My Strict Buying Criteria For Uncertain Markets

Frustrated with the current market? Having trouble making the kind of money you believe you should be making? Maybe it is time to go back to the beginning. Most investors, including myself, evolve through the market in similar fashion. We lose some money by not really knowing or understanding what we are doing, then we eventually stumble across a strategy that we like and adopt as our own.

As we practice using that investment strategy over the years, we learn from past mistakes and change bits and pieces to work more efficiently. Changes over the course of one’s investment career are one of the key traits to successful investing, but we have to be careful not to change key elements of our core strategy. This is the reason I always go back to the beginning and re-read the original books and manuals that allowed me to adopt the investment strategy I practice today.

Over the past two months, stocks have been setting up, then breaking out (sometimes on heavy volume), and then failing. It has been more than tempting to start jumping into a position a bit before the breakout, then selling half or all through the initial move. I first considered this as I bought Krispy Kreme Doughnuts (KKD | Quote | Chart | News | PowerRating) in mid-October and watched the stock move strongly through its pivot point, only to reverse and knock me out.

On 11/7, I watched Taro Pharmaceuticals (TARO | Quote | Chart | News | PowerRating) blast through its pivot point of 45.70 on very heavy volume. The next day, the stock sold off hard.

At this point, I realized that any stock within 15% of its breakout was eventually getting there. The only problem was this: they were failing 90% of the time. This statistic would not allow profitable trades unless I changed something. Just as I was gaining the conviction through my analysis about moving into these stocks ahead of the correct buy point to capture profits on a short-term trade of a stock that would most likely fail to make a larger move, I found my self reading two books: How I Made $2,000,000 In The Stock Market, by Nicholas Darvas and How To Make Money In Stocks by William J. O’Neil. These two books and a couple others are the ones I first read to put me on track to pulling money out of the market and limiting what I put back…they were my beginning.

As I read the books, I realized two things: 1) why I decided on the investment philosophy I now follow and 2) I cannot change how I buy into stocks, even for short-term trading profits, because I do not wish to interrupt the larger picture and my quest for larger profits when they become available.

Going back to the beginning, for me, was important because I want to stay the course and not allow short-term anomalies in the market affect me. In this specific environment, the alternative to buying these stocks early is simple: patience. Over the past few days, I have watched several more stocks prove that it is not quite time to buy stocks I have chosen. Epiq Systems (EPIQ | Quote | Chart | News | PowerRating) has struggled following its breakout through (split-adjusted) 22.06.

Resmed (RMD | Quote | Chart | News | PowerRating) moved through its buy point on heavy volume only to post an immediate distribution day and eventually trade below the $60 buy-point.

One of the main reasons I chose to follow the strategy I practice is to produce returns that I expect without taking on risk that I cannot accept. I have to always check myself against the basics to make sure I do not change too much along the way. Little things may change, like how much of one’s account goes into a stock, but the core traits must be left alone in order to achieve the larger picture. 

So, I sit back and wait, and if this is the beginning of a bull market (on average, they last for several years) there will be plenty of opportunities over the next few weeks or months in which to make the money I got into this game for. Opportunities such as PEC Solutions (PECS | Quote | Chart | News | PowerRating) will be more common.

Good Luck!