Chris Perruna, President of MSW.com, Guest Writing

I was asked to cover my daily activities in the office during the day and how I got started investing in the stock market. The first question carries with it a very boring answer because I am not a day trader so there is not much activity to speak of but I will touch on this subject to close the piece. I will start with the second question by laying the foundation of how and why I became so infatuated with the markets. I saw my first stock charts when I was about 12 years old when I was in my father’s office (he was not a professional money manager or trader – he owned restaurants). These weren’t like anything you see today on a computer, they were hand drawn in a chart book that he used every week. My father preferred to look at weekly charts and point and figure charts and he would plot his own point and figure charts weekly or monthly in the stocks he owned or was watching. I had no idea what a point and figure chart was and I couldn’t understand what the “X’s” and “O’s” represented. At the time, I just knew that the charts looked cool and they dealt with numbers so I was interested. Mathematics and numbers were my strong subjects in school and I always wanted to be an architect or engineer. Luckily for me, I excelled at math and physics and went on to become an architect instead of a structural engineer because I though the design aspect of the business would be more rewarding. I was right and wrong at the same time because the industry had its rewards but it wasn’t my true passion in life.

Back to my teenage years; I would always ask questions and follow the stock tables in the newspaper with my father. I started to watch the charts and understand that the 50 day and 200 day moving averages were important indicators in my father’s system. The other important factor in his system was support and resistance levels which he determined on the point and figure charts (all of these charts can be found on stockscharts.com). Because the market was filled with numbers and money, I was instantly attracted (even if this sounds callous).

Because there were no computers or internet back then, I never had a virtual portfolio but I did track certain local companies that I knew but I had no idea what I was doing. Most of the things my father said went in one ear and out the other, I was just fascinated with the fact that I could buy at one price and cash out at a higher price without any physical labor. My family owned restaurants and I was always working as a busboy or kitchen help which required long hours and hard work on your feet. I am not suggesting that I am lazy by any stretch but I was intrigued that I could possibly make money with my mind. I would throw around some ideas to my father but he never listened and always through he was right. In high school, I started to notice that he traded options but I didn’t understand them and I didn’t care. Not until recently do I truly understand the power of options and why he used them for leverage back in the 1980’s and early 1990’s.

Finally, I graduated high school and went off to college (architectural school) and wanted to open my own brokerage account so I could trade my own stocks. My parents said it was okay as long as I used my own money from the work I did over the summer at the restaurant. I opened my first account in my sophomore year with $2000 and placed $1500 into one stock that my father suggested based on future expectations and earnings. I didn’t know nor care about expectations but I knew he was successful so I bought the stock. (NOTE: I would never listen to anyone but myself and my own analysis today). I truly think tips are for suckers and only suckers take them (even if this included your own father). Luckily for me, the stock went up almost 200% and I was loving life. I figured I would be rich by the time I was 30 years old. I got greedy and figured the stock would never correct and I held on through a stock split and eventually sold for about a 100% profit (at the time I didn’t know this was a normal correction but I now know what happened to my position) . This story sounds so familiar; a novice investor makes money on their first trade and believes they are genius. Two things: I didn’t pick the stock and it was a bull market so everything was going up. After I sold, I traded in several other stocks with some success and some failure. I had no rules, no system and no true education on the market. Computers were breaking onto the scene and the internet was new but I did not own my own desktop in college (they were too expensive) and I didn’t care. The internet seemed cool and Netscape Navigator seemed to have these chat rooms but I could never find them. A few years later, AOL rolled around and my family got a central account.

This is where I started to learn the best lesson of my life. I started to find stock chat rooms and started to trade based on rumors or upgrades by stock analysts from the big firms. I was working as an architect and knew I wanted to spend my life in the stock market but I didn’t know how to do it. Again, some trades worked and some trades didn’t. I don’t even remember why I bought and sold certain stocks or why I bailed out of some losing positions. It was all luck and I had no idea what I was doing and I was basically gambling several thousand dollars per trade, not even thinking about the consequences. I guess I felt I couldn’t lose so I never worried about placing 75% of my account into one stock. I didn’t know what a stop loss was, I didn’t have sell rules and I only traded based on the moving averages (something I learned from my father). I really started to get arrogant and cocky when I started to buy stocks that were doing better than my father. To this day, I will never forget that I suggested to him and his broker to buy Cisco instead of Compaq in the late 1990’s. They both said no and that I was crazy but it turned out that I was right. Too bad I didn’t buy Cisco at the time (and I was looking at Oracle too). I was in and out of AOL, Intel, Microsoft, Advanced Micro Devices and Nvidia (at the end of the boom). I loved the high tech hot stocks that went up $25 per day and $100 in two months from $20. I didn’t care if they dropped $20 a day because I said to myself, they would be back up within a week. This was the late 1990’s so I was just lucky that I was trading the great bull market (one of the strongest of all time). Looking back, any young adult or kid could have made BIG money during the late 1990’s without knowing what to do. Buy Cisco, Intel or Dell and you would build a mini fortune. Buy, hold and get rich; that was my theme.

Finally, the year 2000 hit and I thought I was a stock market genius at this time. I was still buying and selling only one or two stocks at a time and was placing huge portions of my account into one position. As the market started to break in March, I watched several high tech companies form ranges that they were trading in. For example, one stock I was watching would trade from $50 to $100-$120 and then back to $50 in a matter of two months. I bought into this stock in the summer of 2000 near $55 and watched it move above $70 within weeks. I knew I had the 100% profit coming and I couldn’t wait to keep riding this and other stocks. I was so confident; I basically placed my entire account into this stock because I was so sure it was going to $100 once again (especially since it showed a profit from the first day). To make a really long story short, the stock fell back to the $50’s and I wanted to buy more but I was tapped out. I decided to hold and had no idea what the DOW or NASDAQ were doing historically. I didn’t follow their charts because I didn’t know better and I didn’t care. Every market analyst was writing and talking about the DOW 25,000 and I agreed (things were out of control).

The market was tanking and tech stocks were falling left and right but I was so set on doubling my money, I didn’t care (the greed was at an all time high in my life). A few months passed and my stock was showing a loss but still holding the $40-$45 level and I wanted to buy more but couldn’t. Luckily for me, because the stock fell to $25 within the next two months and I was devastated but still though it was going to $100. After all these years in the market you think I would know what I was doing but I didn’t because I was a product of the 1990’s. I only knew of one thing in the stock market: UP! I didn’t listen to my dad and thought I was better than him because I bought the riskier, more profitable stocks in previous years. I guess he wanted me to learn an early lesson in life. He never admitted that he knew the crash was coming but I think he saw something that I couldn’t because I never traded through a true bear market or major correction. I traded through the pullback in 1998 but that was temporary and hardly scratched the surface. Finally, about six months later, I decided that the stock wasn’t coming back and I didn’t want to tell anyone that I had lost most of my money (besides the fact that I was trading money in my account for my sister and mother – not large amounts but large enough for them). I sold near $15 from $55 and wanted to quit. Everything I built up was gone and the good times were over.

If it wasn’t for my passion, I would have given up right there and focused on architecture 110% but something wanted me to find out why I lost my money and how some people continually take profits from Wall Street. I went on a search to become a real trader, with a system yet I wasn’t sure what a system was. I decided to hit the bookstore, the internet and the library in search of successful people before me. I found a free trial period for Investor’s Business Daily and my life changed at that point when I subscribed. I read the newspaper every night after work and immediately subscribed for two years. I knew I was on to something. I read two of the William O’Neil’s books and finally felt that I was going to form a system. I told my father about the paper and he was aware of IBD but remained loyal to Value Line (another great publication).

Again, to keep the story shorter than it already is, I stared to subconsciously develop a system based on CANSLIM. I started to trade again with average results, no big winners and no big losers. After a year or so of small ball (small trades), I bet large on the educational stocks that were listed in IBD (COCO, CECO, APOL etc…). I was back in business and my investing IQ was starting to build. Over the past five years, I have built a true foundation of real success in the stock market. I have been trading for many more years but they don’t count in my mind because I was just doing anything. The final year of the boom was my best ever according to the percentages but I feel that my best work has been done since (most of 1999 was based on luck and a roaring bull market). If you ask me how long I have been investing, I will typically say 10 years. But if you ask deeper, I will say I have been an educated, serious trader for five years.

After my success in the educational stocks, I started to trade the big homebuilders because I moved from the commercial architectural field to upscale single family homes. I again found success in these stocks and I found some failures in some other stocks so my results were average. Overall, my past five years have been filled with many winners and many more minor losers but they all represent success because I cut the losers short. I will never take a 73% loss ever again in my life.

The most important factor in getting started in the stock market is getting your feet wet. Realize that you will make mistakes and no one is perfect in the market. The best traders on Wall Street, the ones making eight and nine figures per year trading for major hedge funds only have a success rate of 50%-60% at best. This means that 40%-50% of their trades move against them, forcing them to sell for a small loss. I use their percentage ratios as an example and not my own because most new investors respect their results more than mine (I am still a private small time investor that only trades for me). I have aspirations to start and run my own hedge fund in the future and have several key contacts in the business but that is a topic for another day. Start to read about successful traders and systems of the past and start to form a system of your own based on something that has worked in the past. Open an account if you haven’t already and start to trade to get a feel for the business. I call it a business because you must treat it like a business or you will most likely fail. If you casually trade and only do your homework when it is convenient for you, money will be lost. Nothing comes easy or free in this life and everything must be obtained through persistent hard work. If you are weak hearted and have a fear of losing money, I suggest you stick with mutual funds because the time will come when you lose a great deal of money. It happens to the best of us, even the most experienced investor.

What do I do to stay current with the market? I study hundreds if not thousands of charts every week to keep my mind sharp. I spend the weekdays performing fundamental screeners using high powered databases that I pay a monthly fee for. I use Daily Graphs as my primary screening tool but also look to other resources for additional fundamental research. Once I gather a list of stocks that qualify through my fundamental screens, I then take each stock and group them into their respective industries. I do this so I can recognize strength among groups because strong stocks typically travel in packs (I refer to them as sister stocks). After I list the stocks by industry, I start to review the charts. I eliminate any stocks that aren’t forming bases, patterns or are moving near or towards support. I do this same process Monday through Friday and then narrow down all of the stocks into one final list on Friday or Saturday. From this list, I look for a few candidates that I can buy during the following week. When I find these stocks, I study the charts and their histories to look for ideal entry areas. I also determine where I anticipate the stocks to go so I can set up my exit strategy before I enter the position. I do not day trade or trade for the short term so I focus heavily on long term trends found on weekly charts and/or point and figure charts. This does not mean that I won’t buy a stock today and be forced to sell tomorrow if it turns on me. I have also bought a stock one day, only to realize a profit by selling a few days later because I thought I made a mistake. I guess I am trying to tell you that some trades I am forced to be in and out due to my rules but I prefer to be in a position for the longer term (6-12 months is my definition, two years maximum). With growth stocks, I tend to be in most stocks for 3-6 months due to volatility. Outside of reviewing fundamental and technical characteristics for individual stocks, I review charts and news for industries, sectors and the major indices.

I dedicate a large portion of my week studying charts and looking for trends and buying and selling opportunities. I performed this work long before I developed my company and this is the exact reason why I setup MSW. I figured that I loved to study the market and I loved to teach so I formed a business out of my passion. Investing in the market does not give me guaranteed income so the stability of a business alongside my investing allows me to alleviate some pressure of always making a living. I believe in multiple streams of income and would never base my sole income or future on just my investing portfolios. Looking at my results from the past five years (listed below), you can see that my profits from the market have varied and this is not a way to support a family and keep my wife secure. I am an investor and entrepreneur at heart so combining the two activities into one entity for me has been the greatest dream ever.

Chris Perruna
Founder & President
http://www.marketstockwatch.com/