# Investment plan as opposed to trading plan



## Onceblue (6 January 2010)

I'd like to ask if members have different plans depending on whether they intend to trade or hold stocks. I've read a good deal about trading plans and I intend to start a small trading portfolio on the basis of some on this advice and my own ideas but I'd also like to hold onto the majority of my current stock as an investment.

I just want to have a plan for the next GFC. I held recently because selling would have meant capital gains even at 50%. I did a short evening course at TAFE and their approach was to use averaging down and in hindsight that would have been profitable but needless to say I didn't do that either.


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## Julia (6 January 2010)

Onceblue said:


> I just want to have a plan for the next GFC. I held recently because selling would have meant capital gains even at 50%. I did a short evening course at TAFE and their approach was to use averaging down and in hindsight that would have been profitable but needless to say I didn't do that either.




Hello Onceblue, what is your current position on the stocks you held through the downturn?  Are they back to their previous high?

Imo this is a risky thing to do.  My preference is to preserve capital as first priority.  Certainly copping the CGT is a factor, but if you have the p/f in Super, it's only 10% CGT.

Your distance from retirement will also dictate your investment attitude, or it would for most people.  If you have confidence in the companies you own, and the tax is a strong consideration, then holding is an option I suppose.
It's what a lot of people did, and those close to retirement are now finding that they have to work a couple of years more to make up the losses.

Re averaging down:  you will find various references to this on the forum if you do a search.   Imo it's one of the most dangerous things you can do.
Just consider what happened to those who did this with Allco, Centro, ABC Learning et al.

You don't say whether you have any familiarity with charting.  If you understand how price action works, that will help you determine entry and exit points.  A very useful book in this regard is "Secrets for Profiting in Bull and Bear Markets" by Stan Weinstein.


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## condog (7 January 2010)

Julia said:


> Hello Onceblue, what is your current position on the stocks you held through the downturn?  Are they back to their previous high?
> 
> Imo this is a risky thing to do.  My preference is to preserve capital as first priority.  Certainly copping the CGT is a factor, but if you have the p/f in Super, it's only 10% CGT.
> 
> ...




Wise words indeed

If your going to average down make sure your doing it on very good fundamental companies that have strong balance sheets, good cash flows and low debt to equity.....debt due is also a concern when averaging down, as often companies get hammered in sp when they have big debts that need renewing eg: RIO

I have no vested interest but I truly believe Brian McNivens "concise guide to value investing" answers all your questions and is the best starting place for all beginners....


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## Krusty the Klown (7 January 2010)

Onceblue said:


> I did a short evening course at TAFE and their approach was to use averaging down and in hindsight that would have been profitable but needless to say I didn't do that either.




What was the course you did at TAFE Onceblue? I wasn't aware they offered investment study.


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## Onceblue (7 January 2010)

Hi Julia, thanks for your reply. Most of my shares are back in the green, but a couple are still red and one's disastrous (SDG). 
I'll certainly get hold of the books that you and Condog mentioned and establish more of a plan than just hold.

Krusty, the course was called "Introduction to the stockmarket" and was held at Box Hill. It went for about 6/8 weeks, one night a week. It was pre-GFC and when I looked back at their site recently there was no mention of it. It was a basic course covering trends, support and resistance. There was no coverage of indicators, patterns or conditonal orders. At the time there were a couple of us who wanted to continue to a more advanced course but there was nothing available.


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## DocK (7 January 2010)

I have found heaps of valuable info on the asx website, and a quick search of your local library's catalogue will provide a starting point for good books on charting etc.  Technical Analysis for Dummies is always a good one to start with.


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## nioka (7 January 2010)

Julia said:


> Re averaging down:  you will find various references to this on the forum if you do a search.   Imo it's one of the most dangerous things you can do.
> Just consider what happened to those who did this with Allco, Centro, ABC Learning et al.
> 
> .




Julia, I can't agree. If the fundamentals are sound then averaging down is what I do. Take centro. I averaged down by buying a million near the bottom when I decided the fundamentals were sound. Overall up around 300% there. Same with ADI, VPG, EDE, BUL,LYC,OZL to name a few.Not all by the million but by the hundreds of thousands. Doesn't work on dogs. The fundamentals are important.

This GFC is the best thing that has happened for my investing in over 50 years. It has been the time to look for lemmings.


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## SmellyTerror (7 January 2010)

Well there's a difference between averaging down as a strategy for general duties, and The GFC. Basing future strategy on how well it did during the last year is not likely to be an accurate prediction. Conditions have been... unusual.

The issue with FA ("picking value") for new traders is that most of the money out there is smarter than yours. The big boys have the resources, the experience, and the manhours that you can't match. You're squinting at the PE while they're have lunch with the Chairman, FFS. You can't beat that.

Well ok, experienced traders like you can do it well enough to profit. But (IMO) it's a mug's game for most of us. (Says a guy who is getting off the "value" train and looking at the other end of the spectrum with pure charting and scalping - I made money in the last year, too, but I can see where I have more of an advantage as a little fish, and it's not in finding value).

Anyway, back to averaging down: Julia didn't say it was "bad", just "dangerous". And it is by any measure. You are increasing your position in a stock that's going down. You are increasing your risk when most of the basic (cliched?) rules of trading are screaming at you to reduce it. The very idea is like fingernails down a blackboard to me.

It can be done. Some people make money from it. But it's dangerous.

Summary: +1 to Julia's #2.


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## So_Cynical (7 January 2010)

Hello Onceblue...i think an investment plan is a good idea, buy and hold and even mindless averaging into anything should be avoided, a strategy of buy and watch combined with a keen interest in sentiment, price movement and fundamentals adopted.

Ive been able to follow a very profitable entry and averaging down strategy since Oct 08, which follows 3 basic rules....all stocks chosen are fundamentally sound (by my criteria ) and major players in there field and have substantial cash flows relative to there size....and yes my timing was great. 


Enter XYZ on a substantial down trend, with 70% of total position/trade capital. 


If stock continues to fall...reassess and exit with a loss or average with remaining 30% once stock has fallen more than 15% from first entry.


Wait for eventually SP recovery and sell all of the first position once XYZ is 9% (approx) above the first entry, also sell about 20% of the average down position at this time.

This will leave you with about 12% of your original investment and a "free carry" profit position of approximately the same size in XYZ for the longer term....add extra cash rinse and repeat.

Since i started using this strategy i have a 100% success rate, as in all positions exited in profit and all positions still held in profit...about 12 stocks in total.


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## Julia (7 January 2010)

nioka said:


> Julia, I can't agree. If the fundamentals are sound then averaging down is what I do. Take centro. I averaged down by buying a million near the bottom when I decided the fundamentals were sound. Overall up around 300% there. Same with ADI, VPG, EDE, BUL,LYC,OZL to name a few.Not all by the million but by the hundreds of thousands. Doesn't work on dogs. The fundamentals are important.
> 
> This GFC is the best thing that has happened for my investing in over 50 years. It has been the time to look for lemmings.



Hello Nioka, good to see you posting again.

Smelly Terror has made the points that I would have.

I'm assuming Once Blue is a fairly new investor.  That's in contrast to someone of your considerable experience and skill.

You say you 'averaged down', then that you bought a million near the bottom.  I've always thought 'averaging down' meant continuing to buy parcels as the SP fell gradually, thus reducing the apparent % loss.

Just think it would be helpful to clarify the above points for beginners who are considering this strategy.

And I recall in past threads your saying that you seek the interest/challenge of taking positions that are, um, less than absolutely boringly safe.

So, fine for you to average down, but I reiterate that I think it's not something a beginner should do, unless it's with a very strong company.

There are countless threads on this forum where inexperienced people have taken advice to average down on the spurious premise that this evens out their overall position.  Might be briefly psychologically comforting to see a lesser % loss on your p/f screen, but ultimately can be the perfect source of big losses.

When you made the decision to buy Centro, had they announced successful refinancing of the debt?  I haven't been following it and have no idea what their current situation is in this regard.


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## It's Snake Pliskin (7 January 2010)

Onceblue said:


> I'd like to ask if members have different plans depending on whether they intend to trade or hold stocks. I've read a good deal about trading plans and I intend to start a small trading portfolio on the basis of some on this advice and my own ideas but I'd also like to hold onto the majority of my current stock as an investment.
> 
> I just want to have a plan for the next GFC. I held recently because selling would have meant capital gains even at 50%. I did a short evening course at TAFE and their approach was to use averaging down and in hindsight that would have been profitable but needless to say I didn't do that either.



Many people like to average down and they end up with mixed results. It has worked in hindsight when the economy returns to a previous point of reference. It _hasn't_ worked when the economy _hasn't_ returned to a previous point of reference. Economies change.


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## SmellyTerror (8 January 2010)

*Seems to me, though, that you're generally better off buying something that's going up, rather than something that's going down.* Colour me crazy.

"Averaging down" for a lot of people doing it (not everyone, mind) seems to me to just be a way to justify hanging on to a comfortable habit, or just a refusal to accept that they might be wrong. Honestly, is there nothing else at all worth investing in on the market? It's a big market. Just seems to me that there must be other opportunities better than the thing that's falling. 

The market doesn't care if you think you're right. Hell, you might *be* right. But if everyone else is wrong you still lose all your money...

---
PS: I think a good rule of thumb is: if I didn't already own some of these shares, would I be looking to buy some right now? 

If no, then DON'T,and have a good hard think about selling the ones you do have. 

If yes, well, that's just general investing / trading, isn't it? Averaging down just ends up as a side effect, not a strategy.


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## Julia (8 January 2010)

Smelly Terror, absolutely agree with all your points.

This discussion also leads into the reluctance to sell a falling stock.
I found this one of the most difficult things to learn.


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## nioka (8 January 2010)

Julia said:


> When you made the decision to buy Centro, had they announced successful refinancing of the debt?  I haven't been following it and have no idea what their current situation is in this regard.




Julia, You make valid points in this debate but overall I believe that averaging down is OK.

BUT ONLY if the fundamentals are sound.

With Centro I believed in the fundamentals and was prepared to buy when all looked lost to many. I based it on the fact that Centro was continuing to trade profitably and that funding would become available. Because my main investments for many years has been in commercial bricks and mortar I am aware of the value of property that is well tenanted, has a long development time and high replacement costs. I also believed that the banks had to let the business continue and forced property sales would mean huge losses for the banks. Also the huge share price drop meant that the few high priced ones held were nothing compared to the bargain available after the crash.

My philosophy is to review each stock I hold almost daily. If I think the price is getting too high I'll probably sell and if it is far too low then I'll probably buy more. That way I am regularly averaging down even in good times. 

I also like to trade for freebies and this week I have sold and rebought extras with the same money on ADI, BUL and MHL.In a way I also consider that averaging down.


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## Julia (8 January 2010)

Well, there you are, Nioka.  You've just demonstrated why you can do this and be successful.  You have the background knowledge, and the skills/experience.

My point was simply that it's dangerous for a beginner, especially when they're unlikely to have the capacity to do the sort of fundamental analysis you describe above.

Good on you for doing so well with Centro.


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## It's Snake Pliskin (9 January 2010)

nioka said:


> Julia, You make valid points in this debate but overall I believe that averaging down is OK.
> 
> BUT ONLY if the fundamentals are sound.
> 
> ...



Nioka,

As you average down, I was wondering if you would call averaging down an entry focused method or an exit result focused method. I am interested in what the thinking is when it is done in the short term and the long term.


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## condog (10 January 2010)

It's Snake Pliskin said:


> Nioka,
> 
> As you average down, I was wondering if you would call averaging down an entry focused method or an exit result focused method. I am interested in what the thinking is when it is done in the short term and the long term.




Firstly lets clarrify for beginners this is a dangerous strategy....for experience it can be redicuously lucrative or dangerous.....and its just plain stupid if theres a chance the company will collapse or suffer further loss.....

I have done it very successfully multiple times with both an entry focused strategy and an exit focused strategy......

When ive been caught in a stock that has good reason to be down, but is bouncing around and volatile somne times I use the volatility to peg back a loss....  My preference is always to get out early and take the hit, but if i think its fallen too far I use this strategy...

Ive also used it where I think a stock is going to go up or skyrocket, If I buy it and it falls, and I am still very confident it will go up I usually buy a lot more.....
Some times I then offload the original more expensive parcel once the price rebounds, to reduce exposure, other times if i have nothing better too put the money in I leave it in there....and enjoy the lower average price.......


Bu having said all that, its important to know your exit triggers prior to getting in...


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## It's Snake Pliskin (13 January 2010)

condog said:


> *I have done it very successfully multiple times with both an entry focused strategy and an exit focused strategy......
> *
> When ive been caught in a stock that has good reason to be down, but is bouncing around and volatile somne times I use the volatility to peg back a loss....  My preference is always to get out early and take the hit, but if i think its fallen too far I use this strategy...
> 
> ...



If it has fallen too far is it averaging down? Or, is it buying without the intent to buy lower? And then when it rises what is the thinking that is going on? Are we now pyramiding by buying more after having averaged down? Just thoughts.

I see no reliable way to mitigate risk other than diversifying by hedging. 

I was interested in Nioka's thought's on my question.


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## mortgagechoice (9 March 2011)

My basic understanding is that trading plan is more short-term in orientation whereas investment plan takes a longer-term perspective. So a trading plan might only be 6-12 months along whereas an investment plan might be 10 years long.


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