Beginning an Investment Journey...

[peter2]

Good to see you are using stop losses. Investors using FA can get their timing wrong just as often as the rest of us. Protecting the banks capital should be high on your trade management process.

Since you are using SL's you will know how much you are risking in each trade and therefore the total portfolio heat. Keep your eye on this figure more than how much you have invested. As you move your SL's up your total risk is reduced allowing you to invest more until you are fully invested. I don't expect you to go from zero to hero (100%) within a few weeks of starting.

The main message I would tell an FA investor is that it is OK to sell. You don't have to experience a horrendous draw down when economic conditions are bad.

 

[So_Cynical]

Good stuff Vader and welcome to the forum.

You seem to have many thoughts similar to mine and a back ground fascination with gambling, particularly the pony's...the LOC is a risk for sure so just take it easy and bet conservatively on "good things" at the right time and at the right price.

-----------------------

In another thread recently i compared the stock market to a 1001 slot roulette wheel but you could also easily compare it to a race with 101 starters, all with identical form and weight etc, so the only thing between them at the end of the race will be luck in running.

The one massive advantage stock market punters have over sport punters is we get to choose to either accept or reject the result you can choose to take your money off the table win/lose or let your money ride again for free...over and over and over and even get dividends along the way.

-------------

Beware the stop loss order as like pretty much everything in the market its a 2 edged sword, on the one hand it well get you out of a trade with only a small loss, on the other hand it can get you out of a trade at pretty much the exact time you should be entering/buying more....just look at all the times robusta sold stocks (over traded) that he should of been averaging down into or simply holding and giving the trade time to come good.

Anyway good luck.

 

[cynic]

After reading your various posts I can see that you're determined to engage the markets and I am satisfied that there is precious little that anyone could say to dissuade you. I believe you are about to have some experiences that will be firmly implanted in your memory for many years to come.

The stockmarket is one of the more seductive and deceptive animals I've encountered within my current lifetime.
I believe that no amount of reading, backtesting, fronttesting/paper trading can adequately prepare one for the shocking experience one has when engaging the real market with real money.

When I meet a newcomer to the market I normally recommend that one keeps one's position sizes as conservative as practicable for as long as possible and to only invest/speculate/trade with money that one can readily afford to lose.

In my opinion, any newcomer to the current market is likely to sustain a significant loss of original capital within their first couple of years. I'd be more than happy for you to prove me wrong.

Best of luck (coz I believe you're gonna really need it!)

P.S. Thanks for having the courage and conviction to post your ideas on this forum and please, regardless of what events transpire-keep posting your results/experiences. They may prove invaluable to other prospective newcomers.

 

[Reasons]

I don't think Vader wants to trade (hence he posted in this forum).

An astute observation and hopefully true.

Godspeed!

I think CanOz was being particularly polite and what he was really saying was if you actually are serious, he will send you his BSB and bank account number and get you to send him the total amount of your LoC in one transaction - it will save him having to pay brokerage and you will both achieve the statistically probable outcome in ‘Godspeed’.

Alternatively, learn about trading via a CFD platform like IG Markets, etc, where you can trade indicies, Forex, shares, etc for $1.00 per point or 1 share at whatever the going rate is for that share, test your theories, develop your trading processes (the objective is just to survive and learn, not make money) and you should then have enough capital to keep trading for a considerably long time until you (possibly) get your head around how complex this game is to play – and how simple it needs to be to eventually succeed.

 

[Vader]

Good to see you are using stop losses. Investors using FA can get their timing wrong just as often as the rest of us. Protecting the banks capital should be high on your trade management process.

Since you are using SL's you will know how much you are risking in each trade and therefore the total portfolio heat. Keep your eye on this figure more than how much you have invested. As you move your SL's up your total risk is reduced allowing you to invest more until you are fully invested. I don't expect you to go from zero to hero (100%) within a few weeks of starting.

The main message I would tell an FA investor is that it is OK to sell. You don't have to experience a horrendous draw down when economic conditions are bad.

Completely agree with everything you say Peter.

@ So_Cynical - yes I hear what you're saying and while I agree that stop losses can be double edged, the downside is a bit worse than the upside... but finding that happy medium is going to be a compromise either way.

My basic strategy (it will be more detailed than this) will be an initial stop loss of 20% below the buy in value of the trade. If something drops further than that after I buy I won't be averaging down, I'd rather accept it as a bad call or bad timing and regroup and reassess at a later date... is 20% too big? that's one of the questions I'm going through at the moment, but from a capital risk perspective I think that is a reasonable place to start.

I will also be setting a maximum % per stock (of the total portfolio size - probably 15% at this stage, but that may change) and if I plan on taking the full 15% for a stock I will average it out over a minimum of 30 days between trades (e.g. 7.5% initially, wait 30 days, reassess, if still doing ok purchase remaining 7.5%).

...and no I won't go to 100% invested in a few days. I will be setting the first month at 25% max - I'm still in two minds about how I set the rules beyond the first month, but will sort it out in the next few days.

...and thanks for bring up the point about the total portfolio heat Peter - I hadn't really crystallised that thought process yet (it was in the back of my head floating around somewhere), but that is definitely a metric I will be keeping a close eye on.

 

[StumpyPhantom]

All good advice I've read so far Vader (I'm intrigued to find Robusta's thread now to see what inspired you).

My comments/observations are pretty much in the same line as theirs, with my added experience that I was a first time investor at the market nadir in late 2008/early 2009, like you having thought about it for a few years but done nothing about it.

But reflecting on that experience in hindsight is not the same as crystal-ball gazing now. Your trial portfolio in 2009 probably also raises unrealistic expectations given that 2009 was a 30-40% gain, depending on when you started. The point is, when the market is tanking 5%-plus on a 2-in-5 days basis, it takes quite some nerve to hang in there.

To cite just one example, I kept dollar cost averaging on GMG as the REIT industry dived throughout that period (started at 93c and bought as low as 21c), to end up with a large parcel averaged at 38.3 cents (bought some more at equity raising for about 30c). All because I believed in their business model and their CEO's capacity to persuade big pension funds to buy in. They're now at about 72-73 cents equivalent.

But I repaid my margin loan very quickly because I realised it was 10% going nowhere fast. The market has to rise 30% to make a margin loan (or line of credit - I don't see the difference) worthwhile. Anyone with margin loans over the last 2-3 years would be operating at a loss, and no one I know is anticipating a 30% rise this year.

So 2008/2009 was my rocket boost and I'm back to even on the loan, and won't dip back in unless there is a black swan event. H S Dent is expecting one (as are others), but you need nerve when everybody is panicking because nobody rings a bell at the bottom of the market.

 

[odds-on]

Best of luck Vader! Enjoy the journey. My advice is to treat it as a game and do not stop reading.

Cheers

Oddson

 

[StumpyPhantom]

Oh -and I also forgot to add. Your stated wish is to be a long term investor, but you seem to have the words of a trader.

You seem to be planning an instant portfolio (allocating percentages far and wide). I would read Roger Montgomery's value.able and his blogs. The reality is a long-term investor's portfolio should be much more 'glacial' in its build up.

Just because you're ready to start, doesn't mean there's a portfolio of shares out there that is ready to be bought by you. Are you prepared to sit there for 35 weeks waiting for the one stock that a number of experts recommend buying because it's 30% or more below its intrinsic value (to give you a good margin of safety)?

And then, wait another 15 weeks before something else comes up? For more than half the year, your portfolio would be 100% allocated to one stock, and then 50% (when you got 2) simply because they're the only worthwhile buys. Don't go out there and spend your load (whatever that is, boosted or not by loans), just because you're at Day 1 of your investing life.

 

[tech/a]

Oh -and I also forgot to add. Your stated wish is to be a long term investor, but you seem to have the words of a trader.

You seem to be planning an instant portfolio (allocating percentages far and wide). I would read Roger Montgomery's value.able and his blogs. The reality is a long-term investor's portfolio should be much more 'glacial' in its build up.

Just because you're ready to start, doesn't mean there's a portfolio of shares out there that is ready to be bought by you. Are you prepared to sit there for 35 weeks waiting for the one stock that a number of experts recommend buying because it's 30% or more below its intrinsic value (to give you a good margin of safety)?

And then, wait another 15 weeks before something else comes up? For more than half the year, your portfolio would be 100% allocated to one stock, and then 50% (when you got 2) simply because they're the only worthwhile buys. Don't go out there and spend your load (whatever that is, boosted or not by loans), just because you're at Day 1 of your investing life.

At last something of interest.

 

[Vader]

Oh -and I also forgot to add. Your stated wish is to be a long term investor, but you seem to have the words of a trader.

You seem to be planning an instant portfolio (allocating percentages far and wide). I would read Roger Montgomery's value.able and his blogs. The reality is a long-term investor's portfolio should be much more 'glacial' in its build up.

Just because you're ready to start, doesn't mean there's a portfolio of shares out there that is ready to be bought by you. Are you prepared to sit there for 35 weeks waiting for the one stock that a number of experts recommend buying because it's 30% or more below its intrinsic value (to give you a good margin of safety)?

And then, wait another 15 weeks before something else comes up? For more than half the year, your portfolio would be 100% allocated to one stock, and then 50% (when you got 2) simply because they're the only worthwhile buys. Don't go out there and spend your load (whatever that is, boosted or not by loans), just because you're at Day 1 of your investing life.

Understood.

While long term trading is the overall goal, I'm not going to just set and forget... I don't see the logic in watching a stock fall 80% calm in the knowledge that it'll get back up eventually if there is any chance whatsoever you can negotiate a path out of that trade before things get quite so bad (I know there may still be times where you don't have a choice).

I plan to break my portfolio up into a few broad categories, but most of the shares I buy I will be looking to hold for about 1-3 years... and yes I've read a lot of posts on Roger's blog - among other things (subscribed to it in google reader) and will have an exit strategy in mind for both good and bad results... I don't necessarily agree with everything he says, but he also has some very interesting things to say.

There will also be shares that I plan to hold for a lot longer than 1-3 years (think major banks etc.). Those I am expecting to be a lot slower to pick up at the prices I want (but who knows, Spain might help me out sooner rather than later, lol).

Of course, whether it works out like that or I go on a few unplanned 'portfolio corrections' like Robusta has needed to do is another thing to watch out for.

... BUT I also doubt I will be able to resit one or two more 'speculative trades'. The potential damage will be kept very low for those and be based around an upcoming catalyst, but I do need a few rules about how to handle those.

...and the one company I am currently considering in this category is more of a long-term speculative stock overall, but has a couple of interesting twists coming up in its near future. I'm not quite sure how to handle that one to be honest if I do decide to dip my toe in - I do plan on discussing that one here prior to any purchases of it btw.

 

[Julia]

Just because you're ready to start, doesn't mean there's a portfolio of shares out there that is ready to be bought by you.

+1. I'm always bothered by the dollar cost averaging thing. Don't understand why you'd just buy a stock on a random day without regard for its price on that day.
If you're going to allocate 15% to a particular stock, why wouldn't you be more selective as to when you purchase that 15%?

But congratulations on your openness and willingness to consider responses.
Submitting yourself to criticism is pretty brave imo.

 

[So_Cynical]

Completely agree with everything you say Peter.

@ So_Cynical - yes I hear what you're saying and while I agree that stop losses can be double edged, the downside is a bit worse than the upside... but finding that happy medium is going to be a compromise either way.

My basic strategy (it will be more detailed than this) will be an initial stop loss of 20% below the buy in value of the trade. If something drops further than that after I buy I won't be averaging down, I'd rather accept it as a bad call or bad timing and regroup and reassess at a later date... is 20% too big? that's one of the questions I'm going through at the moment, but from a capital risk perspective I think that is a reasonable place to start.

Lets look at the alternatives.

• 5% stop loss
• 10% stop loss
• 15% stop loss
• 20% stop loss
• 25% stop loss
• Buy More

Your trade can turn around on you at any time, if you have chosen well it will almost certainly come back at some point...most will suggest a 5% stop loss as trend following requires you to have lots of small losers so the few big winners can cover the small losers and make the system profitable.

But your not going to be a trend follower so why buy into the trend following rules? accepting losers of over 10% would generally be considered bad...3 or 4 in a row and your confidence would be rock bottom and the moneys gone..locked in.

20% Jeez i don't think that's gone fly...hows your comfort zone gona be losing 2K outa a 10K trade, only to watch that loser turn around over the next 5 or 6 months...i know id feel sick.

My losers tend to be of 2 types..very small (1 > 5%) and very big (30 > 100%) but i don't have many so overall my strategy is profitable and after almost 4 years has reliable expectancy...also i will hold an average loser for over 300 days...i give my trades lots of room to move.

---

Just today my 2 year old PTM trade come into profit for the first time in like 11 months, i have 3 average downs with the last one being substantial (actually caught the bottom )....seriously 2 years in and 11 months to come good and come good it has....so glad i didn't sell.

 

[robusta]

Beware the stop loss order as like pretty much everything in the market its a 2 edged sword, on the one hand it well get you out of a trade with only a small loss, on the other hand it can get you out of a trade at pretty much the exact time you should be entering/buying more....just look at all the times robusta sold stocks (over traded) that he should of been averaging down into or simply holding and giving the trade time to come good.

Good point, admit the mistakes but sometimes a good investment is sold off and the best decision is hold or even maybe even buy some more.

Just because you're ready to start, doesn't mean there's a portfolio of shares out there that is ready to be bought by you. Are you prepared to sit there for 35 weeks waiting for the one stock that a number of experts recommend buying because it's 30% or more below its intrinsic value (to give you a good margin of safety)?

And then, wait another 15 weeks before something else comes up? For more than half the year, your portfolio would be 100% allocated to one stock, and then 50% (when you got 2) simply because they're the only worthwhile buys. Don't go out there and spend your load (whatever that is, boosted or not by loans), just because you're at Day 1 of your investing life.

This is a excellent point good to see you are all over it vader.

 

[craft]

Good to see you are using stop losses. Investors using FA can get their timing wrong just as often as the rest of us. Protecting the banks capital should be high on your trade management process.

Since you are using SL's you will know how much you are risking in each trade and therefore the total portfolio heat. Keep your eye on this figure more than how much you have invested. As you move your SL's up your total risk is reduced allowing you to invest more until you are fully invested. I don't expect you to go from zero to hero (100%) within a few weeks of starting.

The main message I would tell an FA investor is that it is OK to sell. You don't have to experience a horrendous draw down when economic conditions are bad.

This is a very good post but I have a slightly different take.

Yes you will get your timing wrong with FA. But a price based stop is not the answer if your entry is not price based.

If your entry is business performance based then your stop needs to be business performance based. This leads to the inevitable fact that you can get seriously stung if your analysis is suspect. Valuation is more an art then a science and it takes time to develop.

Your only protection against poor valuation is to manage your risk through small positions.

Given that you are using a LOC I would say baby steps (and I mean really small) in your position size and number until the market has revealed its lessons.

If you think you need a price stop for risk management (and you probably do) then I would say you should be looking at trading/investing based on price alone. You could use FA as a subordinated means of identifying your universe but I’m not sure that that wouldn’t reduce the effectiveness of the TA.

Just because you have a FA bent doesn’t mean that for a time at least TA will not be a more effective tool – It has more means of controlling volatility without killing its edge.

 

[robusta]

While our methods differ slightly craft ther are not too many posts by you where I do not either learn something , nod my head in agreement or both.

May have ripped this line off from Roger Montgomery but it would be ideal to have a stop loss that would stop you out in a stock market crash but not sell when something cheap gets even cheaper.

 

[skc]

Good point, admit the mistakes but sometimes a good investment is sold off and the best decision is hold or even maybe even buy some more.

MCE?:

This is a very good post but I have a slightly different take.

Yes you will get your timing wrong with FA. But a price based stop is not the answer if your entry is not price based.

If your entry is business performance based then your stop needs to be business performance based. This leads to the inevitable fact that you can get seriously stung if your analysis is suspect.

Exactly what I wanted to say. Find a coherent set of entry and exit criteria. Don't buy fundamental and sell on price.

To Vader..

Here's something on position sizing and risk management in lieu of price based stops.
https://www.aussiestockforums.com/forums/showthread.php?t=22396&p=626488&viewfull=1#post626488

BTW, have you seen the thread that inspired Robusta's thread that inspired you
https://www.aussiestockforums.com/forums/showthread.php?t=21005. This imho is a far more efficient use of your LOC capital than 1-3 year holds.


Good luck.

 

[tinhat]

This is a very good post but I have a slightly different take.

Yes you will get your timing wrong with FA. But a price based stop is not the answer if your entry is not price based.

I choose companies for my capital growth watch list based on FA. Companies with balance sheets that are in order with good growth metrics and with good capital gain potential. So, I use FA, intrinsic value, whatever, to determine the companies I'm interested in holding.

I have however become absolutely convinced that the entry must be made on the basis of price. Firstly, as most FA/value investors will agree, the price must be at a discount to their judgement of where fair value lies. I think this is implied even though you suggest one can purchase a stock without regard to its price.

Timing entry based on technical analysis, which I think is what you are alluding to, for me is imperative even though I choose stocks based on FA.

Just think for a moment about prices and markets from simple economics. Price is the mechanism that reaches an equilibrium between supply and demand. It is the fulcrum point at which supply and demand are in balance. Like all markets, expectations shift the demand and supply curves. If buyers expect that prices may fall they will defer purchase and sellers will fulfil the buyers prophecy by seeking to sell before price falls further (supply exceeds demand -> price deflation). Conversely, if sellers expect that prices will rise they will limit supply in anticipation of receiving a higher price in the future whereas buyers will rush to purchase in anticipation of price increasing (demand exceeds supply -> price inflation).

Why wouldn't we expect value investors to also behave as rational economic agents in the stock market just like any other market? As tech/a mentioned in another thread about value investing, why would any investor incur unnecessary opportunity cost? The answer is of course that as individual economic agents we are not perfectly rational, we are humans. Collectively we would expect markets to tend towards rational behaviour in the long run. In the short run and as individuals we are constantly making imprecise judgements based on incomplete information.

The importance of price for me becomes so obvious whenever I run the figures when looking to buy for the income portfolio for my SMSF. This portfolio is paying pension income. As an example buying ANZ at $20 versus $23.30 represents a difference in yield (gross with franking credits) of 1.4% per annum. It's a significant amount. You'd shop around to get 1.4% off your home loan interest rate.

Following the trend should also reduce the chances of being falsely stopped, whip-sawed, out of a stock. Some people on these forums will tell you they can sit zen like upon their share portfolio without worrying about volatility knowing that in the fullness of time the universe will ensure that all their stocks will reach their true potential and will resonate to the cosmic singularity. I can't do that. I need to preserve capital and generate income and as we have witnessed in the past couple of years there is sufficient uncertainly and risk of significant cyclical swings in stock prices. Timing entry to the trend has become important to me in increasing the chances that I won't get unduly stopped out of a promising stock selection.

As for exiting based on price, every man has his price. Just as when I am willing to buy based on my belief that the price is at a discount to fair value, why wouldn't I exit when I believe the price is at a significant premium to the fair value? Why wouldn't I use a stop loss to lock in capital gains and preserve capital?

In this sideways market IMHO the trend is important and buy and hold is not necessarily the best strategy for capital gains.

 

[burglar]

...
BTW, have you seen the thread that inspired Robusta's thread that inspired you
https://www.aussiestockforums.com/forums/showthread.php?t=21005. ...

Sure did, skc, ...
I was impressed!

 

[sinner]

Hi vader, I didn't read the whole thread since it managed to grow so quickly.

Although, I am pretty sure what everyone has said already.

You'd be amiss to listen to these people!

Someone on this forum a while ago pasted a link to this blog

http://venturepopulist.com/2009/06/hybrid-portfolio-theory/

You are looking to borrow money and gain >100% account exposure to equities. Rather, in the blog post proposed above, the idea is instead of paying interest, earn interest. The majority of the account invested in highly liquid, very safe cash securities. Basically, this would be Gov 90 day bills or cash in a bank account, or a mix of cash and rolling 90 day term deposits in a bank account.

Then the remainder of the account is exposed to positive asymmetric outcomes by whatever mechanism you feel appropriate. If it was me, I'd be investing in a trend following futures managed fund, but there are other options. The blog authors later recommended something like this in another post on Hybrid Portfolio Theory.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1675108##

which they seem to believe returns matches closely investing in venture capital.

Assuming nobody dumped the money you wish to invest in your lap, it's highly likely that you worked very hard for it. Keep that in mind at all times.

 

[Vader]

Thanks for all the replies guys (and the links)... some very interesting stuff there - to give my thinking on a couple of the points raised:

1. The reason why I'm thinking of a hard 20% stop loss is definitely risk based - I think that gives a stock quite a bit of room to move and recover, while giving some protection against a really bad fall... I've definitely done some looking at charts, and while it's not comprehensively back tested, it seems to be in the ball park for what I want it to do.

If I think a stock is a bit riskier though, then I'll set the stop loss tighter - I shouldn't have too many of those, but the option is there.

2. Definitely agree about entry via price - the only reason why I would split the larger holdings over two purchases is purely risk management... the biggest thing I need to protect against is a big correction, especially early on - if I was fully invested right away and there was a big correction, that's going to hurt a lot more than one that comes say 12 months down the track when half of my stocks have had a chance for a bit of growth to offset it.

...and yes, I'm sure I won't avoid a bit of basic TA, and I agree it's going to be more touchy feely than definitive edge, but once I've identified a stock with good financials, that represents what I believe to be good value, I'm not going to just jump in at the first available point and continue to ride a downward trend even lower.

I haven't read through SKC's Fundamental thread yet (I missed that one somehow, will read it today), but yes, supply v demand is certainly something I understand - another simple indicator I have noticed after looking over heaps of charts and their performance over the last year or so is that when the 5d moving average climbs above the 30d moving average (and the 30d moving av is trending upwards), there is usually a decent period of growth that follows.

I'm sure I'll get yelled down for even considering something like that without back testing it further (but the discretionary decision making of the fundamentals obviously makes that a challenging task), but a few of the stocks I'm keeping an eye on at the moment look like they may be approaching that mark before too long.