Page 315 - How to Make Money in Stocks Trilogy

192 A WINNING SYSTEM

normal price declines and highly abnormal big-volume corrections that can
signal potential disaster. But the real problem was they relied on stories
they’d heard and a method of fundamental analysis that equates lower P/E
ratios with “value.” They didn’t heed the market action that could have told
them what was really going on.
Those who listen and learn the difference between normal and abnormal
action are said to have a “good feel for the market.” Those who ignore what
the market says usually pay a heavy price. Anyone who buys stocks on the
way down in price because they look cheap will learn the hard way this is
how you can lose a lot of money.

Look for Abnormal Strength on a Weak Market Day
In the spring of 1967, I remember walking through a broker’s office in New
York on a day when the Dow Jones Industrial Average was down more than
12 points. That was a lot in those days, when the Dow was around 800 com-
pared with 8,000 in 2008. When I looked up at the electronic ticker tape
moving across the wall and showing prices, I saw that Control Data—a pio-
neer in supercomputers—was trading at $62, up 3½ points on heavy vol-
ume. I bought the stock at once. I knew Control Data well, and this was
highly abnormal strength in the face of a weak overall market. The stock
later ran up to $150.
In April 1981, just as the 1981 bear market was getting under way, MCI
Communications, a telecommunications stock trading in the over-the-
counter market, broke out of a price base at $15. It advanced to the equiva-
lent of $90 in 21 months. This was another great example of highly abnormal
strength during a weak market.
Lorillard, the tobacco company, did the same thing in the 1957 bear mar-
ket, Software Toolworks soared in the down market of early 1990, wireless
telecom firm Qualcomm made big progress even during the difficult
midyear market of 1999, and Taro Pharmaceutical late in 2000 bucked the
bear market that had begun that spring. Also in 2000, home builder NVR
took off at $50 and rode steadily lower interest rates up to $360 by March
2003. The new bull market in 2003 uncovered many leaders, including
Apple, Google, Research in Motion, Potash, and several Chinese stocks.
So don’t forget: It seldom pays to invest in laggard stocks, even if they look
tantalizingly cheap. Look for, and confine your purchases to, market leaders. Get
out of your laggard losers if you’re down 8% below the price you paid so that you
won’t risk getting badly hurt.