Craig has a good question - read on.
Loved your Rule #1 book! I have been utilizing Rule #1 investing for about 3 months now, first on paper than with real money. I am holding my own during one of the most bearish markets in recent history, so I am very pleased with how well Rule #1 investing works. You saved me a bundle by motivating me to move out of non-Rule #1 companies, and then wait to buy Rule #1 companies until the indicators say "go". I lost a fortune in the tech bust of 2001, and those "buy and hold / diversified portfolio" strategies got me nowhere in the past 5 years. I have identified several solid 4M companies, and track them daily using the tools you suggested on MSN Money web site.
My question is regarding the 3 technical indicators you recommend (Moving Averages, MACD and Stochastics). You explain in your book that we utilize these indicators to gauge whether the institutional buyers, who control the majority of shares in the market, are moving in or out of a particular stock. If so, why do none of these indicators utilize trading volume data, which is a key indicator of institutional participation in any market movement? It seems to me that if you really want to track what the big boys are doing, you need to track volume as well as pricing data. Any thoughts on this?
Feel free to post this on Phil Town blog, which I read weekly, and really enjoy!
Many thanks,
Craig Behrman
Here's what I told Craig:
Hi Craig,
I tried to keep the process as simple as I could and still get decent results of 15% a year. I thought seriously about tossing in the volume stuff, but decided against it.
My reasoning is this: 85% of the money in the market IS institutional. That means almost ALL volume is from institutional buying and selling, particularly for mid and large cap stocks.
You'll notice that the average sale on almost any stock out there is about 400 shares. Amazing, isn't it, when you consider that for these guys to get out of a position they have to execute maybe 10,000 trades of that size. But that's how they play - sneaking in and out over days and weeks.
What that means to me is that while a spike in volume, say to 150% of the last 60 days average, would strongly indicate a serious institutional move, it doesn't always follow and by waiting, you can be left behind as the stock just sort of pulls away without you.
And then you have this awful decision whether you should chase it days
after the last green arrow kicked in. And that, of course, is the best way to get whip-sawed, because just as you are buying in, the first guys in are selling out and you get popped for a small loss. And if you do it a lot, it's the death of a thousand cuts.Lots of the investools instructors like to add a volume spike to the three greens to confirm a major move is in progress, and there is a lot right about that that I like. Do I insist on it myself? No. But I watch it and a lot of other things as well that help me go for a higher rate of return.
More on those things in the next book, okay?
Now go play.
