Your stock recommendations seem to focus strictly on recent performance of the stock, not necessarily on the fundamentals, i.e. PE ratio, revenue growth, etc. Many of the stocks you reference have "Hold" ratings by other brokers. Is this because your strategy is limited to short term option plays? (June 28, 2000)

  First, we do not focus just on recent performance, though any analysis would be incomplete without looking at how a stock has recently performed. As you can see from our writeups, we look at a stock weeks, months, even a year in the past to determine what type of pattern, if any, it is forming. We look at the technical patterns of a stock to help us forecast where it is going near term. We don't try to say XYZ stock will be at $90 at 1:30 p.m. on July 8. We let stocks show us they are worthy of our money by breaking resistance or out of a bullish pattern on strong volume.

Along with that, we look at the overall strength of the company. While sometimes we will play a pattern for a pattern's sake, the vast majority of the stocks we cover have strong earnings. Our favorites grow their earnings at better than 50% per quarter. In the same vein, however, we do not get hung up on PE ratios even though many of the popular analysts on the television preach on this regularly. Following their own guidelines, they would NEVER have bought CSCO, DELL, MSFT, AMZN, YHOO, SUNW, EMC, and dozens and dozens of other leaders how have grown their stock prices 5000% or better. Why? Because their P/E ratios were too high for them to get involved, and yet many of these stocks increased their share values by thousands of percent before topping out. Thus, P/E ratios do very little in determining what stock will be a leading stock.

Still, brokers like to talk P/E and put ratings on stocks. Why? Because it helps them sell stocks. Brokers are salesmen. Very, very few understand what makes a stock go up or down, and even fewer understand how to read a chart. Their job is to sell you a stock and generate a commission. They put buy, hold, and accumulate ratings on stocks as easily as you drink coffee. How many times have you seen a brokerage house reiterate a strong buy and then two weeks later cut a stock's rating because earnings came out bad? Well, if their 'analysis' meant anything, they would have told you to get out before the earnings came out and the stock was hammered. You have to consider why the brokers put ratings on stocks-they are trying to woo business to generate commissions. To borrow one broker's own phrase, consider the source.

And that leads into another misconception that many investors have. If the P/E is low, usually so is the stock price. Its price is low, it has a low P/E, so it must be a good buy, right? Well, that has proven to be wrong the majority of the time the past ten years in the market. Low-priced stocks do grow to high-priced stocks. Stocks usually do not jump out of the gates at $150 per share. But not every low priced stock makes it to the big time. That is where earnings growth comes in along with price and volume patterns.

Stock charts don't just show where a stock is on a certain day. They show what investors think about that stock. Do they want the stock and are they buying it up, or are they selling the stock? Is the smart money getting out (topping action) or is the stock just consolidating while the weak holders are shaken out before a big move up? Stocks repeat these patterns over and over because investor psychology, i.e., greed and fear, never change. They show up the same way over and over again on charts.

Finally, we do not gear our plays toward short term option plays. Anytime, ANYTIME we say to buy an option when the underlying stock hits a certain price, the stock is a buy at that point as well. Sometimes we are looking for a short term gain, but usually we are looking to ride positions for several days, weeks, or further if the market allows. We do not believe in buying stocks and parking money in one place no matter what the stock does. When we buy stocks, we keep them as long as they are providing us the returns we want. We like to focus large sums on few plays. We believe that over-diversification leads to mediocrity. If we see a winner, we pile into it. If a stock or option does not perform, we get out. If it makes its run and tops, we get out.

Many investors buy a stock and let is then dive under their purchase price instead of selling buy rationalizing and saying they are a 'long term' investor. That is not investing; that is putting good money in a hole instead of letting it work for you. Get out of dogs before they take most of your money (8% on stock purchase) and put it into stocks in plays that are winners (e.g., pre-splits or pre-announcements, breakouts, etc.). The idea is to make money now so it can compound by continually putting it in the path of those stocks that are going to make you the most money. Right now we are seeing quality stocks on all reports breaking out and moving up. That is why we cover leading stocks. We want to put our money where the leaders are, not in those stocks that are lagging. When you go fishing, do you fish for bait or the trophy? The market tells us which stocks are the trophy stocks, and we try to catch them just as they start their runs. Sure we have short term plays that we take profits on when they stop their runs, but we would prefer to hang onto an option play several weeks and cash in a $50 gain per option, or hang onto a stock for months or years and have a 3000% gain. We sell when we have to, we let the winners run until they prove they are finished.


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