Stock Market Wizards
Ahmet Okumus: From Istanbul To Wall Street Bull
Ahmet Okumus was mesmerized by the Istanbul Stock Exchange trading floor at the age of 16. He was so obsessed with it that he began skipping classes for it. He realized that stocks move for a reason and decided to find out that reason.
In 1998, after going wrong in the bear market, he made three changes to his trading rules.
- Not to get involved when there is too much mania because mania cannot be predicted.
- Never have more than 100% net position, either long or short.
- Using options specifically for reducing downside volatility.
He likes to stick to fundamental values. He had a rule that he would buy a stock if it went down to the price limit for 3 consecutive days and then sell it on the first short-term bounce.
His main goal was to select trades with a high probability of gain and low risk. For this, he had to forego many winning stocks but the approach resulted in 90% profitable trades and a triple-digit average annual return.
Okumus started trading in 1992 and managed to earn a whopping 107% of an average annual compounded return by the year 2000.
Okumus's trade involves buying a stock with sound fundamentals at a bargain price. He looks for stocks with good growth in earnings, cash flow, and significant insider buying. Strong fundamentals, however, are only half the picture. A stock must also be very attractively priced. Typically, Okumus buys stocks that have declined 60% or more off their highs and are trading at PE ratios under 12. He also prefers to buy stocks with prices close to book value. Very few stocks meet Okumus's fundamental and price criteria. Thus, he holds only about ten stocks in his portfolio at any given time.
Okumus does not believe in the age-old adage of cutting the losses short. Instead, he buys more if a stock moves lower. Cutting losses is a measure of risk control. Although successful traders incorporate risk control measures in their work, they don't prefer to cut losses for risk control.
Okumus attains risk control by using his above-mentioned extremely restrictive stock selection process. He is confident that the stocks he buys have extremely low risk at that time. To ensure this, Okumus has to give up many profitable trading opportunities. But because he has a stringent stock selection, he can control risk without cutting losses short.
One strategy Okumus uses is a cash-secured put. This strategy involves selling OTM puts of the stocks which he is willing to buy. In other words, selling put options is another way of buying stocks. If the stock price doesn't go down to the OTM strike price, the premium on put sold is earned. Also, if it goes down to the strike price, then he easily buys the stock because at that price (he is willing to buy it at that price anyway). So, by selling puts, he is getting paid by the market while waiting for the stock to come down to his price. For some stocks, it may be possible to make money by selling puts only rather than buying the stock.
His main goal is not to lose money. He thinks making money consistently is good enough. He doesn't believe in going short on an extremely overvalued stock until and unless there is a catalyst for change.
The key elements he follows for trading are discipline, doing good research to know your companies well, and not getting emotionally involved in trades.