My name is Tony, and I’m a young investor who blogs at A Young Investor. Here’s my investment strategy fully explained: from how I decide what to buy/sell, when to buy, how long to hold on, and when to sell (notice, I do not include shorting in this post. This is solely about long positions).
- Determine the long term, secular trend. A secular bull/bear market is a bull/bear market that lasts almost 2 decades. For example, we had a secular bull market from 1981 to 2000, and a secular bear market from 2000 to the present. The secular trends is easy to identify because they alternate and their time frames are consistent; both secular bull and bear markets last around 17 years. The rule is to NEVER invest against the secular trend, even if you expect a major correction because that correction might not materialize.
- But just identifying the long term secular trend isn’t enough. Notice how I mentioned that they last “AROUND 17 years” – sometimes more, sometimes less, but never been off the mark by more than 3 years (historically speaking). In short, if you just buy when the secular bear market reaches its 17th year, you might still have to wait another 3 years before your investment realizes any profits. So it becomes critical to time the market’s turning point and your investment. When it comes to timing, most people assume that they have the predict the future events. Not true!
- You don’t need to predict what the economy or market will be like in XYZ months. All you have to do is recognize the importance of fundamental information that others have missed, and wait for the market to recognize what it missed. Ultimately, the fundamentals will triumph over political policy and speculator mania. However, there can be a long period of disbelief about the fundamentals when the market ignores the fundamentals. Your job is simply to RECOGNIZE what others have missed. However, there will come a time when the fundamentals cannot be ignored, and the trend will turn. E.g. The fundamentals of the credit market turned south in mid-2005, but it was not until August 2007 that the market registered this information and started to get the jitters.
- There can be a long period between the time when fundamentals diverge from the market’s direction and the time when the market re-aligns itself with the fundamentals’ direction. After recognizing the fundamentals that everyone else is ignoring, all you have to do is wait and recognize the catalyst that will force everyone to recognize the fundamentals. That’s when the markets will start turning your way. For example, the economy (and corporate balance sheets) already started to improve in 2009, but stocks did not reflect this reality. The catalyst for the March 2009 market reversal was the announcement of QE1. Buy into your position immediately after the catalyst takes place – never before because you can’t predict when the catalyst will happen.
- But the question arises – what do you buy? While it’s important to be right about the market’s direction, it’s just as important to find a good asset to express that market view, one that will amplify the risk-return ratio in your favour (for example, I made an investment in 2009. My market direction was totally right, but I still lost 20% because the asset had some problems). A good trade itself will limit the potential losses. Because I’m an individual investor, I don’t have time to understand how assets such as options really work. For someone who really understands options, options can be a great way to limit risk and amplify return. One of the key qualities of a good asset is that it makes timing a less crucial factor (e.g. outright shorting of an asset is dangerous because your timing needs to be perfect). As a result of my lack of time, I’m stuck to investing in the market outright via broad market ETFs (e.g. Russell 2000 ETFs).
- Like Warren Buffett said, “I’ve made most of my money in my life by holding on and sitting tight”. I’m not that great of a trader, so once I have a position, I don’t like to trade in an out of it. However, I do have a stop loss to protect my investment should my analysis be wrong. Most people make the mistake of placing their stop losses at a point that’s determined by the maximum amount of money they’re willing to lose. I place it at a price that, if the market breaches it, will invalidate my view on the market. Every stop loss is unique to its individual investment.
- Ride the wave! If you trade in and out of a market too much, you’ll probably end up missing the big chunks!
- When it’s time to sell, repeat what I mentioned above. Since the market is a lagging indicator, the fundamentals will happen first and diverge with the market direction, and then the market will recognize what it missed (or ignored) and converge with the fundamentals. Wait for the catalyst, and then sell. However, there is a slight difference between market tops and market bottoms.
What Assets I Invest In
I invest in markets where there is real supply-and-demand and fundamentals really matter. E.g. currencies and commodities. Other wise, I’ll be competing against other traders who are just (if not more) savvy, resulting in a game in which no one wins. That is why it has become harder and harder to invest markets that are easily manipulated by policy makers or are overpopulated by hedge fund managers such as stocks.