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When Experience Contradicts the Experts

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By David Popper

When I began investing in early 1998, it felt a bit like taking a stab in the dark. After a few rounds of beginner's luck, I was convinced that investing was easy. I drew the conclusion that any stock which declared a split was destined to go up regardless of any other factor. I also read IBD voraciously, and was convinced that successful investors only "bought high and sold higher." In January of that year B.J.Services (BJS:NYSE) declared a 2:1 split scheduled in April. I reasoned that the stock was splitting, and that oil was a commodity in demand. I also noted that BJS was a leading oil integrated oil services provider and had a low PE. I debated about purchasing options or the stock. I chose the stock. I purchased 1000 shares of BJS and sat back waiting to become a millionaire. Over the course of the next 3 months I witnessed the unthinkable happen. BJS went from $35 to $11 as oil went to $10 a barrel. In utter frustration I sold. In 2001 that stock recently hit $80 a share. Someone made an 800% profit in two and a half years while I lost 2/3's of my investment. The BJS trade has kept me humble ever after. I have perhaps overanalyzed the mistakes that I made. I could talk about the lack of being aware of the general market for oil. I could also talk about my lack of understanding of simple chart analysis. The stock was in a decline and just breached its 200 day moving average. I could talk about the lack of selling discipline. I could also talk about the problem of placing all of eggs in one basket. I could talk about several other mistakes. The trade was a complete course in how to make a bad trade. I would instead like to concentrate on another issue. This is the issue of recognizing the opportunity of a lifetime when it presents itself.

There have been several times over the last three years, where I have noticed quality stocks in essential sectors being unfairly punished for whatever reason, only to later rise from the ashes and shine. While most people sat around, wrung their hands and made predictions for the demise of the sector, others purchased low risk positions and doubled, tripled, and quadrupled their money. Oil was not going to stay at $10 a barrel. The sector has always cycled. In hindsight, this was a no brainer, even though every analyst was recommending that the stock be sold. Yes, it took patience and guts to hold oil services stock in 1998. The sector was rated on the bottom of the list in IBD and others were bailing out. It would not be fun to have money tied up in this "dead" sector while the net was racing. But which investor would be better off today? Do you want other examples? Check out the health care industry's performance in 1999/2000 compared with its performance in 2000/2001. Also, look at the the utilities. By using common sense and simply noticing if there are sectors, which are essential to the economy, and which are beaten down, one could purchase shares and await the inevitable. The returns are fantastic and there is far less danger than trading the current popular stocks.

It does take nerve to employ such a strategy. It is impossible to pinpoint a bottom so it is very possible that the stocks you select will continue down for a time. If you employ basis chart analysis, however, using 6 month, 1 year, 5 year, and 10 year charts in conjunction with each other, you can be more accurate. Further, when these stocks are at their lowest levels, the the news is extremely negative, and the predictions are dire. It takes courage to see through the smoke and realize that this is an essential sector which will come back. Warren Buffet's mentor, Benjamin Graham once commented that the way to consistently in the market is to buy these critical sectors when the stocks tank, and to sell when they are on the rise. Because he was a fundamentalist, and not a technician, he stated that stocks purchased may continue to go down, and that stocks, which are sold, may continue higher. He was not concerned because his profit was healthy. If this strategy was used, but enhanced with chart analysis, the profits could be enhanced. If option strategies were employed, such as writing OTM covered calls, while awaiting the rebound, the profits would be enhanced. Simply put, there are treasures available in those essential sectors which are not currently being mined by the majority of the active traders. The BJS story of its temporary demise and 800% resurrection will continue to happen. Some investors will continue to make quiet fortunes in these overlooked areas.

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