Market Experience of a Na�ve Stock Operator

Sometime in the third quarter of 1997, someone told me that I should play the stock market. Knowing nothing about the stock market, I turned to some colleagues to seem to know a lot about it. Following their advice, I opened an account with a stock brokerage company. Well, up to that point it was simple enough. But what should do I do next? So I go to my knowledgeable colleague of mine again. But now he says nothing. Hmm... The very person who was interested in opening an account for me, is completely indifferent now.

So I stop pestering them. I understand why they would guard their trade secret. Oh well, that's life.

So I start watching the market myself. I go to Yahoo finance to learn the market. But I see at the top, Dow Jones, NASDAQ, Amex etc followed by volume. Now what are these Dow Jones, NASDAQ etc? Are they stock or bond? And what is volume? All I knew about volume was something related to space. So I start to do research. I learn that Dow Jones, NASDAQ are just indices. You can not buy or sell them, at least in the beginning.

So I learn how to get quotes, how to put an order to buy or sell stocks: market order, limit order, stops order etc. I learn that a market order is an order to buy a stock such that , when one buys a stock at some price, then it immediately goes down. Then what is a limit order? It is an order to buy or sell stocks where one can specify a price. This sounds well and good, but actually what happens is the following: one either puts an order to buy at a price so low that the order never gets filled, or if one puts a reasonable price, it gets filled but when one check one's account, the stock is trading at least five points below. And what about stop orders? It is an order one is supposed to use to lock in profit. Sounds wonderful! Here is how it works. Let's say you bought a stock at $40 a share, and now it is trading at $50 a share. So you put a stop order to sell at $45. And you are happy that you will at least make $5 a share profit for this one. Well, one day the stock opens at $35, reacting to some bad news. Your order gets immediately filled. Later in the day, however, one institutional buyer, some hotshot fund manager of Janus super growth fund family, comes in, and the stock closes at $47, down only $3 for the day. So in stead of making $10/share profit, you are left with a humiliating loss of $5/share. So one can see putting a market order is uncertain, limit orders difficult to execute, and stop orders are completely beyond your control. There is yet another type of order called stop-limit order. Description of these kinds of orders is simple: just combine the characteristics of limit order as well as stop order.

At this point I start learning about the market in depth. I learn that there are growth stocks, and there are value stocks. I could understand the growth stocks easily, the stock of the companies, which are growing at some good rate and have good prospect in future. And value stocks? What about value stocks? These stocks are valuable because they are not growing any more and have no prospect in future? Hmm..

Anyway, I keep on learning. P/E ratio, PEG and YPEG, market cap, book value, uptick, downtick, short interest, put/call ratio and what not. At this point, someone suggested I start watching CNBC also. So I turned on CNBC one day, and I saw Maria Bartiromo (Or Maria Bartaromo?), speaking from the NYSE at the top of her voice. So I thought stock market might not be so boring after all. I also started listening to the guests. One day one analyst came, and he said instead of studying the individual stocks, one should study the economy and try to gauge the overall market. So I start studying the economic numbers, PPI, CPI, ECI, unemployment, wages, etc. So one day the unemployment numbers comes out, it was lowest in fifty years! I thought, wow! This got to be a good thing for the market. Wrong! Stocks tumbled big time! Later in the day, I learn from some analyst that this kind of stock market action was expected because what is good for the main street is not good for Wall Street. OK - I guess that makes sense. So I learn few more things. I learn that stocks go up because of good earnings. According to Peter Lynch, earning drives the market; it is not that complicated. Well, one morning one company announced super good earnings for the year, and the stock went down! But the same analyst came on to CNBC and said the good news was already priced in to the stock, so when the news actually came, the stock went down due to profit taking. According to him, this was classic case of buy the rumor, sell the news. And so it goes.

As I was learning various things, watching CNBC, surfing the web, surfing yahoo finance, reading motley fool etc, I started placing some trades also. But to my horror, all stocks immediately goes down after I buy! I would watch a stock for a while and see it going up down, between say 30 and 40. So I tell myself why don't I buy when it touches 30, and then sell at 40? It had never betrayed this trading range, I have been watching for two weeks! Little did I know. As soon as I buy the stock, it starts falling prey to gravity. That day it closes at 28. What do I do now? Do I sell it and incur a $2 loss? NO! In stead, I put a limit order to sell at 30. I want to just break even this time. But guess, what happens? Next day it opens at 27, and drift lowers the whole day, finishes at 26 1/8. Now it looks like the stock has never seen 40 in its life. So I say to myself, I want to hold this one a little longer. One day it must come back to 40. Seven days later (which felt like an eternity to me), the stock close at 20 5/8. It seems like it is ready to fall into teens. At this point, my patience breaks, and I sell it for almost 10 point loss. I console myself, well it will go 10, then I will but it, and sell it at 20. So I will break even after all. The very next day, the stock gets upgraded by an analyst, and it rallies like there is no tomorrow. It goes up for three straight sessions and close at 29 � for the week. At this point someone like you may be thinking, I must have bought this stock at that price. No I didn't. I can not say I was not tempted. But I got fed up with the stock and had moved on to some other stock equally defiant.

My losing streaks continued! It was interrupted by a few winning trades, but they were few and far between. So I will be losing...losing..losing..gaining...losin.. losin...losin...losin...losing....losing...gaining..losing.

At this point I start getting worried. As a small investor, what do I do? How will I get insight about a company, or about the market in general? Or are stocks not for me at all? Should I just invest in mutual funds and forget about stocks? Oh well where is the fun in that! No, I was not ready to bite the bullet yet. I thought funds are for old people and retirement accounts. I still thought stock market has a big reward in store for me. If George Soros, William O Neil can do it, why should not I be able to do it. Moreover, if I play the market, I can watch CNBC, and Maria will always be there! I hope she knows how much I am suffering.

Someone told me to apply technical analysis. At first, I thought that will be a complicated thing. But I got to know that their main tenet is stocks which are in uptrend, tend to go up, and stocks which are in downtrend, tend to go down. May be it is just me; I cannot see what is so technical about it. I could have said that. I thought it would tell me something I don't know.

There are some methods by which, they claimed one can make sure fire profitable trade. But some of the methods seem very complicated to me. One such method will say : watch a stock to want to buy for a while until it gives a buy signal or sell? But to identify these signals one has to go through hoops. As an example, one needs to watch a stock with rising momentum. What is a rising momentum? It is a combination of rising price as well as rising volume. But that is not the end of it. Once you have spotted rising momentum on a stock, you watch for a setup which happens in the following manner. The stock should have four consecutive days of up followed by two down days, with diminishing volume. It is important that the down days don't go below 10-day average. At this point, one should watch if any divergence is occurring between the 10-day standard deviation and the 20 exponential stochastic indicator. If all these conditions satisfy along with some others, one should place a buy order after four days of watching. At this point if one is not sick, one can buy the stock on the fifth day if the volume is above average. Now it comes to selling, and you guessed it, the rules get even more complicated for selling. I would rather leave it for the purpose of this article.

At some point, I start watching the internet stocks. I see that everyday they are up. So I delve into them. But their business didn't seem to be very impressive to me, however popular their web site may be. But their stock was always up, even when every other stock in NYSE, NASDAQ, and AMEX was down. This got me puzzled. However hard I think, I cannot seem to make head or tell of it. One day it dawned on me, hey! These stocks are very simple. They don't have any revenue, or profits! May be that's why they are going up so much. Yahoo! But interpretations varied. According to some guests on CNBC, people are buying these companies not because of what they are today, but what they will be in 200 years. Wow! I want to know what kind of glasses they wear. I cannot even predict what will happen to me in two hours from now. Yet another interpretation had it that they are going up because they are new economy stocks. Their stock price can not be valued on old fashioned profit, revenue etc. Rather they have to be valued on the promise they have in store for future. Their work culture is so different, employees come and go anytime, drink beer and play ping pong in the office, wear any clothes and have long hair. This all sounds cool, but I don't see how their stock price keep on climbing because of this. But whatever, who am I to judge? From technical analysis angle also, they were simple to analyze. They just go up, there is not much to analyze. One can just draw a straight line; the stock will follow that. Some day may be slow, and the stock may end down a little for the day. But very next day, traders will be all over it to bid it higher as if it deserved a punishment for one day of slacking. Since everybody was buying the stock, I decided to buy too. Why would I want to be different? So I bought some shares of Amazon.com. (One may ask why I decided to choose Amazon.com! Well they seemed to be in the worst shape of business. Yahoo! was making some money. But Amazon was loosing money like crazy and had no prospect of turning profit in foreseeable future. So I thought this got to be best of the breed.) And this time, bingo! It went up after I bought! Two days after I bought they announced a three for one stock split. That was exciting to me, I will have three time as many shares. The stock doubled in a month or so. It started itching, also some fear sets in. So I sold all the shares. I had a sizable capital gains. But in another month, the stock doubled again. But I thought I didn't do bad this time! If I can make few more winning trades like these, I may even be one of those millionaires. With that thought all my happiness vanished, and I returned to the world of worries.

Copyright � 2003 Gautam Dev. All rights reserved

I am a software engineer and occasional writer.

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