A Method for the Madness: Unraveling Stock Market Mysteries

I have renewed a relationship.

I take its temperature every day and revise my decisions so that the relationship may continue to enrich my life. It's been exciting if a bit trying, but positive overall.

You see, this renewed relationship is with the stock market.

I have been dabbling in stocks with an individual account since 2008, when the mortgage market collapse sunk the stock market and you could buy almost any stock for a few dollars. I started with about $2,000, opening my account in a trading platform that was then Scottrade.com, and which now, after several acquisitions, is Schwab.com.

The first criteria I used and still use to select which stock to buy is somewhat optional as far as investment criteria go, but it's my favorite: Do I know or understand what the company sells? Accordingly, most of the stock I own or have owned are from companies whose products and services I know and/or have used. For example, Sirius XM, Expedia, JetBlue, Hewlett Packard and Sprouts Farmers Market.

But I have been an investor, whereas now I am becoming more of a trader.

What's the difference, you ask?

Investors focus on long-term gains for gradual wealth accumulation, holding on to stock for months or years. Yes, there's been some modest wealth accumulation in my account. (Actually, I don't know that in my case you would call it wealth necessarily, let's just say growth.)

Traders, by contrast, hold stock anywhere from minutes to months, pursuing profit from rapid price fluctuations. I want to do more of this short-term trading, because my investor gains have been flowing slower than molasses, due to my holding on to losing stocks for too long.

Underlying each type of approach is the type of analysis involved.

Investing relies on fundamental analysis, which means evaluating the value of the company based on its financial health (revenue, profit, debt), industry trends and macro environment. Trading relies mostly on technical analysis, which means studying charts that track current and historical price fluctuations, and make buy and sell decisions based on those.

Ideally you should use both types of analysis.

But I had never learned technical analysis, and lack of this knowledge worked to my detriment. I made it one of my retirement projects to take a class on how to invest, and last month I followed suit by enrolling in a four-week class on technical stock analysis, twice a week.

This is what's happened before and after the course.

Before: Old Me in Investor Mode

About 10 years ago I bought Coty stock. Coty is the parent company of various perfume and cosmetic brands, including Opi, a nail polish brand that covers the walls of practically every nail salon I've been to. Bought the stock at about $16 a share. Over the course of several months, saw it rise to $30+. Got very excited and felt very smart. Held on to the stock. Then watched its price begin to drop. Small drops every time I looked, steady small drops. True to fundamental analysis, tried to see what was happening in the company. Read news, but saw nothing major to explain or anticipate how much worse it could get.

This is the kind of chart I should have been looking at but wasn't.

So I held on to the stock. All businesses have setbacks, I rationalized. Coty's product brands were and are strong recognizable consumer brands that people were buying as much as always. The company even bought Cover Girl, a super popular cosmetics brand. So I kept the stock for several years, hopeful for an upward pivot. I finally threw in the towel in 2023 and sold it at $10 a share. (Waah!) I still use Opi nail polish, as does everyone in my nail salon and every woman I know uses Cover Girl something or other. But Coty stock still sucks and, frankly, I don't care to find out why. Coty and I are done. As I write this, Coty is trading at $4.73, so I guess I could have done worse.

After: New Me, Applying Technical Stock Analysis

Earlier this year, I purchased Life Time stock (LTH), after visiting one of their gym-and-lifestyle facilities, which I loved. I bought the stock at $26 per share and was thrilled to see it gradually increase each day. The question arose: how long will this upward trend continue? Instead of hoping for the best, I dove into Thinkorswim.com (Schwab's real-time stock market dashboard) to access Life Time stock's price chart. The trading class has taught us how to utilize the dashboard, which allows you to view minute-by-minute trade volume and price for every stock, as well as buy and sell instantly. I looked at the stock's price patterns over the past year and the last three years. Then, I zoomed in to observe the stock's daily price movements over the past several months.

Trading class on how to draft price resistance lines (techo means roof in Spanish) and price support lines (piso means floor) across the swings in stock price.

I recalled the professor's explanation about resistance lines (the highest price a stock reaches within a specific time period, eg, the last three weeks or three months) and support lines (the lowest price to which a stock falls within the same time frame.) Those give you the track along which the stock is moving, and the track's direction--up, down or sideways. I came to a decision: it was time to sell, at $29. This decision was based on the fact that Life Time stock had been zigzagging downward from a high of $34 in mid-February, and its upward bounces hadn't surpassed $30 since June. The peaks and valleys it has had in the past five years lack convincing upward movement to suggest any significant rise for the rest of this year. As I write this, on August 1st, it's trading at $27.85. So farewell, Life Time stock, perhaps we'll meet again at a more opportune moment. Thank you for the few dollars.

A similar thing happened with Lyft, the ride-sharing company. Bought its stock at $10 a share earlier this year, and sold it two weeks ago at $15, after looking at its stock chart. Today it's trading at $13.62 and there's no telling where it's going. Old me would still be holding it.

I bought those two stocks weeks before starting the class, applying the criteria of "buy what you love" or at least "buy what you know." What the class has given me is some tools for deciding when to sell.

However, I'm still clumsy with my timing. For example, this past week I bought and sold CVS on the same day, losing a few dollars in the process. I bought it because I thought I was reading the charts correctly, but I wasn't. Plus I don't really love CVS, anyway.

I bought Nike yesterday, also not at the best time, but I'll suck it up and hang on to it until the next tick-up in price, when I'll sell it.

The trading course isn't over, and I'm still learning.

And for that I am glad. The stock market has been so choppy over the past five years that the investor's typical mentality of buy-and-hold can result in a lot of losses.

In fact, when I first created my modest portfolio in 2008, it was hard not to make money, because stocks had fallen so low they had no way to go but up. I funded a couple of down payments for new cars and some trips with gains from the years that followed 2008.

But making gains has become slower and less steady, at least for me. Every stock I think of checking shows a lot of zigzagging. This calls for monitoring more, analyzing the technicals, being patient in identifying an opportunity, and deciding ahead of time how much downturn you will tolerate before selling the stock. There's an ample selection of stocks, no need to hang on to a lousy one. All stock purchases are a risk, but you still can make a few dollars if you apply yourself.

To be sure, no discussion about self-guided stock trading would be complete without mention of basic golden rules by which you should abide. Investment expert Andrew Tobias discusses those in his book The Only Investment Guide You'll Ever Need. https://www.barbellalpha.com/p/summary-of-the-only-investment-guide

Here's a very short summary of what he says about creating a solid financial base before taking on investment/trading risk:

• Pay off high-interest debt first, such as credit card balances.

• Build an emergency cash fund to which you have immediate access, should you need it due to an unexpected circumstance.

• Obtain adequate insurance coverage.

I have applied those, as well as these other ones:

• Secure an income source for your living expenses, before seeking extra spending money through stock investment/trading. For example, if you built a 401(k) during your working years, discuss with a professional the best way to draw retirement income from it, rather than using that money for self-guided dabbling in the stock market.

• Do not risk more than you can afford to lose.

• Set limits on how much you'll let the stock price dip before selling.

• Enjoy rewards when they happen.

• Regret losses if they happen, learn something, and then move on.

Truth is no one can predict with absolute certainty what will happen to a stock tomorrow or the day after or anytime in the future. There are many elements beyond our control. All you can do is observe patterns and put as many odds in your favor as you can.

Isn't that the case with everything else in life?

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