Interview with Nusair Bawla (alibawla)

April 11th, 2006

For interviews in the StockTickr Interview Series (RSS feed), we wanted to interview not only well known traders but also those who are out of the spotlight and have found a way to trade stocks for a living. In looking around at the watchlists on StockTickr, we realized that the kind of stocks that were in Nusair Bawla’s watchlist were very similar to the type of stocks that we like to trade.

We approached Nusair to find out a little more about him. Nusair has graciously given us a window into his style of trading and some of the criteria he looks for to pick stocks. Like many of us, his early years in the stock market were pretty rough. In fact, his account was completely wiped out early on by following a hot tip by an acquaintance! He’s since developed some rules for investing that he sticks to and he’s apparently done quite well.

Read on to hear about those rough early year’s in Nusair’s experience in the stock market and how he uses a unique blend of fundamental and technical indicators. Like our previous interviewees, Nusair has agreed to field questions in the comments, so ask away!

ST: Tell us a little about yourself.

Nusair: I am a 32 year old married father of three living in Maryland. In addition to my trading, I also own a small business. Having a steady income coming in from outside the stock market provides me with the ability to trade without worrying about household expenses such as mortgage payments, groceries, etc. It also helps that my wife works and gets health insurance coverage for the family. I mention these things only because when you do not have to worry about meeting expenses, you end up with fewer distractions. An added benefit to all this is that I can hold my positions for as long as I deem necessary since I don’t have to take profits to pay bills with.

ST: How long have you been trading stocks and how did you get started?

Nusair: I have been trading for a little over ten years. My first experience with stocks was pretty painful. A business associate at the time alerted me to an OTC Bulletin board stock called Brown Disc Products (BDPC), which my business partner and I promptly bought a whole load of. I did not know much about stocks during those times, but I had a little money which I completely invested in this stock. I would watch it daily, hoping and praying that it would go up. To make a long story short, the stock went to zero and so did my account. My first eight years of trading yielded fruitful, if not spectacular results. I experimented with fundamentals, and then with technicals for a while, but I did not really find my rhythm till I started to read the writings of James “Revshark” Deporre. He writes a blog at Realmoney.com, and maintains his own web site at sharkinvesting.com. Since I switched my trading to the style that he advocates, my results have been tremendously better. Most of the principles I mention here and adhere to have come from his writings. Although I have never met him, I hope to someday be able to just shake his hand and say “thank you”.

ST: Do you trade for a living?

Nusair: The benefit to owning a business is that I do not need to trade for a living. I do it because I find it to be intellectually challenging. The money I make is mostly a byproduct of what I do. I spend most of my day researching different companies and putting them on several watchlists that I maintain.

ST: Judging from your StockTickr watchlist, you like to trade small caps. Do you find them more volatile than other stocks and how do you handle the volatility?

Nusair: Small caps are inherently more volatile than the average stock because they have no institutional base of shareholders. They pretty much trade to the tune of the traders trading them. Most of the ones I own do not have any analyst coverage or any earnings estimates to work from, so you end up doing a lot research and listen to a lot of conference calls. Since they lack any institutional coverage, they can be moved around quite a bit on little or no news at all. However, this volatility also creates an opportunity for traders who can take advantage of it. Handling the volatility is pretty simple. You stay diversified and do not put all your eggs in one basket no matter how well you know the company. By maintaining many positions in different small caps across various industries, I end up lowering my overall volatility.

ST: So you trade on fundamentals and technical factors – what fundamentals do you screen for specifically?

Nusair: When I am screening for stocks, I am looking for companies that:

a) Are below $20 in price, and preferably $10.
b) Exhibit good relative strength compared to the market (over 75 usually)
c) Have market caps less than a billion dollars
d) Trade an average of at least 25,000 shares a day.
e) No debt

Although I use the above screening tools to get started, I have also found quite a few candidates by just watching the market everyday. I keep my eyes on the new highs list and also look at which stocks have moved the most on any given day. You can find a surprising amount of good stocks just by doing this alone.

As far as technical factors go, I only look at price and volume. I do not use any other technical indicators such as MACD or Bollinger bands. When I look at charts, I am looking for stocks that are at or close to their highs and have little or no overhead resistance in the past year.

ST: How long would you say your average trade duration is?

Nusair: A cornerstone of my strategy that I picked up from Deporre is that of partial buys and partial sells. Once I identify a stock that I like, I will take a starter position that is somewhere between 10-30% of what I consider a full position. At this point, I will simply track the stock and see how it trades daily. I am looking to see whether it trades in a wild manner or if it trades narrow. After watching it for a while, I will look for attractive entry points, which can be either below or above the price I originally paid. It really depends on the way the stock is setting up. If the stock continues higher, I will begin to lighten the load by way of partial sells. This is my ideal situation. If however, the stock starts to drift much lower, I will see if it sells off on higher volume. If that is the case, then I reassess whether I really want to hold it or not. If the stock drifts lower on shrinking volume, I may add some more.

My time frame is usually several months. Once I have a core, I usually trade around it to add incremental gains. As the stock moves up, I let go of 20-30% of my position and wait to see if it sets up again. If it sets up, I will add some of it back. Partial buys and partial sells are a great way to manage your risk because you end up not making any rash decisions. You end up taking profits on the way up and you end up reducing your exposure on the way down.

ST: Do you ever sell short?

Nusair: I do not. I gave up shorting individual stocks a long time ago. I do, however, short ETF’s to hedge.

ST: How does StockTickr fit into your strategy?

Nusair: StockTickr is great not only because you can track your own performance, but also because you get to see what other people are doing. One of the best features is that you can follow other good traders by adding them to your friends list. This feature alone has helped me generate many ideas to research. Anyone who has traded knows that there are many times when the market is not doing much. It is those times that I use to sift through picks from people who have good trading records on stocktickr.com. As an example, a friend on my list bought rediff.com (REDF) a while ago. I was not familiar with the company and did some work on it. Once it set up properly, I ended up buying some and ended with a 22% return in a few weeks. The generation of ideas by a group of investors with a common goal is a concept that is very tantalizing and financially fruitful.

I also use the trading journal in the StockTickr Pro version. I started to use it recently and have fallen in love with it. I can note down the reason for any buy I might make and also input actual data to reveal my risk levels and calculate my expectancy. By having a notation on every stock and knowing my risk levels, I can better assess every situation going forward. Another advantage of StockTickr Pro is the filter it provides. I do not have to go through looking for good traders on the site because it finds them for me. It also filters out their recent activity so that I can look into what other proven traders are buying. Overall, my experience with Stocktickr.com has been great and I expect it to get even better as the site matures.

ST: What 3 books have improved your market performance?

Nusair: How I Made 2,000,000 in the Stock Market by Nicolas Darvas.
If there is one book you read, then this should be it. I have read this one more times than I can count.

How To Make Money In Stocks by William J. O’Neill

Reminiscences of a Stock Operator by Edwin Lefevre

ST: Do you set initial sell stops for your positions or do you use “mental stops”? How do you define your risk when you enter trades?

Nusair: Since I trade a lot of small caps that move around a lot, I do not set any hard stops. The volatility that is inherent to small caps would have me stopped out too often. I usually just monitor my positions every hour or so to see what is going on. If a stock I own has fallen a lot, I may end up selling a portion to relieve some pressure. If it continues to fall in the ensuing days on higher than average volume, then I may sell the whole position slowly. One thing that you have to remember about small caps is that some are extremely illiquid. If you try to even sell a few thousand shares, you can drop the price substantially. On the other hand, if the stock is selling of on low volume, I may just hold it and see how things pan out. I do use mental stops but I really do not have a hard and fast rule about where to place them. I have a pretty good idea of where I will get stopped out before I enter the trade. It all really depends on the type of trade, the chart, and the market environment. One thing to note is that I do not, under any circumstances, allow myself to take large losses. If I feel that a stock has the ability to really tank, then I am vicious about taking the loss and moving on.

ST: As an investor looking for value plays, do you pay much attention to the overall market and make adjustments or do you believe that value will shine through no matter what the overall market is like?

Nusair: I make adjustments depending on the market conditions. In a tough market environment, I am a lot quicker in taking profits and cutting losses. In a market that is trending up, I will generally be less aggressive in taking too many profits. I tend to let my positions run a bit more in a good market. As an aside, I don’t really look at stocks from a value or growth perspective. I simply buy stocks because I think that they are going higher. I treat stocks like a store owner treats his merchandise. I buy them with the intention that I can sell them for more than I bought them for. Every trade is simply me moving merchandise off the shelves and replacing it with other fresher merchandise (i.e. newer ideas, trends). It is a cold way to look at trading, but that is what trading essentially is.

ST: What do you like most about stock trading?

Nusair: The absolute freedom to do anything I want. I have always had an independent streak in me, and trading allows me to structure my life on my own time. Plus, I do not have to answer to anyone other than myself. An incremental benefit is that it is intellectually challenging.

ST: What are the most common mistakes you see investors make?

Nusair:

  • They do not diversify.
  • Their position size is too large.
  • They are highly emotional about making or losing money.
  • They don’t cut losses until it’s too late.
  • They do not take profits when they should.
  • They turn trades into investments.
  • They do not do their own research.

ST: What advice would you give someone just starting to trade stocks?

Nusair: I would tell them to dive right in with a very small portion of their investment assets. This will get them familiar with the emotions that are associated with trading. Alongside, I would tell them to read as much about different trading styles as they can. No one style is superior to another, but you need to adopt one to trade consistently and profitably. I adopted my style from someone who I respected, and I suggest people find a successful trader whose style they are comfortable with and can emulate. Once you are comfortable and profitable with a style, then and only then should you add more of your investment assets.

The psychological aspect of trading is very important. You have to know who you are. If you are comfortable being a day trader, then you increase your chance of succeeding in that arena. If, however, you are not comfortable with the frenetic pace of day trading, then try something else like swing trading. Don’t force yourself to do what is inherently not “you”. My style of trading is a bit more laid back and it suits my personality just fine. If I tried to daytrade, I would have miserable results.

Diversify. Diversify. Diversify. Do not let one position take you down. It will have disastrous results on your psyche.

Keep your emotions in check at all times. Don’t get too excited if a trade goes your way, and don’t get too overly depressed if one of your stocks sinks like a stone. Stay emotionally balanced. Treat your trading like it is a marathon. Grind out small increments here and there, and the end result will surprise you.

For someone just starting out, I would recommend that you find a mentor, not to blindly follow what they do, but to help formulate a strategy of your own. I did this with James “Revshark” Deporre and was very pleased.

Last, but not least, I would use a trading journal. Having a history of what you have done can help tremendously when you are assessing your trading. Having a trading journal will help you identify what your strengths and weaknesses are. It will also force you to put down your thoughts on paper so that you can reflect on your thought process at a later date. I am currently using a physical and an electronic diary (StockTickr Pro) to note my progress.

ST: Thanks, Nusair!

Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.

Previous interviews in the StockTickr Interview Series:

Nusair is monitoring the comments to this post for questions, so feel free to ask questions related to his trading.

5 Comments

  1. Frank Said,

    April 14, 2006 @ 9:31 am

    I’m a young investor just trying to better educate himself, and I just wanted to say thanks for sharing your strategies. I’ve seen you portfolio on stocktickr and I am quite impressed.

    On your picks I’ve noticed that you usually tag Good EPS. Do you have a method or tool that you use to calculate your EPS? Do you have a benchmark or threshold for what you consider good?

  2. alibawla Said,

    April 14, 2006 @ 12:53 pm

    Hi Frank,

    The question you ask has a murky answer but I’ll try to do the best I can. When I am looking for stocks, I am generally looking for companies that are not yet on Wall Street’s radar. These tend to be priced below $20 and often have no analyst coverage or EPS estimates. Once I have found a company to investigate (I go through 100 or so charts and look deeper into about 10-15 a day), I will read the last few earnings report, and listen to the last conference call. If I still like it, then I will set up my own model based on the expectations of management to figure out what the company can earn.

    When I say “based on my own model”, I mean that I input various numbers (based on mgmt estimates) into the last quarters earnings report to see how much operational leverage this company might have. Once I come upon a conservative number, I simply see whether it is cheap relative to its growth rate.

    As an example, i picked up Home Solutions (HOM) after they reported earnings. The company said that they are looking at earning 45 cents per share this year on a 100% rev growth. Management also said that their estimates are conservative. When I input their expectations into my calculations, i can see that they might actually do about 50 cents per share. At the time I was doing these calculations, the stock was trading at 6.30. So this company is trading at a forward p/e of 12.6 and is growing at a 100%!!!!. That is my definition of Good EPS. It is rare to find stocks this cheap, but when you do, hold on to them for a pretty good ride.

    There is no tool I specifically use to find these. I just keep my eyes peeled to the new highs list and the greatest percentage movers everyday. Here is where I find quite a few of my candidates to investigate. Once in a while, you find a gem. To complete the story on Home Solutions, it has ran up a bit and I am still adding at these levels.

    My threshold for what I “consider good” is even murkier. I will generally not pay more than 20 times forward earnings for a position that I want to hold. But it all depends on the company’s growth rate. I owned Google for the longest time last year even though it did not fit my Good EPS methodology because of their viral organic growth.

    Also, when I am looking for companies to invest in, i prefer ones that are experiencing high organic revenue growth (at least over 25%) and even faster EPS growth.

    Hope this helps,
    Nusair Bawla

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