The Ultimate Buy Signal

Sometimes, you've just got to ask the Internet a seemingly silly question to see where it takes you. I find that it doesn't necessarily take you where you intended to go, but as Dirk Gently might have said, it gets you some awfully useful information anyway.

Cued by a phrase I must have read or heard, I wanted to know what somebody, somewhere, was claiming to be the "ultimate buy signal." Between a quick Web search and landing on the appropriate Wikipedia page, I got a very interesting answer. I discovered the "Ultimate Oscillator."

I won't go into the whole theory of this particular buy signal, but Wikipedia explains the payoff in these terms:

A buy signal occurs when:

  • Bullish divergence between price and the oscillator is observed, meaning prices make new lows but the oscillator doesn't.
  • During the divergence, the oscillator has fallen below 30.
  • The oscillator then rises above its high during the divergence, i.e., the high in between the two lows. The buy trigger is the rise through that high.

There's more, but that's enough for me to know it isn't my cup of tea.

Whence the Ultimate Oscillator?
The Oscillator comes from one Larry Williams, who (according to Wikipedia and Williams' own website) has lived an incredibly fascinating life. He is one of the best-selling authors of technical analysis and commodities trading. His daughter is actress Michelle Williams of Dawson's Creek and Brokeback Mountain fame. He twice ran for the U.S. Senate from Montana. He sells his techniques through a four-hour video seminar available for the low price of $1,695.

He's since been arrested in Australia, was released on $1 million bail, and is awaiting extradition to the United States on tax-evasion charges.

I mean, that's just a very full life.

Buying in the absence of an ultimate signal
I don't know that allegedly avoiding taxes (Williams is defending himself on the basis that there has been a mistake), even if proved, would necessarily undercut the validity of any statistical model, but I'll admit that it certainly doesn't increase my trust in the model and its reported riches.

I'm just one of those people who believes you should invest your hard-earned money only for the long term, and only into businesses you fully understand, rather than trading with a holding period of hours or days on the basis of the lines on a stock chart, without regard for such things as sustainable competitive advantages or growth opportunities.

But working for the Motley Fool Hidden Gems service, it behooves me not to just find fault elsewhere, but to offer alternative solutions. So I thought about what it is that we, on the Hidden Gems team, would consider the ultimate buy signal, even if we would never put it into those terms. (We eschew the word "oscillator" as well.)

There are a number of us working to find, cover, and review the stocks that Hidden Gems ultimately recommends, so you wouldn't get us all on the same page about the exact weighting and order of what comprises a perfect buy opportunity. But we'd probably all agree on a list like this:

  • Wide and growing market opportunities.
  • Sustainable competitive advantage (economic moat).
  • Misunderstood business situation or opportunities.
  • Significant founder/insider ownership stake.
  • Strong returns on invested capital.
  • Solid balance sheet.
  • Cash flows as good as or better than net income.
  • Buying back shares.
  • Small market cap.
  • Attractive valuation.

You'll rarely find all of these criteria in one company at the same time, but it is certainly possible to find combinations of these "buy signals" at once. We're focused strictly on small caps (they have significantly higher historical returns than large-cap stocks), but some companies (large caps among them) have met a significant number of these criteria in the recent past, including Valero (NYSE: VLO  ) , Southwest Airlines (NYSE: LUV  ) , Blue Nile (Nasdaq: NILE  ) , Brookfield Asset Management (NYSE: BAM  ) , Coach (NYSE: COH  ) , and J.M. Smucker (NYSE: SJM  ) .

Identifying companies that fit some combination of those factors worked out well for us and our subscribers. Since inception, our returns are 37% versus 13% for the market. We'll never seek to charge $1,695 for two months of our service, as Williams apparently does. (Actually, you can try our service totally free with a risk-free 30-day trial.) But maybe that's because we haven't yet found the "ultimate buy signal."

We have found a number of promising long-term investment opportunities that have significantly improved on the market's returns.  We hope you'll join us in looking for the next ones.

This article was originally published on March 6, 2007. It has been updated.

Bill Barker does not own shares of any of the companies mentioned in this article. Coach is a Stock Advisor recommendation. Blue Nile is a Rule Breakers selection. Brookfield Asset Management is a Global Gains recommendation. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 649904, ~/Articles/ArticleHandler.aspx, 12/19/2014 11:32:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement