There are many books in the investing literature which do not get their deserved attention, usually due to awful writing and poor presentation. The Perfect Speculator by Brad Koteshwar (2005) is exactly a case like this, in which many great ideas are buried by the clumsiness of the author. That being said, if you look beyond the messy surface, you can find a lot of useful points for speculating in the stock market, especially if you are a fan of Nicholas Darvas (1960), William O’Neil (2009) or Mark Minervini (2013). Below are key messages from the book―
Keeping it Simple:
“There are no infallible systems. If there was one, the market would cease to exist, as the infallible system will clean up the market. Once one accepts that fact, one is well on his or her way to getting a grip on the market. As long as one is still looking for that infallible system, he or she will continue to be beaten up by the market.”
“I have found that there are offers of all kinds of cutting edge market-beating signals and methods to snare up the gullible public. Everyone claims to have found the magic answer to beat the market. There is no such thing as a sure thing. And the market in its genius way sets us all up by offering crumbs once in a while so that we keep coming back for more. Every trading system works for some small duration of time at some point in a market cycle. That is just enough rope offered to the gullible public to hang themselves. Of course, nobody wants to hear this because then they have to accept that they cannot find a short-cut to riches. And who doesn’t want a short-cut to riches?”
“I have no understanding of the latest mathematical models, software, probability models, econometrics, etc. I figure if that is what it takes to be successful as a speculator, why is that I do not see tons of mathematicians who are great speculators? And why are the cutting edge mathematicians being hired by brokerages and research entities to develop and maintain tons and tons of mathematical models? I mean, if the math models were so great, why are the great math minds working for brokerages in research and model building instead of successfully trading in the markets? I think it is such a classic human tendency not to be left behind that when one brokerage loads up with scientists and math geniuses in its research department, other brokerages follow suit so that they are not left behind in the quest for the magic answer in beating the market.”
“Yes. We humans want to believe that the secret to market success is something deep and complicated. The reasoning is quite simple. It is so hard to be successful that it must be complicated. It cannot be simple. So, anyone who can sound complicated, show a lot of flash and colour, use some long words and some complicated mathematics is immediately thought to be a genius in the markets. But my readers know better because they are no spring chickens either. They have in their day spent millions on top notch researchers and cutting edge models and lost even more, especially during bear runs.”
“Yes. We humans want to believe that the secret to market success is something deep and complicated. The reasoning is quite simple. It is so hard to be successful that it must be complicated. It cannot be simple. So, anyone who can sound complicated, show a lot of flash and colour, use some long words and some complicated mathematics is immediately thought to be a genius in the markets. But my readers know better because they are no spring chickens either. They have in their day spent millions on top notch researchers and cutting edge models and lost even more, especially during bear runs.”
“My approach is very simple. As I said, I am a simple man. I keep my operations very simple. If something is not coming out and staring at me straight in the face, then in all likelihood it is the market trying to trap me with temptations. More money has been lost in trying to make small incremental amounts of gains than people will ever realise.”
Following the Big Money:
“The market is a game of treasure hunt. All players are given a set of clues. As it happens, the clues offered to all of the players are the same. If correctly deciphered, the first set of clues will take the participant to a second set of clues at the first mile-post. Then, if the clues at the first mile-post are correctly deciphered, the participant can get to the second mile-post where additional clues will be available. Thus, a participant who can consistently figure out the clues correctly will go from one mile-post to the next until he reaches the treasure. How quickly and correctly one can decipher the clues will determine who will get the treasure. Among the clues offered, some will be red herrings and false clues meant to mislead the players. And once again, the players who can recognise these misleading clues to be red herrings will be the ones with the best chance to land the treasure.”
“Among the players, there will be a very small set of really extremely smart players who will have no trouble reading the clues correctly. They will decipher each and every clue along their path to the treasure correctly and at the same time they will be able to discard the misleading clues. These smart folks will be the ones to get to the treasure first and are called ‘smart money’. And then there will be another very small set of players who will decipher most of the clues correctly and when they are unable to decipher the tricky clues or the misleading clues, they will just follow the ‘smart money’ who get everything right. Since this second group will follow the smart money, the smart money will try and mislead their followers by showing some fake-outs and shake-outs to shake-off the followers. The treasure trove is large and there is enough for most who get there sooner rather than later. Many will never get there. Some will get there late. The smart money gets there first. And many folks from the set of followers of the smart money will also get there, albeit slightly behind the smart money.”
“It is no different in the market. The smart money recognises the trend first and acts on it. Then the small set of followers will follow the smart money successfully and recognise the trend next. Most others will miss the best part of the trend. Many will come late to the party and will only be there for the brawls that come about at the end of a long party.”
Just Price and Volume
“I cannot do a superior research than these big boys. But I can see what the big boys do with the research in the way they buy and sell stocks. I see it plainly on the index and individual stock’s price and volume action. That to me is all the information that is needed. I just follow the big money. But to get to that point, I spent years learning. It is only the large gains I have made that have confirmed what all top speculators know. It is all in the price and volume action. And the rest of the stuff in the market is pure fluff.”
“All that is needed to be a successful speculator is in the price/volume action of leading stocks and leading indices.”
The So-called “Fundamentals”
“You know that it is the anticipation of earnings that is more important than actual earnings. Earnings growth is in many cases a lagging indicator. Many times a big move has already occurred and gone before a young company can show actual earnings. The stock market is forward looking. The move happens in anticipation of. Not because of. It is common for the novices and amateurs to focus solely on earnings growth. That is what the insiders want the public to focus on. After all, the insiders cannot sell their holdings unless there is a big pool of buyers for the insiders’ holdings.”
“Usually, by the time earnings growth has been firmly established, the better part of a stock’s move has already gone by. It goes back to my earlier discussion about the research that the big boys do. Remember, they have an army of researchers who have already foreseen and anticipated all that needs to be anticipated. The big money places its position based on what is anticipated down the road. Not because what earnings were for the quarters gone by. In an environment where everything is discounted based on anticipated conditions and events months in advance, what good are earnings of quarters gone by and already in the past. Today’s news is ancient history. The news is used to shakeout and fake-out the amateurs. In the longer term, news only acts as a lagging confirmation of the move of a stock that has occurred weeks or months ago. I pay attention to anticipation of earnings. Not actual earnings history. As I said, even today’s news is ancient history in the market.”
Being Wrong
“A speculator will first observe the market’s and the stock’s action. After observation, he will interpret what he observed. And once he interprets the market and the stock action, he will execute a trade. But he will always execute his trades with the protection against losses and an acceptance that the interpretation could be wrong. He will not execute his second trade until his first trade proves to him that his interpretation was correct. From then on, each subsequent action is completely based on the outcome of the previous move.”
“There is no certainty in speculation. In fact, there is absolute uncertainty in speculation and absolute uncertainty is the only certainty to a successful speculator. As a result, there is no way it can be a science. If it were a science, we should have a great level of certainty in its outcome. We know that is not the case.”
“A speculator will allow for the fact that he could be wrong. And if he is wrong, he needs to eliminate the loss taking position promptly and look for a subsequent trade to place the right trade. A speculator first observes the market and individual stocks to see if a confirmed trend is visible. Until he can observe a confirmed trend, he will not place a trade.”
Not Losing is Winning
“Let us take our sample example account that had $100,000 to speculate in the market. If the account lost a third of its value and got down to $66,666, the account has to make back $33,333 to break even. That means the account has to make $33,333 on $66,666 or a 50% return just to break even. Do you know how hard it is for an account that made mistakes and ended down 33% to turn around and eliminate all the mistakes and on top of that pull off some great moves to make a 50% return on investment?”
Just Price and Volume
“It is obvious to my readers, who possess a great deal of common
sense, that it would be foolhardy to think that the common man can out do in
research what the big behemoths do. And by extension, since these big moneyed
folks place large funds into the stocks they like, all I need to do is follow
the big money and I would thus follow the best research in the country. There
cannot be a simpler method to function well in the market than this. Follow the
big money’s price/volume action to see what the big boys are doing. The
price/volume action shows to me where big money is buying, where they are
selling and where they are supporting a stock.”
“I cannot do a superior research than these big boys. But I can see what the big boys do with the research in the way they buy and sell stocks. I see it plainly on the index and individual stock’s price and volume action. That to me is all the information that is needed. I just follow the big money. But to get to that point, I spent years learning. It is only the large gains I have made that have confirmed what all top speculators know. It is all in the price and volume action. And the rest of the stuff in the market is pure fluff.”
“All that is needed to be a successful speculator is in the price/volume action of leading stocks and leading indices.”
The So-called “Fundamentals”
“You know that it is the anticipation of earnings that is more important than actual earnings. Earnings growth is in many cases a lagging indicator. Many times a big move has already occurred and gone before a young company can show actual earnings. The stock market is forward looking. The move happens in anticipation of. Not because of. It is common for the novices and amateurs to focus solely on earnings growth. That is what the insiders want the public to focus on. After all, the insiders cannot sell their holdings unless there is a big pool of buyers for the insiders’ holdings.”
“Usually, by the time earnings growth has been firmly established, the better part of a stock’s move has already gone by. It goes back to my earlier discussion about the research that the big boys do. Remember, they have an army of researchers who have already foreseen and anticipated all that needs to be anticipated. The big money places its position based on what is anticipated down the road. Not because what earnings were for the quarters gone by. In an environment where everything is discounted based on anticipated conditions and events months in advance, what good are earnings of quarters gone by and already in the past. Today’s news is ancient history. The news is used to shakeout and fake-out the amateurs. In the longer term, news only acts as a lagging confirmation of the move of a stock that has occurred weeks or months ago. I pay attention to anticipation of earnings. Not actual earnings history. As I said, even today’s news is ancient history in the market.”
Being Wrong
“A speculator will first observe the market’s and the stock’s action. After observation, he will interpret what he observed. And once he interprets the market and the stock action, he will execute a trade. But he will always execute his trades with the protection against losses and an acceptance that the interpretation could be wrong. He will not execute his second trade until his first trade proves to him that his interpretation was correct. From then on, each subsequent action is completely based on the outcome of the previous move.”
“There is no certainty in speculation. In fact, there is absolute uncertainty in speculation and absolute uncertainty is the only certainty to a successful speculator. As a result, there is no way it can be a science. If it were a science, we should have a great level of certainty in its outcome. We know that is not the case.”
“A speculator will allow for the fact that he could be wrong. And if he is wrong, he needs to eliminate the loss taking position promptly and look for a subsequent trade to place the right trade. A speculator first observes the market and individual stocks to see if a confirmed trend is visible. Until he can observe a confirmed trend, he will not place a trade.”
Not Losing is Winning
“Let us take our sample example account that had $100,000 to speculate in the market. If the account lost a third of its value and got down to $66,666, the account has to make back $33,333 to break even. That means the account has to make $33,333 on $66,666 or a 50% return just to break even. Do you know how hard it is for an account that made mistakes and ended down 33% to turn around and eliminate all the mistakes and on top of that pull off some great moves to make a 50% return on investment?”
“On the other hand, if an account only lost 5% and went from $100,000 to $95,000, it only has to make $5,000 on $95,000 investment to recover. This is a little over 5% gain that is needed to break even. By not losing, one can save years and years of agony, hard work, pain and sleepless nights. Not losing is worth many years of learning in the markets.”
“The basic idea of a stop-loss is two-fold. The first goal is to protect our capital. This you covered in your book and others have as well in many books that are out on the market. The second more important goal is to prove me wrong. When several of my sell-stops get hit, the market is sending a message to me that I am wrong in my interpretation of the market’s and the stock’s direction.”
“Seeing something that is not there is the most common and the most expensive mistake even the most experienced speculators make. It is easy to rationalize one‘s position by seeing something that is not there. The need to be right makes one biased in seeing what they want to see. And then the wish becomes the father of the thought. And wishing a move to occur makes one see things that are not there. I write often in my comments that the market is a mirage. One sees water where there is sand if one is thirsty enough. Then as one sees what is not there, just like the unfortunate soul lost in the desert one ends up eating sand instead of drinking water.”
“They have learned the hard way my first and true lesson, which is, first, do no harm. It takes a genius to understand and recognise that not losing is actually winning. Hardly anybody recognises this. And consequently, you hardly see any consistently successful speculators in the markets.”
Staying out of the Way
“The basic idea of a stop-loss is two-fold. The first goal is to protect our capital. This you covered in your book and others have as well in many books that are out on the market. The second more important goal is to prove me wrong. When several of my sell-stops get hit, the market is sending a message to me that I am wrong in my interpretation of the market’s and the stock’s direction.”
“Seeing something that is not there is the most common and the most expensive mistake even the most experienced speculators make. It is easy to rationalize one‘s position by seeing something that is not there. The need to be right makes one biased in seeing what they want to see. And then the wish becomes the father of the thought. And wishing a move to occur makes one see things that are not there. I write often in my comments that the market is a mirage. One sees water where there is sand if one is thirsty enough. Then as one sees what is not there, just like the unfortunate soul lost in the desert one ends up eating sand instead of drinking water.”
“They have learned the hard way my first and true lesson, which is, first, do no harm. It takes a genius to understand and recognise that not losing is actually winning. Hardly anybody recognises this. And consequently, you hardly see any consistently successful speculators in the markets.”
Staying out of the Way
“This is where staying out of the market is just as important as getting in. There will be periods where nothing looks good from a price/volume perspective. And even if something looks good, market conditions make it impossible to be successful as the market does not offer decent odds of winning. In such periods, it is very important not be active in the market. It is very important to sit back and wait and observe the market action. This is very, very hard for most folks. There is always someone hyping some stock all the time. To sit back and not fall for the hype is extremely hard for most folks.”
“The machinery wants the common folks to keep buying and buying through bull and bear trends because the machinery exists to sell stocks. If no buyers can be found, the machinery has to cease to exist and that is not acceptable. Therefore, the brain-washing goes on that the market cannot be timed.”
“We try to look for a magic answer to finding the gold at the end of the rainbow. And we try to find a rainbow every day of the week, every week of the year, year after year. We forget that rainbows do not come every day of the week. The Wall Street machinery of tipsters, bullish newsletters, stock brokers, rumour mongers, insiders, agents of the insiders, etc. all work individually and in concert with each other to convince us that rainbows come about every day. One has to wait for rainbows to develop. It requires patience and the ability to sit tight and do nothing.”
“It is about the hardest lesson to learn to wait and sit tight and to do nothing. To await the right conditions and confirmation of improved probabilities of wins is not possible for the vast majority of the public. Wall Street would cease to exist if all the folks decided not to buy and just sit tight and await better days. That would be the end of Wall Street. That cannot be acceptable to the cutting edge machinery of pure unadulterated form of capitalism. The machinery will keep churning out plenty of useless information, misinformation, disinformation, hype, rumour, etc., to keep bringing in a continuous flow of buyers irrespective of the prevailing conditions. There is a sale made available every day. Not a single broker has been found to be in existence who will say to anyone at any time the famous non-existing words in the broker lingo, ‘Do not buy today. Wait for a better day.’ These words do not exist in Wall Street’s vocabulary.”
“The big money is possible only in about 3-4 uptrend segments in any 10-year cycle. During the waiting time, these new young growth stocks are setting up their play. The setup takes a long time. To wait for such cycles to make serious and large commitments is hard for most folks. But if one took the time to review their own past executions and performance over the recent most 10-year cycle, they will note that more than 80% of the folks have lost money in the market. Anyone can have a good and a lucky year. That is not the test. The true test of a successful speculator is how he did over a 10-year period. If one has the guts to dig out their own 10-year performance and do a study, they will easily recognize that what was made was more than offset by what was lost.”
“On the whole, I aim to catch a handful of serious big moves during any 10-year cycle. I say to my daughter that if I double my money four or five times in a decade and then if I do not give much of it back to the market, then I have done my job. For example, if I started with $100,000 and doubled my money only 3 times during a 10-year cycle during three different up trending cycles and then never lost anything during the rest of the 10-year cycle, my $100,000 would be worth $800,000. Not bad for a 10-year performance. Let us assume one did this over two ten-year cycles. The $100,000 would be worth $6,400,000.”
Waiting for a Trend
“A trend is something that is moving in one direction clearly. An uptrend is a market that is moving up. A down trend is a market that is moving down. But markets do not move up or down in a straight line. However, in a confirmed up trend, the market moves up a little and then reacts and moves down a little. But the move down or the reaction is less than the first move up. Then it moves up yet again. This time it moves up to a point much higher than the high it made the previous time it moved up. Then it reacts and moves down again. But the down move reaches down to point that is much higher than the lowest point during the last down move. In essence, we are seeing a series of higher highs and higher lows. This is a confirmed uptrend. A down trend works in exact reverse. A confirmed down trend is when a series of lower highs and lower lows are being pegged by the market or the stock.”
“A speculator will not make commitments until he has clearly seen at least one set of higher highs to confirm an uptrend or one set of lower lows to confirm a downtrend. I call it a zig or a zag. I need to see at least one zig or one zag to prove the beginning of a trend. And once I see a zig or a zag, we come to the first step, which is exactly what the speculator has now observed. Now the second step is to time his first trade. Not only does he need to time his trade, but he must also manage his money so that should he be wrong in his interpretation based on his observation, he will lose small amounts. At this early point, the speculator is not looking to make a killing. He is just trying to confirm if he is in sync with the market.”
“While it is impossible to pick the absolute bottom and the absolute top of a significant trend, I can definitely catch the meat of a significant move. During such significant trends, odds of winning improve substantially and my test case buys prove to me when such improved odds come about. Once proven that odds have improved, I can then seriously and deliberately expose larger commitments to the market. And I keep moving my sell-stops along an up trending and moving stock up along with its price. This way, at some point when odds of continued trend start to diminish, my sell-stops start getting hit and I get taken out of the market. And usually odds start to diminish in advance of the end of the trending move. And I may not be able to catch the top, but as I said, I am happy with the middle meaty portion of a significant move.”
“The biggest problem one faces in the market is the need to wait to confirm the trend. The most common and costly mistake is to jump at every first inkling of a rally. In the stampede to be the first to identify a trend, many get crushed. It is the patient ones who wait out the many false starts, who will be fit as a fiddle to make the move when the true trend starts. A lot of money has been lost in trying to be the first one to identify the trend.”
Looking for Confirmations
“The machinery wants the common folks to keep buying and buying through bull and bear trends because the machinery exists to sell stocks. If no buyers can be found, the machinery has to cease to exist and that is not acceptable. Therefore, the brain-washing goes on that the market cannot be timed.”
“We try to look for a magic answer to finding the gold at the end of the rainbow. And we try to find a rainbow every day of the week, every week of the year, year after year. We forget that rainbows do not come every day of the week. The Wall Street machinery of tipsters, bullish newsletters, stock brokers, rumour mongers, insiders, agents of the insiders, etc. all work individually and in concert with each other to convince us that rainbows come about every day. One has to wait for rainbows to develop. It requires patience and the ability to sit tight and do nothing.”
“It is about the hardest lesson to learn to wait and sit tight and to do nothing. To await the right conditions and confirmation of improved probabilities of wins is not possible for the vast majority of the public. Wall Street would cease to exist if all the folks decided not to buy and just sit tight and await better days. That would be the end of Wall Street. That cannot be acceptable to the cutting edge machinery of pure unadulterated form of capitalism. The machinery will keep churning out plenty of useless information, misinformation, disinformation, hype, rumour, etc., to keep bringing in a continuous flow of buyers irrespective of the prevailing conditions. There is a sale made available every day. Not a single broker has been found to be in existence who will say to anyone at any time the famous non-existing words in the broker lingo, ‘Do not buy today. Wait for a better day.’ These words do not exist in Wall Street’s vocabulary.”
“The big money is possible only in about 3-4 uptrend segments in any 10-year cycle. During the waiting time, these new young growth stocks are setting up their play. The setup takes a long time. To wait for such cycles to make serious and large commitments is hard for most folks. But if one took the time to review their own past executions and performance over the recent most 10-year cycle, they will note that more than 80% of the folks have lost money in the market. Anyone can have a good and a lucky year. That is not the test. The true test of a successful speculator is how he did over a 10-year period. If one has the guts to dig out their own 10-year performance and do a study, they will easily recognize that what was made was more than offset by what was lost.”
“On the whole, I aim to catch a handful of serious big moves during any 10-year cycle. I say to my daughter that if I double my money four or five times in a decade and then if I do not give much of it back to the market, then I have done my job. For example, if I started with $100,000 and doubled my money only 3 times during a 10-year cycle during three different up trending cycles and then never lost anything during the rest of the 10-year cycle, my $100,000 would be worth $800,000. Not bad for a 10-year performance. Let us assume one did this over two ten-year cycles. The $100,000 would be worth $6,400,000.”
Waiting for a Trend
“A trend is something that is moving in one direction clearly. An uptrend is a market that is moving up. A down trend is a market that is moving down. But markets do not move up or down in a straight line. However, in a confirmed up trend, the market moves up a little and then reacts and moves down a little. But the move down or the reaction is less than the first move up. Then it moves up yet again. This time it moves up to a point much higher than the high it made the previous time it moved up. Then it reacts and moves down again. But the down move reaches down to point that is much higher than the lowest point during the last down move. In essence, we are seeing a series of higher highs and higher lows. This is a confirmed uptrend. A down trend works in exact reverse. A confirmed down trend is when a series of lower highs and lower lows are being pegged by the market or the stock.”
“A speculator will not make commitments until he has clearly seen at least one set of higher highs to confirm an uptrend or one set of lower lows to confirm a downtrend. I call it a zig or a zag. I need to see at least one zig or one zag to prove the beginning of a trend. And once I see a zig or a zag, we come to the first step, which is exactly what the speculator has now observed. Now the second step is to time his first trade. Not only does he need to time his trade, but he must also manage his money so that should he be wrong in his interpretation based on his observation, he will lose small amounts. At this early point, the speculator is not looking to make a killing. He is just trying to confirm if he is in sync with the market.”
“While it is impossible to pick the absolute bottom and the absolute top of a significant trend, I can definitely catch the meat of a significant move. During such significant trends, odds of winning improve substantially and my test case buys prove to me when such improved odds come about. Once proven that odds have improved, I can then seriously and deliberately expose larger commitments to the market. And I keep moving my sell-stops along an up trending and moving stock up along with its price. This way, at some point when odds of continued trend start to diminish, my sell-stops start getting hit and I get taken out of the market. And usually odds start to diminish in advance of the end of the trending move. And I may not be able to catch the top, but as I said, I am happy with the middle meaty portion of a significant move.”
“The biggest problem one faces in the market is the need to wait to confirm the trend. The most common and costly mistake is to jump at every first inkling of a rally. In the stampede to be the first to identify a trend, many get crushed. It is the patient ones who wait out the many false starts, who will be fit as a fiddle to make the move when the true trend starts. A lot of money has been lost in trying to be the first one to identify the trend.”
Looking for Confirmations
“Another key point is to remember what we
old-timers say - do not let the wish become the father of the thought. Just
because one wishes the market to go up should not turn into the thought that
the market is indeed going up. Do not see what is not there. Look for
confirming signals. And when confirming signals are absent or there is doubt
about the trend, then do nothing. The market is a genius at offering false
signals. Until I can see that the trend has been confirmed by the indices as
well as leading young growth stocks, I have a hard time placing my test-case
small commitments. I can only get my signals from the indices in conjunction
with leading stocks. If I cannot get a confirmation, I must assume the market
is throwing a curve ball.”“I am one of those people who approach the market with a degree of scepticism. I start with the assumption that every rally is a fake out. Until this assumption of mine has been disproved by individual stocks, I am not convinced of the rally’s strength.”
“You will find a dime a dozen services out there claiming to know what breakout stocks are and how they behave. Unfortunately, not one of them will do justice to its readers. The implication by the Wall Street machinery is that when stocks breakout, many will make a good run-up. This implication is either naive or purposely misleading. Whatever the case may be, it is a false premise. First of all, one must define clearly what is meant by a breakout. A breakout just means that a stock or an index broke out of one trading range and went into another trading range. That is it. Nothing more is meant by a breakout. There is a wide following and belief that a breakout is the beginning of an up-trend. To assume, claim or imply such a thing is foolishness. A breakout occurs during some point of an every up trend. That does not mean every breakout is the beginning of an uptrend. A great major league ball player starts off in the minor leagues. It does not follow that every minor league player goes on to become a great ball player.”
“It takes time for a stock to set up its play before making its move. During the course of its set-up, many times a stock will offer many false signals. It may offer signs that a true move has begun, only to reverse and head back into its basing or the setting-up phase. It will demand patience from the speculator. Since the speculator is waiting for the one clear stretch of 6-12 month-period where the stock is going to zoom at its fastest pace and go the farthest, he is only interested in a clear-cut visible trend where the stock makes a clean set of higher highs and higher lows. Such a move usually only comes about once during any stock’s lifetime. During such a period, it is not unusual to see a stock multiply many times over its beginning price for the time period.”
“To simplify the lesson, I like to see stocks that use up many, many months or even years in setting up their play. The longer the sideways basing pattern and the longer the quiet unnoticed set-up, the faster and farthest the move when the true move begins. I can tell you that the general public has no patience in waiting for the play to be set-up. That is where the big mistake is made by the public. They will believe every breakout from one price range into another is the beginning of a great new move. To explain this I have to take a step back and go into what breakouts are.”
Following the Leaders:
“Every cycle has new leaders. It is not unlike a sports team. It takes a new generation of young players to take a game to new heights after a set of older prior greats start to slow down. In the early industrial revolution days, it was steel and rails that led the market up. Then came the autos and heavy machines. Then came the aeroplane and associated industries. Then came radio and television and associated technologies. Then came computers. Then came software and then the internet and associated technologies. In there somewhere were medical technologies and pharmaceuticals. The next serious bull trend will have a new set of leaders. It always takes a new set of leaders to carry the market forward.”
“With thousands of stocks moving up and moving down, how do I narrow my focus down to the next big winners? Well, I start off with only those stocks that are 10-15 years old or younger. In other words, I have no interest in stocks that have been in existence for over 15 years. As I said, it is the new young growth companies that make the big bucks. If a stock is over 15 years old, it has had the chance to move in prior bull trends. And if a stock has made a move in prior bull trends, then it is probably too late for me to catch its fastest and farthest move up.”
“Then I demand that the stock I am watching is nearing its all-time high. Some folks look for stocks making new 52-week highs, but not me. I need to see a stock come near its all-time high. My interest is first and foremost to watch as few stocks as possible, which means I must cut down the number of potential winners down to a humanly manageable level. For me to do this, I have to place certain restrictions and parameters in place. So, all the parameters I use are for the sole goal of reducing the number of stocks that I watch to just a handful. After all, we started with the aim of looking for just a handful of clear big winners during any given decade.”
“I am only interested in new young growth companies that are already showing rising prices and in new all-time high price areas.”
The Game Plan:
“To sum it up, I am looking for stocks that have spent some years and months in a long sideways basing pattern. This is the set up: longer the setup, better the odds of a good move coming up when the play actually begins. Then the stock must enter into all-time new price highs and show a tendency of rising prices for some weeks and months. Typically, I only look at stocks that have already doubled from its low to high for the latest 52 week period. In other words, if I check for the 52-week low and the 52-week high price of a stock, the 52-week high price must be at the very least twice the price of its 52-week low price. In addition, I must see at least one resting phase during the uptrend or the game-phase. As I said, the game begins only after a long set up.”
“I then add an additional requirement. The stock must have moved at the very least 20% or more in price from the high of its last breakout within four weeks or less. This 20% move within four weeks must have occurred without the stock ever heading back into the consolidation price area. Then I call this stock my 20/4 mover - which stands for 20% or more within 4 weeks without heading back into the basing or the consolidation price area.”
“While the first stock that makes such a 20/4 type move is a good sign, I usually wait until I see at least two such stocks from two separate industries that show me that the time has come to test the waters in the market. I have not really talked about the importance of volume here. I will reserve the importance of volume for later. Now that I have seen at least two 20/4 moving stocks that meet my required criteria, I will then make the decision that it is time to test the market with small pilot buys. A small pilot buy is a test buy in the market to confirm what I have seen, observed and interpreted is correct. If I am indeed correct, then my test buys or pilot buys should make gains from the get go without getting below my buy prices. In order to confirm that I am right, I need to implement one other action. This is the stop-loss rule. This is well talked about, well written about and widely followed by traders and speculators. Some do it successfully and others do it badly. But at least traders and speculators do follow some form of a stop-loss. That is better than what the gamblers and investors do who have no stop-loss policy.”
Summary:
“My philosophy is simple. The first premise is that the stock market is very tricky and more than 80% of the participants will lose money over the long-term. If I am going to be involved with an animal that defeats 80% of the folks, then I am only interested in the big money. In other words, if I am going to risk losing in the market, I better be looking only for the big bucks. Otherwise, why risk my money for meagre wins or worse, to take losses?”
“The second premise is that the big bucks are made only on young unknown growth stocks. The old vanguards like General Motors, IBM, Wal-Mart, Cisco, Microsoft, etc., have become mature stocks with large floats and are more for the pension funds and others who believe they can withstand the gyrations of the market via steady companies. Little do they know that one single bear run will wipe away all the hard earned gains made over many years. But everybody is different and everybody comes to the market with different attitudes and goals.”
“The third premise is that the stock I am watching as the potential winner must have shown to me via its price/volume action that it has the ability to move up in price. If I am a ball club owner, why would I pay a ball-player the big bucks unless I see during the minor leagues stint that he was consistently good and was in fact improving his averages? If I cannot see such improving or rising ability, I have no interest in a stock. This is what I refer to as the prior uptrend. Without a prior up trend, a stock has not proven anything to me.”
REFERENCES:
Darvas, N. (1960). How I Made Two Million Dollars in the Stock Market. Secaucus, NJ: Lyle Stuart.
Koteshwar, B. (2005). The Perfect Speculator. Scottsdale, AZ: Great Expressions Publishing.
Minervini, M. (2013). Trade like a Stock Market Wizards: How to achieve superperformance in stocks in any market. New York, NY: McGraw-Hill Education.
O’Neil, W. J. (2009). How to Make Money in Stocks: A Winning System in Good Times and Bad (4ᵗʰ edition). New York, NY: McGraw-Hill Education.
“You will find a dime a dozen services out there claiming to know what breakout stocks are and how they behave. Unfortunately, not one of them will do justice to its readers. The implication by the Wall Street machinery is that when stocks breakout, many will make a good run-up. This implication is either naive or purposely misleading. Whatever the case may be, it is a false premise. First of all, one must define clearly what is meant by a breakout. A breakout just means that a stock or an index broke out of one trading range and went into another trading range. That is it. Nothing more is meant by a breakout. There is a wide following and belief that a breakout is the beginning of an up-trend. To assume, claim or imply such a thing is foolishness. A breakout occurs during some point of an every up trend. That does not mean every breakout is the beginning of an uptrend. A great major league ball player starts off in the minor leagues. It does not follow that every minor league player goes on to become a great ball player.”
“It takes time for a stock to set up its play before making its move. During the course of its set-up, many times a stock will offer many false signals. It may offer signs that a true move has begun, only to reverse and head back into its basing or the setting-up phase. It will demand patience from the speculator. Since the speculator is waiting for the one clear stretch of 6-12 month-period where the stock is going to zoom at its fastest pace and go the farthest, he is only interested in a clear-cut visible trend where the stock makes a clean set of higher highs and higher lows. Such a move usually only comes about once during any stock’s lifetime. During such a period, it is not unusual to see a stock multiply many times over its beginning price for the time period.”
“To simplify the lesson, I like to see stocks that use up many, many months or even years in setting up their play. The longer the sideways basing pattern and the longer the quiet unnoticed set-up, the faster and farthest the move when the true move begins. I can tell you that the general public has no patience in waiting for the play to be set-up. That is where the big mistake is made by the public. They will believe every breakout from one price range into another is the beginning of a great new move. To explain this I have to take a step back and go into what breakouts are.”
Following the Leaders:
“Every cycle has new leaders. It is not unlike a sports team. It takes a new generation of young players to take a game to new heights after a set of older prior greats start to slow down. In the early industrial revolution days, it was steel and rails that led the market up. Then came the autos and heavy machines. Then came the aeroplane and associated industries. Then came radio and television and associated technologies. Then came computers. Then came software and then the internet and associated technologies. In there somewhere were medical technologies and pharmaceuticals. The next serious bull trend will have a new set of leaders. It always takes a new set of leaders to carry the market forward.”
“With thousands of stocks moving up and moving down, how do I narrow my focus down to the next big winners? Well, I start off with only those stocks that are 10-15 years old or younger. In other words, I have no interest in stocks that have been in existence for over 15 years. As I said, it is the new young growth companies that make the big bucks. If a stock is over 15 years old, it has had the chance to move in prior bull trends. And if a stock has made a move in prior bull trends, then it is probably too late for me to catch its fastest and farthest move up.”
“Then I demand that the stock I am watching is nearing its all-time high. Some folks look for stocks making new 52-week highs, but not me. I need to see a stock come near its all-time high. My interest is first and foremost to watch as few stocks as possible, which means I must cut down the number of potential winners down to a humanly manageable level. For me to do this, I have to place certain restrictions and parameters in place. So, all the parameters I use are for the sole goal of reducing the number of stocks that I watch to just a handful. After all, we started with the aim of looking for just a handful of clear big winners during any given decade.”
“I am only interested in new young growth companies that are already showing rising prices and in new all-time high price areas.”
The Game Plan:
“To sum it up, I am looking for stocks that have spent some years and months in a long sideways basing pattern. This is the set up: longer the setup, better the odds of a good move coming up when the play actually begins. Then the stock must enter into all-time new price highs and show a tendency of rising prices for some weeks and months. Typically, I only look at stocks that have already doubled from its low to high for the latest 52 week period. In other words, if I check for the 52-week low and the 52-week high price of a stock, the 52-week high price must be at the very least twice the price of its 52-week low price. In addition, I must see at least one resting phase during the uptrend or the game-phase. As I said, the game begins only after a long set up.”
“I then add an additional requirement. The stock must have moved at the very least 20% or more in price from the high of its last breakout within four weeks or less. This 20% move within four weeks must have occurred without the stock ever heading back into the consolidation price area. Then I call this stock my 20/4 mover - which stands for 20% or more within 4 weeks without heading back into the basing or the consolidation price area.”
“While the first stock that makes such a 20/4 type move is a good sign, I usually wait until I see at least two such stocks from two separate industries that show me that the time has come to test the waters in the market. I have not really talked about the importance of volume here. I will reserve the importance of volume for later. Now that I have seen at least two 20/4 moving stocks that meet my required criteria, I will then make the decision that it is time to test the market with small pilot buys. A small pilot buy is a test buy in the market to confirm what I have seen, observed and interpreted is correct. If I am indeed correct, then my test buys or pilot buys should make gains from the get go without getting below my buy prices. In order to confirm that I am right, I need to implement one other action. This is the stop-loss rule. This is well talked about, well written about and widely followed by traders and speculators. Some do it successfully and others do it badly. But at least traders and speculators do follow some form of a stop-loss. That is better than what the gamblers and investors do who have no stop-loss policy.”
Summary:
“My philosophy is simple. The first premise is that the stock market is very tricky and more than 80% of the participants will lose money over the long-term. If I am going to be involved with an animal that defeats 80% of the folks, then I am only interested in the big money. In other words, if I am going to risk losing in the market, I better be looking only for the big bucks. Otherwise, why risk my money for meagre wins or worse, to take losses?”
“The second premise is that the big bucks are made only on young unknown growth stocks. The old vanguards like General Motors, IBM, Wal-Mart, Cisco, Microsoft, etc., have become mature stocks with large floats and are more for the pension funds and others who believe they can withstand the gyrations of the market via steady companies. Little do they know that one single bear run will wipe away all the hard earned gains made over many years. But everybody is different and everybody comes to the market with different attitudes and goals.”
“The third premise is that the stock I am watching as the potential winner must have shown to me via its price/volume action that it has the ability to move up in price. If I am a ball club owner, why would I pay a ball-player the big bucks unless I see during the minor leagues stint that he was consistently good and was in fact improving his averages? If I cannot see such improving or rising ability, I have no interest in a stock. This is what I refer to as the prior uptrend. Without a prior up trend, a stock has not proven anything to me.”
REFERENCES:
Darvas, N. (1960). How I Made Two Million Dollars in the Stock Market. Secaucus, NJ: Lyle Stuart.
Koteshwar, B. (2005). The Perfect Speculator. Scottsdale, AZ: Great Expressions Publishing.
Minervini, M. (2013). Trade like a Stock Market Wizards: How to achieve superperformance in stocks in any market. New York, NY: McGraw-Hill Education.
O’Neil, W. J. (2009). How to Make Money in Stocks: A Winning System in Good Times and Bad (4ᵗʰ edition). New York, NY: McGraw-Hill Education.
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