One of my readers called recently about a discovery his 14-year-old son made while using a new investment program on the family's computer. The man was so excited he could could scarcely hold the phone. "Hell," he said, "I could hardly believe it. The kid was just messing around and found a jackpot!"
A week earlier the man had showed his son how to instruct the computer to automatically process huge quantities of stock-market and economic data, looking for trends and relationships that could lead to profitable investments. He also showed him how to learn to trade by practicing his strategies with historical data that could be acquired by telephone and dumped directly into the computer. The boy took to it as if it were the latest video game. The objective was to give himself $5,000 and do the best he could with it.
My caller explained that his son had just rushed into the den waving a printout showing a relationship he had found between several high-tech stocks and some economic data he had obtained over the phone. The man chuckled at first, because his son didn't know enough about economics to realize the data he selected "couldn't possibly have any relationship to the stocks he had selected."
But they did! In fact, the boy used the information to run his hypothetical $5,000 portfolio to nearly $80,000 before unknown factors caused it to break down. His interest aroused, my caller wanted to learn more about using his computer to discover relationships and patterns that would result in profitable trades.
Using a computerized investment program to process and display years of prices, economic data, and market statistics to look for trends and leading indicators can be one of the most profitable analysis tools available. But it is only one of the many services provided by such systems.
A microcomputer can just as easily sift through the balance sheets of thousands of companies and prepare a list of those that meet whatever investment criteria the user desires. Microcomputers can greatly simplify sophisticated option trades and can even help evaluate complex real-estate transactions. And, of course, the computer is an acknowledged pro at simply keeping track of news and prices on a regular basis, like an electronic mother hen.
Moreover, after a decision has been made regarding an investment, a microcomputer can be used to place buy and sell orders with an increasing number of brokerage firms, including Fidelity Brokerage Services, Max Ule and Co., C.D. Anderson, and North American Investment Corp.
The computer can also be used to manage a portfolio and help with tax planning so that investors can keep most of what they earn. But the best news is that these powerful services are readily available, affordable, and easily learned.
In fact, all the advantages of computers that were once the exclusive domain of institutional investors may now be employed by individuals. Microcomputers, like the six-shooters of a century ago, are proving to be great equalizers. They can provide the ammunition and the confidence you need to be a winner in the competition for investment profits.
Most existing investment software is available for Apple II series microcomputers and for the IBM PC. IBM's machine is emerging as the computer of choice, because many of the most powerful programs just being introduced are designed only for the PC. Of course, the new software will undoubtedly run on many of the IBM-compatible computers as well.
Whichever computer you choose, be certain it has the ability to display graphs. The computer should also have two disk drives and will need 256k of internal memory for the most powerful software, although many popular programs need as little as 64k.
And unless you have photographic recall for important information, you will find a printer very useful. Almost all dot-matrix printers, such as those made by Epson, IBM (an Epson under the cover), and Okidata, will reproduce your graphs, but double check with your dealer before you buy.
In order to use networks and financial databases, you will need a modem to permit your computer to communicate with them over the telephone. Modems are rated according to the speed at which they transmit and receive data.
A 1200-baud modem, for example, works four times as fast as the less expensive 300-baud units. But since most databases only charge twice as much for the 1200-baud transmission rate, the faster modems are the most economical in the long run, even though they cost more initially. Several excellent modems exist, including the Hayes Smartmodem 1200, which has seen much successful use by investors.
The choice of software depends upon the types of investments made and how they are selected. Fundamental investors screen financial data to find companies whose earnings, lack of debt, and dozens of other factors indicate they are undervalued by the stock market. Commodity traders examine information such as the commodity demand, weather predictions, and the amount of crop still on hand. In both cases, investors are content to wait patiently for the markets to discover and revalue their investments.
Technical investors, on the other hand, are not interested in fundamentals and "undiscovered value." They believe that everything that is known about an investment is, or soon will be, reflected in its price. Therefore, by analyzing price and volume movements alone, it is possible to detect upcoming changes early enough to profit from them.
Although fundamental investors sometimes refer to technical investors as "witch doctors reading entrails" and are in turn referred to as "old men a hundred years behind the times," both techniques have their strong points. As a result, more and more people are using a blend of both fundamental and technical analysis, which often yields outstanding returns.
Such investors use fundamentals to discover a group of attractive issues that they feel are prime candidates for market reappraisal. They then use technical studies to monitor each investment for signs that a reevaluation is starting.
Standard & Poor's Stockpak II is an excellent program which will screen thousands of companies for commonly used financial parameters. The user selects the desired values, then the program searches the data and creates a list of those stocks that qualify.
Of particular value is the program's unique capability of accepting new, user-defined parameters from investors who wish to select companies with special characteristics that make them unusually attractive at particular points in the economic cycle. Stockpak II is powerful yet easy to use. Unfortunately, however, the program will not display a company's name (only its symbol), which makes long lists inconvenient to read.
Stockpak II uses datadisks, which are mailed out each month, rather than accessing an on-line database. Users may subscribe to a composite service consisting of 1,500 stocks selected from the New York Stock Exchange, the American Stock Exchange, and the Over-the-Counter Exchange. They may target a particular exchange or take the full service of 4,600 stocks.
Value Line's Value/Screen is a similar product, which processes 1,650 stocks selected from the major exchanges. Value/Screen also uses monthly (or quarterly) datadisks. Unlike Stockpak II, however, Value/Screen does not allow the user to create totally new selection parameters, although the set included in the program is quite expensive.
Value/Screen is very easy to use. It has an excellent system for reporting the results of screens, which includes the use of company names as well as symbols. The program contains a limited but useful portfolio management program.
Both Stockpak II and Value/Screen have an important limitation. Because they use datadisks rather than on-line databanks, screens can be run using information which has changed since the disk was sent.
This problem is largely confined to screens based upon price. Investors who are alert to the limitations of datadisks, however, are not likely to get into trouble. And because running screens involves considerable data processing, investors who use the disk-based programs will avoid high network and database charges.
A good fundamental-analysis program that uses up-to-date on-line information is Dow Jones Market Microscope. However, it ranks rather than screens companies. Investors who want full-function screening of on-line company data should find Savant's Fundamental Investor worth reviewing.
The Technical Investor by Savant Corporation could easily be the Mercedes-Benz of technical-analysis software. The package will automatically handle every type of security for which historical or daily information is available on the Dow Jones Industrial, Transportation, Utilities, and Composite averages.
The program also allows the user to enter prices by hand if desired and creates additional databases for commodities, collectibles, diamonds, or other investments. A year's worth of daily data for 80 securities or 40 years' for two securities can be stored on each disk. Users may have as many disks and follow as many investments as they wish.
The Technical Investor has an impressive collection of analysis tools and excellent graphics capabilities with which to display results. Multiple charts may be placed on the monitor at once to facilitate comparisons.
Available charts include price and volume bars; high, low, and close prices; point and figure charts; five different price/volume trend indicators; regressions; oscillator functions; exponential and moving averages; relative-strength plots; and more. Whew!
If many of the terms are unfamiliar, don't be alarmed. The package is easy to use and allows its operator to bypass any functions that aren't desired.
If The Technical Investor can be compared to a Mercedes-Benz, Compu Trac by The Technical Analysis Group is clearly a Rolls Royce. Compu Trac is the most comprehensive, exhaustive, and powerful collection of technical-analysis tools available to individual investors.
Compu Trac includes more than 40 analysis tools for stocks, commodities, and market data, and users can custom design additional programs. The software will accept data from several on-line databases. Graphics are very good and permit split-screen comparisons of charts.
Serious investors tend not to find Compu Trac difficult to learn. The program's price includes several cassette tape recordings in addition to instruction manuals which cover equipment set-up procedures and the operation of each program feature. Compu Trac is a program to grow into as you use its many features. It is as much a technical-analysis tutor as it is a computational servant.
The selection of networks and appropriate on-line databases is best deferred until one's investment software has been selected. Usually the programs will specify which are compatible and most suitable for the intended uses. And as we saw with Stockpak II and Value/Screen, sometimes no network is needed at all.
Networks and databases may also be used without investment-analysis software, although several services do include special communication packages in their start-up kits. Because Dow Jones publishes the Wall Street Journal and Barron's, the company offers many articles of interest to investors on its Dow Jones News/Retrieval network in addition to price quotes, Securities and Exchange Commission disclosure filings, and other services.
CompuServe's Executive Information Service is also very extensive, with Standard & Poor's, Value Line, and Moody's databases included with many other stock, commodity, economic, and market features. CompuServe may also be used to place buy and sell orders with Max Ule & Co.
Often, however, special-purpose networks with only a few databases are faster than their more comprehensive competitors. The Warner Database and Nite-Line, for example, are two to three times quicker than most general-purpose networks. If all an investor needs is prices, it pays to set up a file with one of the specialized networks and simply run it periodically. Investors may then use the prices directly, dump them into their analysis programs, or even transfer them into Lotus 1,2,3 or VisiCalc.
Although computers are enormously useful tools for investment analysis, they are incapable of making investment decisions. Investors, with their unique skills and intuitions, must still interpret the information.
Tim Slater, president of Compu Trac, recently put the computer in perspective: "One must realize that if a computer could be programmed to completely take over and be perfectly effective, within a short period of time the computer itself would own an exchange."
"The simple fact," Slater adds, "is that there are many intangibles within the market structure, and one's mind is necessary to make the correlation of the data, charts, and studies which the computer can so easily provide."
James Powell is managing editor of High Tech Investor and Technology Stock Monitor, published by HMR Publishing of Barrington, Illinois. This article is adapted from the Winter 1985 issue of Wealth magazine.
This article originally appeared in print under the headline "Profits On-Line".