Bible_Belt said:
A friend of mine trades a system for a doctor and his friends. They buy stocks priced $5-10, which are hitting 52-week highs but used to trade for a much higher amount in the previous 2-4 years. It's very simple, but they do ok.
You are truly a Renaissance man, BB. I started with a penny stock firm straight out of college in 87 based on a plate telling me the guys were making big money. Didn't stick around once I realized it was a scam, though the money was great, I didn't want to end up in jail. Ended up working at Merrill twice, Fidelity for awhile, a huge bank that is now defunct and solo for awhile. It was a fun way to spend 20s, early 30s but I was partying and didn't have the discipline to hit the big time.
My favorite big model is also simple, I call it "dancing with the elephants" and it is based on finding sound fundamental trades with nascent momentum like your friend's system, but also requiring that they have some factors that were precluding them from institutional parameters and screens that have recently been removed. In essence, trades that were invisible to elephants yesterday, or even repellent, but something has changed to bring them on to institutional radar.
For example, a reverse split will instantly remove a stock from most screens, because reverse splits are associated with a failing company swirling the toilet. Some few healthy companies, though, reverse split for the very purpose of getting a higher stock price and fitting more institutional parameters (as a rule, institutions can't buy $5 stocks because the volume they need to buy moves the price too much both in and especially out). It takes a certain period, could be 6 mo to a year, for the stench of the reverse split to fade and during that time, the stock may develop screaming fundamentals with little activity. Volume and price early breakouts signal that the reverse split stigma is fading, and the stock is moving onto more screens. I am looking for a 30 day to 2 month hold on that, 20%+ appreciation in that time, and then out. This is an OLD example, and no idea if it still holds, so not giving any investment advice here, OP. THE ONLY CERTAINTY IS CHANGE. The rule here is "look for something the elephants think is bad that is actually very good" and apply that rule to status quo.
Anyway, there are many other ways to dance with the elephants, to try to anticipate what big money will do, keeping in mind that big money pools tend to think alike in their screening and models, there is nothing new under the sun. Part of your research has to be to LEARN everything you possibly can about big money, mutual funds, pensions, government pools, large hedge funds, and see the big money environment AT A POINT IN TIME, as an organic whole like a creature. Once you have 5-10 models like this uncovering prospective trades, you will have each of them spitting out a deal every now and then. IMO, few trades are better, doing lots of trades is for day traders, not my style, I'm not good at working the B/A and would make a lousy specialist or floor trader, more of a big picture guy, but everyone is different. I would seek to have 3-5 open deals at any given time, with the cheapest possible hedges in place such as way out of the money puts on the industry index and/or market as a whole.
But remember, OP and others CHANGE CHANGE CHANGE. There is no static black box, or if there is, I'm not smart enough to find it. When you hear about trading methods, KISS, every level of complexity leads to greater chance of error IME. Simple principles. Adjust to the status quo, and doing that takes IMMENSE work.
One other thing is that EMT is becoming more and more discredited daily. Not sure that Malkiel is still the best thing to read, however good to know generally.
http://en.wikipedia.org/wiki/Efficient-market_hypothesis
Some more reading, everything on heuristics you can get your hands on, Kahneman and Tversky, Gigerenzer. Knowledge of current cognitive science can help you dance with the elephants better. One tip for general research is add "pdf" to your searches. Once you get a study, it will list all the other studies. Then search those titles including "pdf" in the search terms and you can pull up the latest cognitive research very quickly for free. Cut paste from the pdfs as you read into a word document to create 1-2 pg summaries of only the meat of the study. One other layman book along these lines is "The Invisible Gorilla." If I were learning trading stocks for the first time, I'd spend just as much time on modern cognitive and neuroscience as actual investment books.
Before I forget, one other model I am going to finish one day will be called the "sosuave" model, and will try to isolate overpriced companies with failing fundamentals with a history of heavy affirmative action and promotion, especially of women, companies with an airy-fairy gynocratic Peter Principle social activism culture, outsized, expensive and glitzy marketing overlaying less substance and depth of management, in industries with less burdened competitors selling superior products. Should be good for a laugh at least, and I wager it will return solid to boot.
sorry for the rambly post, just typing as things come to mind.
