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Bang, We’ve Hit Bottom – Fasten Your Seat Belts For the Trip Back
As an objective analyst for the entire automotive aftermarket industry, I’m often asked to pull a rabbit out of my bag. Well I don’t have this bag and even less the rabbit to get out of it. That said, my twenty-five years in the industry have taught me never to take the advice of a poorer man.
Now why would anyone ask me? With the salary of an industry analyst, I am undoubtedly among the poorest of them all. However, as most readers know, I’ve covered all the gems and laggards in the industry. Today, there are many laggards in this industry, and that includes subsidiaries of giant corporations.
As part of my mission, I also have to go to meeting places for investors. I see a lot of talk and action from these sources that fully defines the rush syndrome. The rush syndrome is also called the herd syndrome because it relates the attitudes and behaviors of these investors to those of a herd of cattle rushing over a cliff – it is axiomatic that this n is not a successful course. Day traders who fill pages and pages of chat room screens do not trade for the money but for the adrenaline rush that fuels their veins every time. Luckily, they sometimes come across a winner fueling their excitement. The statistics, however, tell a different story; The ratio of losers to winners is 1080:1.
Of the 30 day traders I surveyed, none indicated they understood the concept of weighted average returns. Most responded “that’s how it goes” when asked about the high level of loss. Basically it’s a game. Just like the chat rooms they participate in.
So how do you really make money in this game?
Well, I went to see three full-time expert investors (they avoid the trader title). There is a pattern in their thinking that I will share with you. Each called the method followed for investment; “Fundamentals of Business”.
Here are the rules of Fundamentals Trading as they described them to me;
1. Stay under the radar, out of chats and message boards. Remain anonymous during interviews; only use the media to read, never post in chats or forums. When browsing through them, look for presentations or reasoned comments.
2. Unless you have multi-million dollar resources and can involve sophisticated metrics, a successful day trader does not exist.
3. Don’t bet cards except; (i) combine volume and trend and trend with volume. High volume and falling price over a period of a month, in the absence of negative news, means profit taking often made in a massive way. This is a very positive signal that must be followed to the end. (ii) A sudden stop in volume and an unchanged stock price signifies a bottom. The stock will often do nothing or trade sideways for a while. (iii) A rise of 0.125 or more confirms this low. Don’t expect it.
4. Don’t be an amateur. If a trade or investment is worth making, it’s worth doing for a fraction of a penny more. Do not place orders in round numbers. For example, if a bid is .19, place your bid at .18.3.
5. Don’t be a foolish amateur. Bid your trade at the lower of 120% of the market maker’s highest bid or 110% of the lowest published bid. Then apply the rule and finalize your bid by adding .003.
6. If trading stocks under $1 does not work on percentages but on real money. Don’t underbid 1 cent to save $20. You will do yourself and the stock more good by bidding 1 cent and then adding 0.003 as this will lead to more interest and better performance for the stock. It will also clean up unpublished lower offers.
7. Chat room traders are notorious for ignoring the rules. By doing so, they keep chasing after the trade and lose their money most of the time.
8. Hold stock until you have objective confirmation of the facts. For example, if volume dries up to almost nothing after rising more than 20% and the stock fails to rise for seven straight days, don’t sell, watch it instead. If the stock drops 3 or more times in a row and only then drops 90% below its price at the high of that series with no apparent negative news, a sell decision would be appropriate.
Never sell on a sudden bearish tick, even if it drops below 90%, as it could just be a big block traded on an AON (All of Nothing) at a favorable price. You must have dry volume and three consecutive ticks down before a sell is considered. Do not violate the rule of three consecutive ticks down, any rise in between or parallel trade at the same price interrupts and restarts the rule of three.
Too often traders underbid on principle and sell or buy on a whim (for example, if you buy 2000 shares at 0.20 cents, a price increase of 1 cent will cost $20. If you are concerned about $20 , you do not have a company to trade stocks.
Emotions have no part in successful trading. The goal is to maximize profit, and in that quest, patience is a virtue. These rules are particularly applicable to small caps or so-called penny stocks.
What is success, I asked and got a unanimous answer: “Well, success is ending every quarter on the positive side with less than 10 trades”. All three traders agreed that less is more and that “Fundamentals Trading” means you are buying something real, not hype or a theory about what might happen.
Fundamental trading is investment trading. You don’t need quick sales to make money. Most of the money is made by those who buy into smaller companies with good fundamentals backed by great press releases and news. Good companies are also good global citizens – a failure in this area suggests short-term prospects on the part of management that could lead to disaster enough to knock the air out of their balloons.
I left and thought about which of the publicly traded companies in this industry could abide by these rules. Much of the industry’s request to trade associations has been about a small company (market cap $15,000,000), which trades on the OTC under the symbol FLKI. In this direction, it took little research to confirm that the company follows each of these rules. Therefore, the business should be of interest to those who want their investment to be backed by ongoing activity, an apparent rarity in these OTC markets, I was told. By exploitation, I mean here; substance behind the trades, real company, real products, real sales, you know the story. Except that I have no qualification to recommend a security which is a personal decision to be made by the investor according to criteria which he will establish himself.
Reporting for the industrial press and since 1997 on this non-conformist company has been a pleasant challenge. The company is incredibly successful, it is a world leader in product development, it has a barn full of over 160 product concepts distributed globally and as many in the pipeline. Its unique management has created a company whose counter-cyclical activity is crisis-proof.
The hype is abundant in the OTC and Pinksheet stock environment. SPGE was the latest of the stocks recklessly pursued by day traders in the chatrooms. The press, including the New York Post, has claimed in recent articles and editorials that all the hype around this outfit was just that; hype. Its stock has been suspended, and among other things the SEC is interested in the fact that a company claiming more than $30 million in sales only has $34,000 in the bank.
Claiming no distinction in mathematics, I asked the gurus I interviewed to demonstrate an application of their rules against FLKI which I had concluded the company met the standards. Referring to their background check (called “dd” in the industry jargon), they pointed out that the company’s shares rose 896% from 5 cents to over 50 cents to become number 1 on CNN’s Money “Best Performing Stocks”, which it had was hit by massive profit taking on increasing volume, which depressed the stock price significantly. All of this, however, suddenly stopped. Volume dried up to a few thousand shares, and the stock held firm. A confirmation of the bottom required a close on the upside of 0.125 or more. This happened and the bottom was confirmed at 0.19 cents. All of these facts are historical and common knowledge – “dd” which stands for due diligence, aims to bring these facts together.
That done, and applying the rules presented, the stock, according to the gurus, is a strong buy down to 0.204 (it was offered at 0.19 cents). The highest bid is 0.16 cents, which would produce an entry bid of 0.176 + 0.003 or 0.179, tested against 110% of the lowest bid of 19 cents, resulting in a price of the offer of 0.209 + 0.003 or 0.212. So, following a perfect application of these rules, the shares should be bought, I was told, at 0.212 cents, anything less being considered a volatility advantage.
I like the stability of the rules that work and the proven home runs that the “never a negative quarter” rule hugs. I am a believer. For the gurus, the company is a model target for “Fundamentals Trading”. Moreover, according to his latest press releases, which were similarly consulted as part of the “dd” training course that I followed, he seems to follow the rule of never having a negative quarter!
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