So, I've dabbled in investing before. Nothing very serious and nothing very good. I rode Level Three (LVLT) from 28 to 7 a couple years ago and swore off stocks. So, I went to Mutual Funds and followed the instructions I had always been given. "You buy and hold." "You dollar cost average." That led to a nice 30% loss in 2008 and through early 2009. Then, I tried seasonal investing where you get into the market sometime in the Fall and then get out sometime in the Spring. There are signals "the market" gives to some gurus somewhere and my investment manager gets "the signal" to buy or sell depending on the season. For the portion of my portfolio under this management it has not made much of a difference. The returns were dismal.
In late 2008 though I started looking at some trading articles. I watched CNBC and Fox News Business. I decided that if these fools could trade and make money, I could too. Somebody I read said something that stuck with me. It was that you had to find stocks that the market had punished unfairly. I thought that made sense. I looked around in my daily life. I used/ use Google all day long. I looked at Google and it was at $323 a share down from over $600 a few months earlier. I bought some. It went up a little and then down a little. I went down to $318 and I bought some more. It was then late 2008. I figured I would hold on and see what happened. I subscribed to Motley Fool. I saw a couple of their recommendations. I decided that LoopNet (LOOP) looked good, because even though commercial real estate was in trouble, it still had to be bought and sold. I bought it at $8 and change in Oct 2008 and sold it for $8 and change a year later. However, my Google was really moving. It was back around $600 per share by now. I also bought some Cal-Maine in late 2008, because everybody likes eggs, and after a year of owning that stock I sold it and was up almost 40% including my dividends. In Spring of 2009 I read an article about Oracle and how they had just made an acquisition that was going to really help them. I hunted around for more info about it and found little. But, I looked at other things the author had written and it sounded smart and earlier stuff turned out to be accurate at predicting what was going to happen, so I bought some. I sold it in Feb 2010 for a 20% gain. I knew I was getting lucky with my picks because I didn’t know enough to be this good. The whole market was going up from March of 2009 through early 2010 and I was just along for the ride.
Here’s what he said. The market is rally only healthy a couple times a year and that is when you make your money and should be in the market. He said…well actually let’s change it from what he said to what I took from it. All of the following is based on what I heard but it may or may not be what he said. He said that he uses the Nasdaq to determine when the market is healthy. So, I took that to mean a Nasdaq Composite fund that follows the Nasdaq like IXIC. When it is above its 50 day moving average (50 DMA), then the market is healthy, it’s like a traffic light to investing. Above the 50 DMA is green and below is red. He said that you shouldn’t like sell everything when it goes below but you should use it as a guide. In this one 15 minute interview I learned more than I had learned in the two if not the previous 30 years of my life.
Well, it sounded good, but was it really good? I thought I would back test it. You know, see if it really worked using date from the past. So, I went and got some charts from Yahoo Finance. I charted the IXIC from 1/15/2000 through 1/15/2010. I figured out every time the IXIC went above and below its 50 DMA, approximately. In January of 2000 the IXIC was at $3,882. I then translated the $3,882 into $3.882 for ease of calculation and “bought” 2575 shares for an initial investment of approximately $10,000. In March of 2000, the IXIC fell below its 50 DMA, so I “sold” my 2575 shares for $4.572 a share (the IXIC was at $4,572). For the next 10 years the IXIC went above and below its 50 DMA about 30 more times. It finished at $2,163, or a decline of 44%. So, if I bought $10,000 worth of the IXIC in January of 2000 and left it there for the 10 years it would have been worth less than $6,000.
Instead, by getting out when the market was “unhealthy” and getting back in when it was “healthy,” I would have been able to beat that by a bit. Now, I’m not talking about cherry picking tops and bottoms, I’m talking about catching the meat of the markets good moves by using the 50 DMA – something that can easily be seen. Anyway, by using the 50 DMA as our trigger, investing $10,000 in January of 2000 would have turned into over $62,000. That is over a 600% return instead of a NEGATIVE 44% return.
Well, that’s enough for now. I’ll pick it up here next time.
