BUSINESSWEEK ONLINE: DAILY BRIEFING -- Business news and investing tools

[an error occurred while processing this directive]

OCTOBER 27, 1999

Diary of a Day Trader, Part 4

"The big problem with most traders is that they are too interested in the 'big killing'"

Robert Barker
Robert Barker covers personal finance in his weekly column, The Barker Portfolio, for Business Week from Melbourne Beach, Fla. And he appears every Friday on Business Week Online



Assistive Technology

Byte of the Apple

Eye on Japan

Inside Wall Street

Not-So-Neutral Corner

Online Asia

Power Lunch

Privacy Matters

Sector Scope

Sound Money

Street Wise

Washington Watch

News Flash Archive

George Henel, a day trader from Buffalo, N.Y., thinks that his breed gets a bad rap, so he agreed to share several weeks' worth of his experiences with BW Online Columnist Robert Barker and his readers. Here's Part 4 of the six-part series.

Monday, Sept. 20
No pay today. In fact, I have 5,000 shares of Anadarko (APC) overnight. We have done this before, but at higher levels. I am underwater about $3,000 but feel that all the oil stocks were sold today, and we were just part of it. The American Petroleum Industry oil-inventory statistics are out tomorrow night. There could be jitters over this or possibly an OPEC meeting Wednesday. Most likely the latter.

Cooler weather is starting in Buffalo today. I also noticed that natural gas prices were up about nine cents today. Bottom line: I have one of the best oil and gas stocks in inventory. I don't like the size of my position but think that the "boys" will rally the averages with the oils at some point this week.

There certainly are a lot of investment techniques, but I like the "value" approach. It gives you a cushion if you are wrong in your timing of a stock purchase. Unlike trading highly volatile tech and Nasdaq stocks, this approach gives you the comfort of knowing that if your timing is wrong, you can -- within limits -- maintain your position and be an investor for a few days or weeks. This element of stock selection can also reduce the amount of stress that is usually associated with trading.

As I see it, the big problem with most traders is that they are too interested in making the "big killing" and are not conscious of the magnitude of the risks they are taking on to do it. The risk-reward ratio is so extreme that their trades come closer to gambling than investing.

Let's analyze this a little further. Technology stocks are the usual tool of the day trader. I guess I have never understood why there is so much greed in these types of stocks. Everyone seems to think that they have discovered the next Microsoft (MSFT) and are more than willing to pay $100 for a company that may have 20 cents in earnings and pays no dividend. A stock of this character probably has a book value of $2. The excitement in the stock stems from the fact earnings are "up 100%," from a dime last year.

Now if you step back and throw a little cold water on you face and look at this thing [the stock], you have to say that it is very "light" on any intrinsic value if the concept behind the stock falters or if earnings sputter. The company and stock are an idea, a dream. And don't tell me, "but it's high tech, it's the wave of the future." Well, I can still show you my Bomar calculator that I paid $125 for when they came out. It can add, subtract, and divide. The company was the one of the first to market a calculator and went out of business. Some places give these things out free today.

Tuesday, Sept. 21
Quite cold today -- 45 degrees. Almost could use gloves on my morning walk. Hoping that Anadarko will go against the 100-point loss as of 9:45 a.m.

Looks like gold and white metals higher.

Wednesday, Sept. 22
Sometimes you just can't figure. Everything I mentioned about oil happened as planned -- except for the fact that Anadarko went down again today. It had been up, but I think we have some big tax sellers here. The whole energy complex is up this evening in night trading.

I will tough this out a little more. Standard & Poor's must think APC is a value, too. They raised it to a 5-star buy on Sept. 20. They said "APC is now trading at a solid discount to its estimated reserve per share, and sees this as a chance to buy one of the industry's players at a good price."

It was a funny day. We had a "buy program" which raised everyone's spirits, but the sellers were still there late in the afternoon. I tried to day trade a 1,000 [shares of] APC and 1,000 Cooper Cameron (CAM) with no luck, except for $95. I did take about $1,000 on Stillwater Mining (SWC) in other family accounts.

So I will continue to do damage control. One thing that encourages me a bit is that the Nasdaq was up today. America Online (AOL) up about six points. This is aggressive money. But maybe people who buy these types of stock never worry anyhow.

I note that Phelps Dodge (PD) raised its bid for Asarco (AR) to $25 per share. This was one of the stocks I always thought to be undervalued. I traded it as low as $14. You can see that I wasn't the only one who saw value in this stock. Another of my "friends" was Getchel Gold. I last traded about 5,000 shares at the $15 level with a small profit, when the following week it was taken over at around $30 per share. I also had a bank stock which I sold in the low 30s, only to see it taken out at $72 a year later. It kind of hurts to miss these opportunities (and gains).

I view Anadarko to be a potential target. I have seen it mentioned on "target" lists. Unfortunately, you can wait for a long time and it may never happen. But the value is still there, and if the market pushes it low enough, some company will try to take it out. So if you are going to trade, why not trade in these fertile fields?

Friday, Sept. 24
Not a good day. Someone at Microsoft (MSFT) reiterated a comment that he thought that tech stocks and Microsoft were overvalued. Doesn't seem like anything new, but this was the catalyst for yesterday's 200-point decline.

We are down 500 points for the week and could be through Dow 10,000 in a whisper.

Everyone has pushed, pushed, and pushed this market. Merrill (MER) this week recommended General Electric (GE) at 40 times year 2000 earnings. They also started an Internet fund of some sort just after recommending their "Christmas Basket" of Internet stocks several weeks ago.

CNBC is barely talking about the decline yesterday. In fact, shortly after (and while) it happened, they were talking about stocks that went up. This shows that they don't report market news but rather try to formulate market opinion.

Bottom line: Yesterday was very close to a panic sell-off. Broke some big technicals.

I sold some stocks to get off margin and lost about $2,300. Still own the Anadarko. Oil was up almost 75 cents yesterday and they even sold the oil stocks near the close. The drawdown in APC is getting close to my entire profit for September. If this decline continues, it may turn into a rout. The baby will go out with the bath water.

It doesn't matter. Value may take a long time to recover. The major trend may have reversed. I have a good record August-to-August and may sell to defend it.

Saturday, Sept. 25
Things could not have been much worse for the market this week. I believe the Dow lost over 4%. I have feared this type of sell-off for some time. It just never seemed to come.

My Anadarko dropped some more. When I look at other energy producers such as Burlington Resources (BR) and Apache (APA), it was a tough week for them as well. Hard to understand, since oil is still around $24.74 a barrel.

I bought some J.C. Penney (JCP) on Friday. This seems like a real value. The stock closed at a multiyear low, at about $34.50. The book value is around $27. The stock dividend is $2.18 for a yield of 6.3%. The stock goes "ex-dividend" on Oct. 6 for a quarterly payout of 54 cents a share (already declared). So here we have a major stock close to its book value, yielding 6.3%, going into its strongest quarter of the year (the holiday selling season), selling at a new multiyear low, and a company which has promised to pay you 54 cents in dividends in less than three weeks. Yet in watching the tape Friday, you couldn't believe how desperate the institutions were to get out of this stock. Very big blocks approaching 100,000 shares which "had to be done" with great urgency.

This purchase brings up a technique which I sometimes use when trading. I call it "trading up to a dividend." A very simple concept. I have a list of major companies and the dates their stocks go ex-dividend. In this way, I can look at stocks in calendar order before they declare their dividend and see if they might be a good trade going into their dividend. The dividend adds some security to the trade since normally the stock trades up ("lifts") as we get close to the "ex" date. I may or may not stay for the dividend, but if things go against me I can always sit with the stock and get paid for the wait.

One caveat: Some stocks, believe it or not, will go down the day before they go "ex." Once Arco (ARC) went down $2 the day before it went "ex" on a 75-cent dividend. It then went up several dollars after. Normally, though, if the stock looks like a good trade, the dividend will increase the probability of success. Once again, you have to know how a given stock normally acts as it approaches the ex-dividend date.

"Trading up to a dividend" is so elementary, but you know, I have never seen it discussed anywhere. It seems like a natural for increasing the probability of a trade. Maybe it could be that most people don't trade stocks that pay dividends?

(Tomorrow: Part 5 of Diary of a Day Trader: "We're due for a rally")

Barker covers personal finance in his weekly column, The Barker Portfolio, for Business Week from Melbourne Beach, Fla. And he appears every Friday on Business Week Online

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _