Fundamental versus techincal investment.

During the recent rout in the stock market I am starting to question the pure buffet style of investment for small investors like me. Does it really pay to see all your gains washed away simply because the company fundamentals are strong and there will be an eventual recovery ?

I do not think so. For small investors I would surelly suggest reading the book "How to make money in stocks" by "william j. o'neil". This book emphasises on ways to preserve the gains in the bull market and several other useful hints. Mainly it introduces CAN SLIM strategy.

C Current quaterly earnings per share: Higher, the better.
A Annual earnings increase: Look for significant growth.
N New products , New management, New Highs : Buying at the right time

S Supply and demand: Shares outstanding plus big volume demand
L Leader or Laggard: Which is your stock ?
I Institutional Sponsorship: Follow the leaders
M Market direction: How to determine it ?

During this correction the stocks where I lost money were precisely the ones where the sector was beaten down due to huge gains in the earlier bull run. Most of the stocks still have good fundamentals but cannot be called good growth stocks. This is where the CAN SLIM strategy will help investors. Hopefully we can find a nice balance of both worlds.

Example :

Philips : Though it is undergoing drastic reorganization, streamlining and focussed acquisitions does not have the required growth momentum. No new products etc. So although the company is sitting on huge cash reserves (close to 20 bn) it is in a beaten sector.

Arcelor mittal: This is a very nice selection but still is suffering in the short term due to overall steel sector getting the beating. In fact it is a very investor freindly management and looks agressively for growth. Recently they have penetrated the chinese steel market(joinlty with bao steel and nippon steel. 15% stake). This stock also lists in the IBD top 100. Look for buying opportunity in a week or two.

Salzgitter: This is also a good company with sound policy and with exteremely low debt/equity: 0.04. But still I lost some cash due to wrong timing of buying this stock. It is also a nice fundamental stock and they are also tying up with Korean POSCO in search of growth.
So overall it is a nice long term investment, given the growth of the german economy in the offing.


Overall there advices are very useful (atleast to me):
(Courtesy: www.investors.com)

1. Consider buying stocks with each of the last three years' earnings up 25%+, return on equity of 17%+ and recent earnings and sales accelerating.

2. Recent quarterly earnings and sales should be up 25% or more.

3. Avoid cheap stocks. Buy higher quality stocks selling $15 a share and higher.

4. Learn how to use charts to see sound bases and exact buy points.

5. Cut every loss when it’s 8% below your cost. Make no exceptions so you can always avoid huge, damaging losses. Never average down in price.

6. Follow selling rules on when to sell and take profit on the way up.

7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when general market indexes show five or more days of volume distribution.

8. Read IBD's Investor's Corner and Big Picture columns to learn how to recognize important tops and bottoms in market indexes.

9. Buy stocks with a Composite Rating of 90 or more and a Relative Price Strength Rating of 85 or higher in the IBD SmartSelect® Corporate Ratings.

10. Pick companies with management ownership of stock.

11. Buy mostly in the top six broad industry sectors in IBD’s New High List.

12. Select stocks with increasing institutional sponsorship in recent quarters.

13. Current quarterly after-tax profit margins should be improving, near their peak and among the best in the stock's industry

14. Don’t buy because of dividends or P-E ratios.

15. Pick companies with a superior new product or service.

16. Invest mainly in entrepreneurial New America companies. Pay close attention to those with an IPO in the past 8 years.

17. Check into companies buying back 5% to 10% of their stock and those with new management.

18. Don’t try to bottom guess or buy on the way down. Never argue with the market. Forget your pride and ego.

19. Find out if the market currently favors big-cap or small-cap stocks.

20. Do a post-analysis of all your buys and sells. Post on charts where you bought and sold each stock. Evaluate and develop rules to correct your major past mistakes.