/2006 when it broke out $50.27 at 2x volume.  It went up in a nice up trend and hit $70 at early March.  I sold it at $64 on 04/05/2006 when it actually corrects.  It is still at the correction phase.  But my other RAIL purchase on 12/09/2005 at $48.98 is not good at all since it is neither O’Neil nor Cramer’s method, even though it works out alright since railcar business is definitely on the bull market.  At a good bull market, I can get away with my poorly executed buying.