Joe Fahmy The Next Big Move » Jack Schwager

Trading Stocks Over Earnings

Joe Fahmy — Tue, 12 Oct 2010 03:23:29 +0000

In Jack Schwager’s Market Wizards, one of my favorite interviews is with Paul Tudor Jones. I highly recommend reading it because Jones has all the qualities of a successful trader: confidence, flexibility, intensity, emotional control, lack of ego, ability to cut losses, and consistent returns with minimal draw-downs. Jones believes “The most important rule in trading is: Play great defense, not great offense.”

I especially think of this quote when trading stocks over earnings reports. Jones says “never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.” Although Jones was mainly referring to his futures positions, this advice can also be applied to stocks or any other trading instruments. (This strategy does not really apply to long-term investors who are holding positions over several quarters of earnings or longer).

Since we are just starting earnings season, I want to discuss a strategy that I find fairly successful when trading stocks around news releases. It involves “buying the rumor and selling the news.” In other words, I find that many stocks “run” into their earnings dates and tend to “sell off” after the release, especially if the stock has made decent gains in anticipation of the news. Therefore, part of my research during earnings season is to find out EXACT earnings dates and to try and take advantage of possible moves prior to those dates. One thing to keep in mind is that I am not blindly buying stocks a week or two before earnings. My strategy begins with sound fundamental companies and combines buying them near strong technical areas.

Here’s a real-time example: $BIDU closed Monday (10/11) at 99.74. The company reports earnings around 10/26 (they should post the exact date soon). I think you could buy it here and use $95 as your stop with a possibility of the stock running to 110-115 prior to its earnings release. By the way, this is NOT a recommendation! I am simply trying to give an example of 1) starting with a strong fundamental company 2) buying it near a decent support area and 3) trading it in anticipation of a potential run into its earnings release. If you trade this idea, PLEASE USE A STOP and protect your portfolio if the stock turns against you.

There are situations where I will hold a stock over earnings. For example, I like to find “sleeper” companies that are not widely followed by analysts. In other words, I would never play $MSFT over their earnings because 400 analysts follow them and their estimates are in a fairly tight range. I prefer finding companies with a few analysts covering them, thus making upside surprises more likely. One VERY important note: When I do hold a stock over earnings, I keep a “smaller than normal” position size. Again, I’m just “playing defense” and not concerned with missing potential upside. If you are adamant about holding a stock over earnings because you have done your research and you are 100% convinced that they will beat estimates, my best advice would be to hold a position that will allow you to “sleep at night” in case the stock gaps down 10-20%.

In summary: Do your due diligence, find out the earnings dates of the stocks you are trading, try and take advantage of “run-ups” into earnings, and if you decide to hold over earnings, keep your position sizes small. Remember: “PLAY DEFENSE!”

Follow me on Twitter @jfahmy

My One-Year StockTwits Anniversary!

Joe Fahmy — Thu, 30 Sep 2010 00:29:40 +0000

The main thing I love about StockTwits is “idea generation.” As I trader, it is very important to do your own work, but it also helps to exchange ideas and concepts with other traders. I am very thankful to be a part of the StockTwits community because it has allowed me to share my ideas, while also learning from some very talented people. I truly believe in the importance of surrounding yourself with sharp, motivated people because it can positively influence us and make us strive towards constant improvement.

Since this is the one-year anniversary of my investment blog, I wanted to “re-introduce” myself because there are so many new followers on a daily basis. Back in 2006, I used to send “Market Notes” via email to update some fellow traders on my views of the US stock market. I found it very helpful because it gave me the opportunity to organize my thoughts and prepare myself for trading. Thanks to Philip Pearlman and Howard Lindzon, they convinced me to turn these Notes into an investment blog. My intention is to provide keen market insight, strong stock ideas, and to hopefully pass on some of the lessons I’ve learned from 15 years of trading.

My Investment Process:

The first thing you HAVE to do is define yourself! Are you a trader? Or an investor? I am a trader. I hold positions anywhere from 2-3 days to 2-3 months. I screen the market every night with proprietary screens I developed over the years. These screens are quantitative, technical and fundamental. They are based on the “Greatest Winning Stock” models and studies done by William O’Neil. Essentially, I start with sound fundamental companies and try to trade them at the proper time AND when the market is healthy. I believe in Jesse Livermore’s philosophy: the market is healthy 2-3 times a year, do your homework to identify those times, and trade them aggressively. The rest of the time, build cash and protect your profits. Livermore believes you are a fool for trading everyday and “you should not be in the market all the time.”

My Advice:

Find a philosophy that fits your personality and mimic someone who has been successful at it. I don’t believe in re-inventing the wheel. In other words, if you are a long-term value investor, study Warren Buffett. I like O’Neil’s philosophy because it combines both stock trading and market timing, but it might not be for you.

Be ready to work at it! Remember, there is NO substitute for experience and stock trading involves hard work and emotional control. Gerald Loeb says: “Knowledge born from actual experience is the answer to why one profits…knowledge means information and the ability to interpret it marketwise.”

Study great traders. Three common words of advice from the best traders are: CUT YOUR LOSSES! You will begin to realize the importance of this advice when you study the top traders.

Thank you again for allowing me to share my ideas over the past year. I hope you continue to find this blog insightful and that you also learn something along the way. You can email me at jfahmy@zenithasset.com if you have any questions or comments. I will try to answer them as best as I can.

Follow me on Twitter @jfahmy

Why I Hate Shorting Stocks

Joe Fahmy — Mon, 12 Jul 2010 09:27:49 +0000

During this recent market correction, I have received several emails asking me why I don’t recommend short ideas. In my Introduction blog post, I talk about finding an investment philosophy that fits your personality…and quite simply, shorting is not for me. The title of this article is not meant to offend anyone, as I never try to impose my trading style on anyone. I actually believe that shorting is a necessary part of the stock market and that short-covering can add stability to a correcting or “free-falling” market. Nevertheless, it doesn’t fit my personality and here are my reasons why:

1) I believe that the market is healthy 2-3 times a year. Do your homework, identify those times, and invest accordingly. The rest of the time, I prefer to stay out mainly to take a mental break and focus on other things. For example, since the March 2009 low, I intensely traded the market for about 14 months and never took a break. When the market went into its recent corrective phase, it gave me time to work on my business, take a brief vacation, do post analysis of my trades, spend more time with family, and most importantly: take a mental break! Even if trading is not your main occupation, you’ll be surprised how much more productive you can be at work when you’re sitting in cash, waiting patiently for new bases to build, and not constantly watching the market.

2) Shorting is flat out too difficult and frustrating. In Jack Schwager’s Market Wizards, William O’Neil says that: “Selling short is quite tricky. I myself have only made significant profits on the short side of two of the last nine bear markets.” I’m not a big fan of re-inventing the wheel. In other words, if one of the top traders of all time is telling us that shorting is difficult, then who am I to think that I’m going to be any better at it?

3) Effective use of capital. In 2002, a hedge fund manager that I have tremendous respect for shorted some of the bond insurers ($MBI $ABK) saying they would eventually fail. He was mostly correct in his prediction, but there were a few problems. First, it took over SEVEN years for his call to play out. Second, the stocks increased over +50% from 2002-2007 BEFORE they eventually fell apart; this can be painful and excruciating when you are short a stock. Third, during that period, there were huge winning stocks (such as $TASR $HANS $AAPL $GOOG) that increased from +500% to over +2000%. In my humble opinion, I would rather invest my capital on the long side in stocks with infinite upside potential than frustrate myself on the short side for limited gains. In other words, I WOULD RATHER MAKE DOLLARS THAN PENNIES!

4) Limited gains. A $20 stock can theoretically go to $1,000 or higher on the long side. A $20 stock can only make you $20 on the short side and that’s only if the company completely goes out of business! Realistically, the company’s stock will stabilize in the single digits even if the common paper is worthless.

5) In 1999, after CMGI’s stock rose from $1 to $120, a very sharp money manager I know was adamant that the stock was going back to $1. Once again, he was dead right with his prediction except for one thing: the stock tripled to $360 before it collapsed back to $1!!! This proves the old stock market adage that: “Just when you think a stock can’t go any higher it usually does, and just when you think it can’t go any lower it usually does.”

6) Shorting seems to only work well in full blown Bear Markets and not in intermediate 8-12% corrections. For example, I know people who shorted stocks effectively back in August 2008, and they were frustrated that they covered WAY too early. In their defense, no one expected the severity of the ensuing correction at that time. Another example is the current market environment. Some people are shorting now with the expectations of a new Bear Market, but they could also end up frustrated if we abruptly turn and move to new highs later this year. My point is that either way: SHORTING IS VERY FRUSTRATING!!!

7) Whenever you are loaded up on the short side, you wish for the worst possible news to come out. You hope for a bomb to go off somewhere, Middle East tensions to escalate, swine flu to spread, a plane crash, anthrax in the mail, or a deadly virus to breakout that can only be cured by capturing the host monkey from the movie Outbreak. In other words, we turn into sick individuals just so we can make $1.37 on our $FAZ and $QID positions! I know this point may sound a little disturbing, but trust me, if you are in intense trader like myself, it’s very true.

As I said in the beginning, this article is not meant to offend short sellers. I simply think that shorting is too frustrating and I would rather take a mental break and focus on other things while the market is correcting. I will leave you with one final thought: The best traders I know do post analysis of their trades. Go back and isolate your short trades. Be honest and ask yourself if you’ve made a net profit on those trades. I’m guessing that over 95% of you will answer no. By the way, I’m also in that 95%…another reason why shorting is not for me.

Follow me on Twitter @jfahmy

Why I Hate Shorting Stocks

Joe Fahmy — Thu, 11 Feb 2010 05:39:35 +0000

When I called for a market correction in mid-January, I received several emails asking me why I don’t recommend short ideas. In my Introduction blog post, I talk about finding an investment philosophy that fits your personality…and quite simply, shorting is not for me. The title of this article is not meant to offend anyone, as I never try to impose my trading style on anyone. I actually believe that shorting is a necessary part of the stock market and that short-covering can add stability to a correcting or “free-falling” market. Nevertheless, it doesn’t fit my personality and here are my reasons why:

1) I believe that the market is healthy 2-3 times a year. Do your homework, identify those times, and invest accordingly. The rest of the time, I prefer to stay out mainly to take a mental break and focus on other things. For example, since the March 2009 low, I intensely traded the market for about 8 months and never took a break. When the market went into its recent corrective phase, it gave me time to work on my business, take a brief vacation, do post analysis of my trades, spend more time with family, and most importantly: take a mental break! Even if trading is not your main occupation, you’ll be surprised how much more productive you can be at work when you’re sitting in cash, waiting patiently for new bases to build, and not constantly watching the market.

5) In 1999, after CMGI’s stock rose from $1 to $120, a very sharp money manager adamantly convinced me that the stock was going back to $1. Once again, he was dead right with his prediction except for one thing: the stock tripled to $360 before it collapsed back to $1!!! This proves the old stock market adage that: “Just when you think a stock can’t go any higher it usually does, and just when you think it can’t go any lower it usually does.”

6) Shorting seems to only work well in full blown Bear Markets and not in intermediate 8-12% corrections. For example, I know people who shorted stocks effectively back in August 2008, and they were frustrated that they covered WAY too early. In their defense, no one expected the severity of the ensuing correction at that time. Another example is the current market environment. Some people are shorting now with the expectations of a new Bear Market, but they could also end up frustrated if this is only a 8-12% correction. My point is that either way: SHORTING IS VERY FRUSTRATING!!!

Follow me on Twitter @jfahmy

Finding Big Stock Winners

Joe Fahmy — Tue, 29 Sep 2009 19:40:52 +0000

The tag line for my blog “Big Game Hunting in the Stock Market” comes from my constant desire to find “Big Stock Winners.” By big winners, I mean newer entrepreneurial companies that are going through a growth period where their stocks can experience HUGE price appreciation. Recent examples include Hansen that went up over +1200% in 2004-05, Intuitive Surgical +420% in less than 2 years, and Taser +2200% in just 39 weeks!

My yearning to find these stocks could be described as a craving or even an obsession. In Jack Schwager’s Market Wizards, David Ryan sums it up best: “The greatest thing about the market is that it is always fun to be looking for that next big winner…trying to find the stock with all the characteristics that are going to make it have a big move…to me it is like a giant treasure hunt.”

Ryan’s success comes from his job at William O’Neil & Co. where he learned and perfected O’Neil’s studies of “Great Winning Stocks.” The research makes absolutely perfect sense to me. If you are going to try and find the next Microsoft, Home Depot or Yahoo, study what these companies had in common BEFORE their stocks had tremendous price advances. I emphasize the word BEFORE because it is key to understand the early stage characteristics of a potential big winner.

The studies of the “Greatest Winning Stocks” are very in-depth but here are some of the highlights:

1) Growth — The most dominant reason behind the success of huge winning stocks is major increases and acceleration in quarterly earnings and sales. In other words, Wall Street wants to see growth! Look for companies that have a minimum of 25% earnings and sales growth because that is what big winners show prior to their advances.

2) New products and services — Look for companies that are revolutionizing the way we do things. If their products are doing well, it almost makes sense that the company’s earnings and sales will grow. Examples include Xerox in the 1960’s, McDonalds in the 70’s, Walmart and Home Depot in the 80’s, Microsoft, Cisco and Dell in the 90’s, and Apple and Google over the past decade. The common theme with all these companies is that they developed products or services that essentially changed our day-to-day lives.

3) Newer/Entrepreneurial companies — Most stock winners went public within 8 years (or less) prior to making their big advance. The point is: don’t be afraid to buy IPO’s or newer companies that don’t sound familiar. Although the companies mentioned above are household names today, most people were probably apprehensive of buying them because they seemed foreign at the time.

4) The average price was approximately $35 per share BEFORE the big advance. The point here is “you get what you pay for.” Don’t be afraid to buy expensive stocks with institutional support behind them.

As I mentioned earlier, the studies on “Great Winning Stocks” are very thorough and discuss details such as relative strength, trading volumes, shares outstanding, and most importantly, the proper technical timing to purchase a stock. If you are interested in learning more, I highly recommend O’Neil’s book How to Make Money in Stocks. It might help you with the fascinating treasure hunt of finding big winners.

Follow me on Twitter @jfahmy

Introduction

Joe Fahmy — Thu, 24 Sep 2009 12:30:34 +0000

In early 2006, I created “Market Notes” to update fellow traders on my views of the US stock market. I found it very helpful because it gave me the opportunity to organize my thoughts and prepare myself for trading. Thanks to Philip Pearlman (twitter: @ppearlman) and Howard Lindzon (twitter: @howardlindzon), they convinced me to turn my Notes into this investment blog. My intention is to provide keen market insight, strong stock ideas, and to hopefully pass on some of the lessons I’ve learned from 15 years of trading.

My Investment Philosophy:

The first thing you HAVE to do is define yourself! Are you a trader? Or an investor? I am a trader. I hold positions anywhere from 2-3 days to 2-3 months. I screen the market every night with proprietary screens I developed over the years. These screens are both technical and fundamental. They are based on the “Greatest Winning Stock” models and studies done by William O’Neil. Essentially, I start with sound fundamental companies and try to trade them at the proper time AND when the market is healthy. I believe the market is healthy 2-3 times a year, do your homework to identify those times, and trade them aggressively. The rest of the time, build cash and protect your profits. As Jesse Livermore says: “You should not be in the market all the time.”

My Advice:

Study great traders. Three common words of advice from the best traders are: CUT YOUR LOSSES! You will begin to realize the importance of this advice when you study the top traders.

Thank you for your interest in my blog. If you have any questions or comments, you can email me directly at joe@tradingbigwinners.com. Also, follow me on Twitter: @jfahmy.

Joe Fahmy The Next Big Move » Jack Schwager

Recommended Reading List

Trading Stocks Over Earnings

My One-Year StockTwits Anniversary!

Why I Hate Shorting Stocks

Recommended Reading List

Why I Hate Shorting Stocks

Recommended Reading List

Finding Big Stock Winners

Introduction