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Finding a Balance Between Trading and Investing

by Ken Wolff with Shawn Wolff August 2002


Last week I talked about finding a balance between trading and investing. This week I came across several more confirmations for my belief that in order to really work money in these troubled times, we must learn to combine the flexibility of a daytrader with the patience and careful consideration of the investor. And that includes researching fundamentals.

As primarily a daytrader in the past, I admit I hadn’t paid much attention to fundamentals. Who cares what the PE/ratio is when YHOO is making 20-dollar climbs in a day? Just shake your head, mumble a little about irrational exuberance, and enjoy the ride. A strategy based solely on identifying movements and jumping on in, worked quite well. If the market is climbing in leaps and bounds, then hey, let’s face it, any reason to buy is a good one.

The problem I am seeing now though is that way down here, at Nasdaq 1300 and DOW 8750, intra-day ranges on our favorite stocks are excruciatingly narrow. So if you go chasing after intra-day scalps, you will have to satisfy yourself with some pretty microscopic gains. That means you will have to load up some pretty big shares for the reward to be worth the effort, and that of course means increased risk. We don’t all have the time or patience for that, especially at my age.

So how I am coping with this is, for daytrades, I am moving in first and foremost on the early trades. Any professional trader worth their salt will tell you that the early trades hold the highest potential, and the highest predictability. They follow the recent patterns most predictably, and the swings are usually much larger in the early trading when the volume is most active. So I take the cream of the daytrade crop, and then sit tight. I find this works well for a lot of our members anyway, who just want to do a little trading before they run off to work.

For the remainder of our day, I find that we are moving in a more research-oriented direction, with slower and more carefully considered trades. I am spending more hours a day on research than I ever have before. We’re becoming our own little grass roots research team. And if this is any reflection of the trading community in general, I think this is an exciting step.

If there is anything I learned from the Bull Market, it is that the market is a product of perception. And lately, I see that perception changing. I am finding that recent patterns on slower intra-day and multiple-day trades, are becoming more and more reliant on the fundamentals. Investors have been badly hurt on the way down. They are understandably scared, and I believe they are wising up a bit. At least I hope they are. This explains, for example, the relative strength we have seen in the DOW since January. We feel safer in the good ole blue chips that our grandfathers bought. We like the idea of dividends. And we are more careful this time around to make sure we are truly picking good companies.

For example, it looks like "buy the dip" is once again becoming a viable trading strategy, with one important catch. You have to make sure you are buying a good company that has sold off for a bad reason, as opposed a bad company that has sold off for a good reason. And that means a little research.

One good example of this that one of our respected members Jeff Diamond brought up this last week was Landry’s Restaurants (LNY:NYSE).

You may remember reports last week of a Canadian man who died from the first confirmed case in Canada of Creutzfeldt-Jakob disease, the human form of mad cow disease. McDonalds (MCD:NYSE) was hit by this news, as was oddly enough LNY. Landry's is the second largest operator of seafood restaurants in the US. Ok, yes, I believe they sell steaks too, but a "seafood" restaurant selling off on a mad cow "beef" scare? So we looked into it further.

August 1 they reported that second quarter earnings are expected to be several cents above consensus estimates. A Thomson First Call survey of six analysts produced a mean second quarter earnings estimate of 52 cents a share, vs. year-ago second quarter earnings of 47 cents a share. All indications are that earnings will be excellent. They even pay a dividend.

So when we found out that all evidence now points to the Canadian man having acquired variant CJD from multiple, long-term stays in the U.K. during the peak of the outbreak of mad cow disease, many of our members moved in long. The mad cow scare brought it pretty close to retesting the previous low of 17.55 from July 23. Since that time its been struggling off the bottom. If they report well though, it could have a lot more upside.

Another good example was Blockbuster (BBI:NYSE) selling down in sympathy with BBY (Best Buy:NYSE). Now did that make sense? BBY collapsed last week, largely because of PC's and XBOX's not selling well. So the market decided consumers were dead? What about Wal-Mart reporting 4.5% rise in July comps and reaffirming guidance? But even if consumers are cutting back, wouldn’t they then rent more DVDs and video games, rather than buy them? BBI is largely in the rental business. Besides that they just reported in July a 59 percent surge in second-quarter profits. Their closest competitors, Hollywood Entertainment Corp. (HLYW:Nasdaq) and Movie Gallery Inc. (MOVI:Nasdaq) have also reported higher second-quarter profits. And they are down close to 33% from the May highs. I’m watching for a bounce.

The point is to look into these things. When you see unusual movements, look deeper, dig in and do some research. Find out whether it’s a good stock down for a bad reason, or a bad stock down for a good reason. And by the way, we got into NUE again above 46, but it is getting into profit-taking territory now. I know, I know, its easy to get attached to these after so much research, but remember that balance between trading and investing will see you through in this market. Have a nice week!










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