I posted this on the AMD board on Yahoo. In case you missed it, I'm posting it here for you. I hope Cramer is still looking for the secret formula!!
Hope this doesn't disappoint you guys too much, but the methodology I employ is basically a random walk along with allowing the market to take you where it's going. I don't call the market.
Lately I have modified it. I used to buy more shares, now I limit my purchases to 50 shares. One of the super whales suggested that over dinner. He confided that he only buys a 100 himself unless the stock is in play for a takeover or merger, etc. If the deal isn't completed, he sells down his position back to 100. Before I got this advice, I was pulling out my hair trying to figure out how to get 1000 shares for each stock. It was a wonderful gift.
I really don't think my method is useful to you because options involve a time element which purchasing the stock does not. In both cases you wait for an event to happen. I could buy today and the favorable event could come to pass in 5 years time. I purchase 1 share for $1 of the Bear Manufacturing Co. Five years from now the share sells for $1000. I can sell or not, depending. If I had purchased an option it would be more time specific. The advantage of an option would be that it costs less to play the game. However, it appears to me the risk is greater because of the time element. The event must happen within the stricture of the time period you've selected.
Obviously you try to buy low and sell high, and do not chase. Here I sometimes fail - occasionally I chase to punish myself for not being in the stock at the right time..
Additionally, from Louis Rukeyser, ignore the noise. You must ignore the noise.
It was Socrates who said simple was best. I try to incorporate that.
I also buy a lot of stocks. I don't believe in Lord Keynes' type of portfolio where you hold 1 stock. And, I don't go in and out. You say why not? In the standard methodology, taxes are not included. I like to include the taxes before I sell the stocks. If I pick up 1000 shares of a 1@ stock and 5 years later I sell at $100@, I have to pay long term capital gains which have to be deducted from the sale price. In the case of short term gains which are taxed as ordinary income, you receive no premium for your risk. Each time you go in and out you incur taxes which erode your profits. And, of course, you have to pay more commissions. Even worse, you have to hope the stock doesn't decide to do a loop-d-loop and go the other way. So, by taking a long term approach you lower the tax and get to retain more of your gains.
I buy many stocks within a sector, not best of breed. Between you and me, I think that that's foolish for the simple reason that you're purchasing the guy who already got there, #1. How much more growth is he going to be able to give you? Buy the guy on the bottom, or even #2 or 3, something that gives you a return on your money. I believe it was Al Frank, who ran a mutual fund, who found that all the stocks within a sector move together. So if you buy those lower on the list, you'll get a larger return. As long as you're not playing with penny stocks, for instance defense stocks, it will be very rare that they go into Chap 7 just because they're on the bottom.
Please don't tell Cramer. Let him continue to look for the magic formula since he's so sure it exists.
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