My Investment Journey

[Julia]

It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards.!

I bought those 16 stock in June 2008, when XAO was at around 6,000.

You have made two different statements above about your timing. The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.

If indeed you did buy into this by then strong downtrend (though perhaps you didn't after all), I'd be interested to know your rationale for so doing. Did you do it because you gave no credence to the gathering global storm clouds? Believed all the genius advisers who assured investors it would all be nothing much, that Australia was deliciously uncoupled from the rest of the world? etc etc. Or because you considered all that irrelevant as long as you were happy with your own valuation of all those sixteen companies?

I'm not setting out to be provocative or unreasonably persistent. All the time we have people telling us how they believe in averaging down. It's something I find hard to understand but accept the assurances that it works for some. If you have not 'averaged down' on already held familiar stocks, but bought 16 new companies in the circumstances described above, I'd really like to try to understand why anyone would do that. There must be something I'm missing.

I'd be equally appreciative of anyone else who is in favour of such an entry point explaining why it's a good idea.

No obligation to respond, of course.

 

[KnowThePast]

Know the Past: I congratulate you on your capacity to respond to some fairly robust criticism with civility.

Agreed, I saw his response last night and nodded my head thinking it was a very mature response and one we see all to rarely online.

Thanks guys.

Criticism, or even just fear of it, is the reason I started this thread. Thanks for all your input and keep it up please. A few days of responding about stop losses + FA made the subject clearer in my head than it's ever been. Event if it's wrong

KTP,

I would firstly like to apologise for my over rigorous post earlier,

My confusion and terse comment stems from the following inconsistencies and those already mentioned.
By revising this thread I noticed that on 3 separate occasions you mentioned 2008, you now say it was 2007. I also came across the following from 2 separate posts.....

hmmm....

Moving on..

Thanks brty, and no need to apologise. I am the one who should thank you for constructive critisicm.

Regarding my "2008" posts. Yes, it's my wrong, they should have all said 2007. I mistyped it in my first post and than kept coping that mistake into all subsequent ones.

+1.

Keep an open mind about how to approach the market. Not one approach is universally correct or most profitable...

Definitely, and I respect those that achieve resuls doing it differently.

But I roughly know what works for me and I've been doing it for some time now. At this point, I am not going to abandon what I'm doing in favour of something completely different. It's more about refinement and gradual additions/changes.

 

[KnowThePast]

I am also still confused.

If indeed you did buy into this by then strong downtrend (though perhaps you didn't after all), I'd be interested to know your rationale for so doing. Did you do it because you gave no credence to the gathering global storm clouds? Believed all the genius advisers who assured investors it would all be nothing much, that Australia was deliciously uncoupled from the rest of the world? etc etc. Or because you considered all that irrelevant as long as you were happy with your own valuation of all those sixteen companies?

I'm not setting out to be provocative or unreasonably persistent. All the time we have people telling us how they believe in averaging down. It's something I find hard to understand but accept the assurances that it works for some. If you have not 'averaged down' on already held familiar stocks, but bought 16 new companies in the circumstances described above, I'd really like to try to understand why anyone would do that. There must be something I'm missing.

I'd be equally appreciative of anyone else who is in favour of such an entry point explaining why it's a good idea.

No obligation to respond, of course.

Hi Julia,

Just to clarify once more, I've never bought those shares. This was just a back test I did in June 2013 to see how a "Buy and hold great companies" strategy would work in the worst possible scenario. Worst possible scenario being:
1. At, or near the highest point in the market before GFC.
2. No regard paid to the price of shares, just buy them at any price.

I've chosen a round date of 6 years ago, being June 2007. Apologies for me saying 2008 in some posts, all of them should have said 2007.

This is not a strategy I am using, nor would I recommend that to anyone. Although my reasons for not buying those companies at that time wouldn't have been that they market was in downturn. My reasons would be that most of those companies were selling at prices much too high.

 

[craft]

Hi KTP

Nice to see this tread back on track in the civility department – I didn’t imagine people for a second could think you were talking about anybody but you and your approach with the lazy comment. The problems with forums I guess, everybody interprets from their own perspective and you inadvertently offend.

A few posts back SKC summed up nicely as he often does.

Again, it's a trade-off between having a pre-defined trigger that's probably less than perfect and bound to create false negatives, vs the chance of inaction (due to emotions, denial etc) when the "trigger event" does present itself.

Obviously from my posts I’m with you on the no predefined exit, my question is how you intend to manage the bit after ‘vs’ in the above paragraph.

How do you protect yourself if you lose (don’t actually have) the abilities to invest without safeguards? I think it was Phil Fisher that was an interesting cases study in relation to losing the ability.

Cheers

 

[KnowThePast]

Hi KTP

Nice to see this tread back on track in the civility department – I didn’t imagine people for a second could think you were talking about anybody but you and your approach with the lazy comment. The problems with forums I guess, everybody interprets from their own perspective and you inadvertently offend.

Thanks craft.

A few posts back SKC summed up nicely as he often does.

Again, it's a trade-off between having a pre-defined trigger that's probably less than perfect and bound to create false negatives, vs the chance of inaction (due to emotions, denial etc) when the "trigger event" does present itself.

Obviously from my posts I’m with you on the no predefined exit, my question is how you intend to manage the bit after ‘vs’ in the above paragraph.

How do you protect yourself if you lose (don’t actually have) the abilities to invest without safeguards? I think it was Phil Fisher that was an interesting cases study in relation to losing the ability.

Cheers

I've had a long train journey yesterday, so I took a chance to re-read, selectively, Fisher's book. Couldn't find any case studies specifically on this topic, but it was a great refresher anyway.

Funny how upon re-reading something you realise that you had a totally different perception of it before. I've always remembered Fisher as one of the biggest advocates of hold forever strategy, mainly due to his "the correct time to sell a good company is almost never". But on reading it today again, he actually has one of the most trigger happy sell criterias - he chooses a growth company that meets 15 of his points and advises selling when it starts to deviate significantly from those 15 points. Finding a company that meets and sustains those 15 points for more than a couple of years is rare, in my opinion.

It's the rare "great growth" companies that he advises holding on to forever.

The key point to remember, though, is that this sell criteria is recommended for a strategy where stocks are selected if their growth is expected to be substantially above average. Therefore, he recommends selling not even when the company is deteriorating, but as soon as it becomes apparent that high growth into the future in unlikely.

For someone with a different buy criteria, the sell criteria will be different too.

The key point to take out of all this, for me, is that a regular review should be conducted of your holdings. And one key question should be asked - based on my Buy criteria, would I want to buy this company again today? More to it of course, but that's the key question.

Fisher did have one hard rule which I like - the 3 year rule. He gave a stock 3 years, if at that point it still didn't perform, he sold it. I think I will implement that as well.

And as he said, each rule has exceptions, but not many.

 

[tech/a]

A lot like a woman!

 

[craft]

Thanks craft.



I've had a long train journey yesterday, so I took a chance to re-read, selectively, Fisher's book. Couldn't find any case studies specifically on this topic, but it was a great refresher anyway.

Funny how upon re-reading something you realise that you had a totally different perception of it before. I've always remembered Fisher as one of the biggest advocates of hold forever strategy, mainly due to his "the correct time to sell a good company is almost never". But on reading it today again, he actually has one of the most trigger happy sell criterias - he chooses a growth company that meets 15 of his points and advises selling when it starts to deviate significantly from those 15 points. Finding a company that meets and sustains those 15 points for more than a couple of years is rare, in my opinion.

It's the rare "great growth" companies that he advises holding on to forever.

The key point to remember, though, is that this sell criteria is recommended for a strategy where stocks are selected if their growth is expected to be substantially above average. Therefore, he recommends selling not even when the company is deteriorating, but as soon as it becomes apparent that high growth into the future in unlikely.

For someone with a different buy criteria, the sell criteria will be different too.

The key point to take out of all this, for me, is that a regular review should be conducted of your holdings. And one key question should be asked - based on my Buy criteria, would I want to buy this company again today? More to it of course, but that's the key question.

Fisher did have one hard rule which I like - the 3 year rule. He gave a stock 3 years, if at that point it still didn't perform, he sold it. I think I will implement that as well.

And as he said, each rule has exceptions, but not many.

Hi TKP

What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's. I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.

It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.

 

[odds-on]

Hi TKP

What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's. I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.

It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.

Pick a game (e.g. Poker, Bridge, Backgammon, etc) that you enjoy. Purchase some software and load it onto your computer. Become proficient in the game. Set a simple test that if you can beat the computer over a set number of matches then your brain is in a fit state to make an investment decision, if you cannot beat the computer, walk away!

I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.

Cheers

 

[KnowThePast]

A lot like a woman!

The 3 year performance rule?

Hi TKP

What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's. I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.

It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.

Hi craft,

I don't think I am going to do anything about it. I will make mistakes and I will learn from them.

There's often a tendency to fix everything, present in humans and especially bureaucracies. But sometimes the right solution is just to get better. But it will take time and there will be mistakes along the way.

I would not recommend this to everyone. Certainly not to someone who is just starting out or has to preserve capital above all else.

I've been at it for 10 years and have 30 more to go until retirement, I have time and risk tolerance for it.

Pick a game (e.g. Poker, Bridge, Backgammon, etc) that you enjoy. Purchase some software and load it onto your computer. Become proficient in the game. Set a simple test that if you can beat the computer over a set number of matches then your brain is in a fit state to make an investment decision, if you cannot beat the computer, walk away!

I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.

Cheers

I like it! The danger is that by the time you solve the puzzle your brain will no longer be in a good enough state

I found out (the hard way, on many occasions) that I am bad at making quick, on the spot decisions. Very bad, significantly worse than average. I tend to do much better if I can sit on an idea for a while and think about it. This was one of the major reasons behind my rule of investing once a month. Although I shouldn't say investing, it's really more about making a decision only once a month.

Sometimes an opportunity comes along and I need to analyze it quicker, but generally, I know what my best few options are a month before I actually buy or sell. I have that month to sit on it, think things through, look things up, etc.

I find that this forced month of "no decisions" works very well for me.

Now that I typed all this, I think that's a good answer to craft's question above as well.

 

[Sir Osisofliver]

Hi KTP,

Nice to see you back. I've been busy too but thought I would pop in. Especially nice to see you responding so well in this thread, I love people who have a clear thought process, who know themselves well, yet remain open to commentary.

As per usual though, I'm going to ask a couple of thought provoking questions for you and give you my thoughts (This is still based on the idea that while you like the idea of a hard exit, you don't know how to implement - if you've changed that the below might be pointless)...here we go...

Sir O quite rightly pointed out that risk lies in what is unexpected. So why use a known criteria for an unknown event? When the event happens, one needs to weigh the options and decide whether selling is the best use of capital at this point in time.

Can we know everything? Of course not. No matter how diligent our analysis of a stock may be, (whether technical or fundamental) we frequently operate in an environment of imperfect or incomplete information. I run several systems across differing time periods. I'm also a weird person because I use both Technical and Fundamental analysis, having no preference for either style...They both have their place. For some of my systems, FA has more weight, some TA. All my systems however employ mechanisms to limit downside risk. The reason being that it produces a statistically better result over the longer term. To me a stop loss is a mechanism to determine when the imperfect or incomplete information is going to adversely impact my investment...IE a measure of financial risk within my strategy of investment.

You asked above why use a known criteria for an unknown event. My answer (not necessarily yours) is because the third dimension of financial risk, (the extent) is unknowable. The "event" may cause a small retracement in the share price, or may be the initiating event that snowballs into complete destruction. Only with hindsight can we know the answer to this question.

Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there is no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).

I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) Why do you think I sold it?

* * * * *

I've seen you repeatedly state that you will use diversification as a method to reduce risk in your investing activities. Fair enough, diversification will reduce certain types of risk. Specific stock risk in particular is mitigated (not eliminated) by diversification. What about market risk? Market risk is something that impacts the entire market, for example, Interest rates. A stop loss mechanism is a way of mitigating (not eliminating) an event that can impact your entire portfolio. If it's your intention to carry positions for long periods of time in your system or strategy, you will be impacted by Market Risk...how do you intend to recognize and/or mitigate this risk?

That's all for now, I have more but time-poor.

Cheers

Sir O

 

[burglar]

... I am bad at making quick, on the spot decisions. ...

Sometimes, I can't type fast enough to get out of trouble!
On top of that, I am racked by indecision!

I feel that I am very slow.

To overcome this huge disadvantage,
I have found it is helpful to have an exit plan, even before I buy.

 

[craft]

the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.

Hi craft,

I don't think I am going to do anything about it. I will make mistakes and I will learn from them.

There's often a tendency to fix everything, present in humans and especially bureaucracies. But sometimes the right solution is just to get better. But it will take time and there will be mistakes along the way.

I would not recommend this to everyone. Certainly not to someone who is just starting out or has to preserve capital above all else.

I've been at it for 10 years and have 30 more to go until retirement, I have time and risk tolerance for it.

TKP – I respect the strategy to back yourself, however in my opinion the answer to my question lies not in the ‘how to’ of your strategy – but in knowing when to sack yourself.

My personal answer has two parts.

First Part: Am I any good at this?

I use a linear regression line on 5 years of both my equity curve and the XAO Accumulation index. If the slope of my equity regression line does not outperform the XAO Accumulation regression line – I’m history as manager of my money on performance grounds and will commence transferring funds to a broad based low cost ETF.

Second part: Am I losing my ability?

I draw a channel around my long term equity curve and my long term cash distributions – If It penetrate the lower bound of either something has potentially changed. If one is breached I’m on high alert – If both are breached I’m at the very least stood down pending a major investigation.

********

Do you have a properly recorded equity curve for your actual 10 year history? Its an imperative piece of data IMO. If you don't have it - start now and also ponder that the majority of people (like 99% on forums) think they are better then average.

 

[Ves]

Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?

I have tried to find it before - without much success. Is it something you need to pay a data provider for?

 

[craft]

I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.

Cheers

I like that engineer

- - - Updated - - -

Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?

I have tried to find it before - without much success. Is it something you need to pay a data provider for?

I get it included with my paid data. Don't know of any frees sources off the top of my head but imagine they would exist - try the free charting site maybe?.

 

[skc]

Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?

I have tried to find it before - without much success. Is it something you need to pay a data provider for?

I can send it to you if you want. How far back do you need?

 

[Ves]

I can send it to you if you want. How far back do you need?

Thanks for the offer, skc - my portfolio started in April 2011, would be good if it went back that far. Would it be possible to export it to an Excel file?

 

[skc]

Thanks for the offer, skc - my portfolio started in April 2011, would be good if it went back that far. Would it be possible to export it to an Excel file?

See PM.

Apologies for all off-topic posts.

 

[KnowThePast]

Hi KTP,

Nice to see you back. I've been busy too but thought I would pop in. Especially nice to see you responding so well in this thread, I love people who have a clear thought process, who know themselves well, yet remain open to commentary.

As per usual though, I'm going to ask a couple of thought provoking questions for you and give you my thoughts (This is still based on the idea that while you like the idea of a hard exit, you don't know how to implement - if you've changed that the below might be pointless)...here we go...

Thanks Sir O.

Can we know everything? Of course not. No matter how diligent our analysis of a stock may be, (whether technical or fundamental) we frequently operate in an environment of imperfect or incomplete information. I run several systems across differing time periods. I'm also a weird person because I use both Technical and Fundamental analysis, having no preference for either style...They both have their place. For some of my systems, FA has more weight, some TA. All my systems however employ mechanisms to limit downside risk. The reason being that it produces a statistically better result over the longer term. To me a stop loss is a mechanism to determine when the imperfect or incomplete information is going to adversely impact my investment...IE a measure of financial risk within my strategy of investment.

You asked above why use a known criteria for an unknown event. My answer (not necessarily yours) is because the third dimension of financial risk, (the extent) is unknowable. The "event" may cause a small retracement in the share price, or may be the initiating event that snowballs into complete destruction. Only with hindsight can we know the answer to this question.

I agree it is only with hindsight that we will know which ones continue falling and which ones will bounce back.

But what are the odds? I will ramble on...

Out of 10, or 100, good, financially sound companies - how many continue going down and how many recover? My analysis/experience/reading tells me that selling after a big drop in these kind of companies is not the best strategy.

Furthermore, "good" companies experiencing large drops are very often (but far from always) the very best investment opportunities. Again, I feel experienced human judgement is required rather than an automatic decision.

Another argument is about risk - is the company that dropped in price more volatile and therefore more risky, or is it less risky because it is cheaper?

I agree that selling on substantial decline will further mitigate risk - but I think it will end up being the wrong decision more often than not. For the type of companies I invest in, anyway.

A lot of FA is based on finding companies that are priced below value. In many cases, this means you look at companies that have had a fall in price. This results in a situation where for the same kind of company:
- If I already own it, than I sell.
- If I don't own it, Buy!

Let's go back to CAB. I bought it 2009 for my super at $6.20. It has recently fallen down to under $4, for reasons we all know. Now, I agree with "the market" that the company is worth less now than a year ago. It has deteriorated. Should I sell? But despite deterioration in value, I still think there's plenty there now that the price has fallen.

If I sold at $4 or under because it's gone down, when do I allow myself to buy back in? Do I time the market?

What do I do with companies like LYL, where I expect them to have a bad year in 2014. I bought them because they were cheap enough, I did not try to time the low point. If they go on to have a bad 2014, just as I expect, and the share price drops even further, do I sell? My underlying assumptions have not changed, everything is going as I expect, what to do?

I am curious of what your previous FA experience tells you. How often did you get out and the price has gone back up? Was it a worthwhile percentage play in your case?

I think a lot of the auto sell comes from background of timing the market. Sell, wait till it goes up, buy again. I have nothing against that approach, but I have long ways to go before I am competent in anything like that. So what are the benefits of it for me, who makes no attempt to time the market?

Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there is no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).

I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) Why do you think I sold it?

I will have to disagree with you on one bit - simple to understand. I looked back on my notes for it and I have just one sentence against it - "I don't understand this business well enough". But that's for me, it's not the kind of company I usually invest in, so other may find it easy to understand.

But that places me in a good position for your experiment because I've done no research on them and can therefore try to guess why you sold:
- got too expensive based on FA analysis
- too many people talking it up, etc.
- fundamentals changed.

Am I close? Or was there a large dip in the price?

* * * * *

I've seen you repeatedly state that you will use diversification as a method to reduce risk in your investing activities. Fair enough, diversification will reduce certain types of risk. Specific stock risk in particular is mitigated (not eliminated) by diversification. What about market risk? Market risk is something that impacts the entire market, for example, Interest rates. A stop loss mechanism is a way of mitigating (not eliminating) an event that can impact your entire portfolio. If it's your intention to carry positions for long periods of time in your system or strategy, you will be impacted by Market Risk...how do you intend to recognize and/or mitigate this risk?

That's all for now, I have more but time-poor.

Cheers

Sir O

That's a good point, short/medium term, I am not really protected against market risk. Some protection I do have:
- generally long term holding
- 2+ years to enter the market.
- safety margin on my investments. Due to the price I am willing to pay for my investments, I tend to buy less when the market is high and hold less in stock. I am also a lot more likely to sell as some of my stocks will trigger my sell price.

I will expand further on my sell strategy, as I've realised it may sound like I don't have one. I have clear rules about when I will sell, and I do so on a regular basis. I've posted the following sell criteria in my first post, almost directly from Phil Fisher:

1. When I made a mistake.
2. When circumstances changed.
3. When there's a better investment.
4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.
and I've recently added:
5. 3 years performance rule.
6. I should add a new one yet again, based on my experience with IRI a few months back. Sell whenever something gets "Stock of the Month/Year" award.

1 & 2 -fairly self explanatory. I regularly revisit my investments to see if my reasons for buying are still valid. If they changed, either due to new events or finding a flaw in my reasoning, I sell. But first, I consider the investment merit of it in light of new evidence, and whether I would have liked to buy into this now if I didn't already hold.
4. Special situations - won't happen often, so let's move on.
5. enough said.
3. This is key. It's a small point, but has a lot to it. One important thing to remember is that all my investments need to also be compared to a cash account. When the price gets high, I will sell, even if there's no other equity investment to put it in.

I've mentioned this before, for me, buying a share is not a yes/no decision. It is a comparison. What do I compare on?:
1. Price. I do a valuation of the company based on what I think is most likely scenario.
2. Risk.
3. Long term potential.
4. Certainty of earnings or competition moat.

I try and keep these things separate, eg. I don't price risk in my valuation. I can then look at all companies which prices are below my required margin of safety. I know that my price estimates, like anyone else's are probably way off, so whether a company if 50% under value, or 70%, does not make a big difference to me. I assume they are priced about the same.

I can then compare these companies on the other 3 factors. Again the key to the comparison is that Cash account is an option I compare against, as it has all 4 factors locked in.

Which means I will sell when the price gets above my value. The company with more risk and less potential and earnings certainty will be sold at a less of a premium than one with low risk, higher potential, etc.

To reach the selling trigger, either the price has to go up, or the value to come down. But I disagree, that under this methodology, sell trigger can be reached by price going down


I fully understand everyone's arguments about stop losses and their benefits. My point is that not all risks have to be mitigated. It's a decision that's based on personal circumstances. And sound logic, hopefully. There's risks which you may decide are worth bearing, for more reward. But one must understand exactly what's at risk. Do I?

 

[KnowThePast]

TKP – I respect the strategy to back yourself, however in my opinion the answer to my question lies not in the ‘how to’ of your strategy – but in knowing when to sack yourself.

My personal answer has two parts.

First Part: Am I any good at this?

I use a linear regression line on 5 years of both my equity curve and the XAO Accumulation index. If the slope of my equity regression line does not outperform the XAO Accumulation regression line – I’m history as manager of my money on performance grounds and will commence transferring funds to a broad based low cost ETF.

Second part: Am I losing my ability?

I draw a channel around my long term equity curve and my long term cash distributions – If It penetrate the lower bound of either something has potentially changed. If one is breached I’m on high alert – If both are breached I’m at the very least stood down pending a major investigation.

********

Do you have a properly recorded equity curve for your actual 10 year history? Its an imperative piece of data IMO. If you don't have it - start now and also ponder that the majority of people (like 99% on forums) think they are better then average.

Good points craft.

Yes, I do measure myself. Against XAO. So far, so good. Beaten it over the last 6 years, but no Buffet.

I greatly enjoy this game, but like with most things, I only enjoy it if I am getting better and can beat more and more of others. I am competitive.

If my 5 year returns are below XAO, I will use an index fund.

 

[Ves]

Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there is no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).

I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) Why do you think I sold it?

Babcock and Brown is a great lesson for new investors, I agree.

However, suffice to say the problems and risks with this company should have been made clear or at least more identifiable to anyone who bothered to read their cash flow statements.

Look at the operating and investing cashflow. It's non-existent. It's little wonder they went bankrupt - they literally bled cash. Even as far back as 2004 and 2005 you can see the big cash flow deficits building up.

BNB is a fantastic example of why return on equity is a slippery figure prone to accounting wizardry. You really, really need to know how cash flows through the business.... how they fund their operations and growth, what return they can achieve on future investments and how their balance sheet is structured to accomodate this.

Learning how to read cash flow statements instead of relying on the profit and loss statement (or reported NPAT taken off a broking site) would help a lot of investors make better decisions.