26 February 2014
How to Invest
Here is good article on how to invest. Used by a top trader....
Q: what is the appropriate strategy for retail investors?
A: As a general rule, there are two points to consider. Firstly, the strategy must not rely on having an edge in resources of time, knowledge and finance, as retail investors are weakest in these areas when compared to all other players. Secondly, such a strategy must necessarily be based on the patience to buy shares at basement prices on a non-leveraged basis with minimal transactions over an extended period.
Q: How can retail investors know when shares are at basement prices?
A: Shares will be at basement prices when bearish psychology is extreme and liquidity is tight in the following situations:
-The asset bubble bursts and strong economy tailspins into a recession like the recent Asian crisis
-The economy goes into a period of stagflation
-The economy in a depression with prevailing banking crisis.
-The market crashes due to special events eg Gulf War, 19 Oct 1987 (program trading), LTCM debacle, etc
Q: How do I improve my timing in order to buy shares at basement prices?
A: For situations where share prices are low due to a weaker economic cycle it is best to invest over a six to 12 month period. The initial investment should be 50% of capital, with 10% each subsequently over the intended period for the last 50%. The timing of the initial investment of 50% is crucial.Based on my experience it is best to buy on the day following the national government's admission that the economy is in a recession and gives a negative GDP forecast for the rest of the year. When this announcement is one that makes the front page of the national daily, then almost all the bad news has been discounted by the market.
For a market crash due to a special event it is normally right to commit 50% of capital on the same day of the event and the rest of the 50% within a week. Special event crash tends to be immediate and furious as institutional and retail investors all unload holdings aggressively yet simultaneously, thereby prices reach bottom very quickly.In the case of a banking crisis, the time to buy is when the government's plan to use public money to re-capitalize the banks, whether directly or indirectly through tax incentives aimed at the disposal of bad loans, is at the final stage.
Q: What type of shares should one buy?
A: Buy the top two of the best-managed institutions from each of the key sectors of banking, media, telecommunications, healthcare and computer software. These sectors tend to be essential and also have inherent oligopoly power.
Q: Is the investing going to be smooth sailing?
A: Absolutely not, especially at the initial phase of your buying spree. All your good friends including your dear spouse will think that you are crazy. They will say, "The market is getting lower, this is too dangerous, you can wait". And likely, in the next few days or weeks after buying, the market may indeed go lower, and you will look like a fool.But to want to buy at the absolute bottom is not possible. But to buy near the bottom is possible and can be made highly probable by this approach. Be prepared for some short-term psychological torture. But you need to buy. If not, you will watch and miss the opportunity altogether. Somehow in most cases, you will later look like the wisest man in town for having the courage to buy those shares. View it as short term pain, long term gain.
Q: When then should one take profits?
A: For shares bought resulting from a market crash due to special events (ie it is a one-off situation), one can take profits when profits are between 30% to 70% within a six months period.However, for shares bought as a result of an economic crisis or economic downturn one should keep them for years. Liquidation should only begin when the bull market is so obvious and in such a great rage that it sucks in all kinds of new retail players. The greater fool theory, unfortunately, always comes into play near the end of a new bull market cycle. Shares should be disposed gradually over a 24-month period as bull markets normally last much longer than expected.
Q: After taking profits, what should the investor do with the money?
A: Stay in cash until shares are at basement prices again. This strategy implies that when not invested one must hold cash and be patient even if the waiting period is long. In fact, one of the unprofitable "myths" that is frequently encouraged and practiced is that of continued deployment of capital to enhance returns.This approach usually means that when the opportunity comes for acquiring bargain basement shares you will not have the money. Instead you will be among those hurt by lower share prices. Rather, you should build up liquidity for deployment when market liquidity is tightest in order to make big money.
Q: How often can a retail investor reasonably be expected to participate in such an investment strategy?
A: Assuming a 35-year investment life, one can expect to participate in three to four complete economic cycles, with each cycle of about eight to 10 years, yielding returns of at least 100% over capital. With this approach, transaction costs will be at the barest minimum and any disruption to one's job will be almost non-existent, as the investor will be doing nothing most of the time.
During this period of 35 years, one who is patient and courageous will in addition be rewarded with about five event market crashes, which should yield at least 30% for each event. Therefore this strategy though on a day to day basis does not seem to bear anything, can be very profitable and consistent over the 35 years horizon.Be patient and be prepared, and you will come out tops in the investment arena. If you are not patient and prepared, the stock market will be an expensive place to find out who you are.
Q: what is the appropriate strategy for retail investors?
A: As a general rule, there are two points to consider. Firstly, the strategy must not rely on having an edge in resources of time, knowledge and finance, as retail investors are weakest in these areas when compared to all other players. Secondly, such a strategy must necessarily be based on the patience to buy shares at basement prices on a non-leveraged basis with minimal transactions over an extended period.
Q: How can retail investors know when shares are at basement prices?
A: Shares will be at basement prices when bearish psychology is extreme and liquidity is tight in the following situations:
-The asset bubble bursts and strong economy tailspins into a recession like the recent Asian crisis
-The economy goes into a period of stagflation
-The economy in a depression with prevailing banking crisis.
-The market crashes due to special events eg Gulf War, 19 Oct 1987 (program trading), LTCM debacle, etc
Q: How do I improve my timing in order to buy shares at basement prices?
A: For situations where share prices are low due to a weaker economic cycle it is best to invest over a six to 12 month period. The initial investment should be 50% of capital, with 10% each subsequently over the intended period for the last 50%. The timing of the initial investment of 50% is crucial.Based on my experience it is best to buy on the day following the national government's admission that the economy is in a recession and gives a negative GDP forecast for the rest of the year. When this announcement is one that makes the front page of the national daily, then almost all the bad news has been discounted by the market.
For a market crash due to a special event it is normally right to commit 50% of capital on the same day of the event and the rest of the 50% within a week. Special event crash tends to be immediate and furious as institutional and retail investors all unload holdings aggressively yet simultaneously, thereby prices reach bottom very quickly.In the case of a banking crisis, the time to buy is when the government's plan to use public money to re-capitalize the banks, whether directly or indirectly through tax incentives aimed at the disposal of bad loans, is at the final stage.
Q: What type of shares should one buy?
A: Buy the top two of the best-managed institutions from each of the key sectors of banking, media, telecommunications, healthcare and computer software. These sectors tend to be essential and also have inherent oligopoly power.
Q: Is the investing going to be smooth sailing?
A: Absolutely not, especially at the initial phase of your buying spree. All your good friends including your dear spouse will think that you are crazy. They will say, "The market is getting lower, this is too dangerous, you can wait". And likely, in the next few days or weeks after buying, the market may indeed go lower, and you will look like a fool.But to want to buy at the absolute bottom is not possible. But to buy near the bottom is possible and can be made highly probable by this approach. Be prepared for some short-term psychological torture. But you need to buy. If not, you will watch and miss the opportunity altogether. Somehow in most cases, you will later look like the wisest man in town for having the courage to buy those shares. View it as short term pain, long term gain.
Q: When then should one take profits?
A: For shares bought resulting from a market crash due to special events (ie it is a one-off situation), one can take profits when profits are between 30% to 70% within a six months period.However, for shares bought as a result of an economic crisis or economic downturn one should keep them for years. Liquidation should only begin when the bull market is so obvious and in such a great rage that it sucks in all kinds of new retail players. The greater fool theory, unfortunately, always comes into play near the end of a new bull market cycle. Shares should be disposed gradually over a 24-month period as bull markets normally last much longer than expected.
Q: After taking profits, what should the investor do with the money?
A: Stay in cash until shares are at basement prices again. This strategy implies that when not invested one must hold cash and be patient even if the waiting period is long. In fact, one of the unprofitable "myths" that is frequently encouraged and practiced is that of continued deployment of capital to enhance returns.This approach usually means that when the opportunity comes for acquiring bargain basement shares you will not have the money. Instead you will be among those hurt by lower share prices. Rather, you should build up liquidity for deployment when market liquidity is tightest in order to make big money.
Q: How often can a retail investor reasonably be expected to participate in such an investment strategy?
A: Assuming a 35-year investment life, one can expect to participate in three to four complete economic cycles, with each cycle of about eight to 10 years, yielding returns of at least 100% over capital. With this approach, transaction costs will be at the barest minimum and any disruption to one's job will be almost non-existent, as the investor will be doing nothing most of the time.
During this period of 35 years, one who is patient and courageous will in addition be rewarded with about five event market crashes, which should yield at least 30% for each event. Therefore this strategy though on a day to day basis does not seem to bear anything, can be very profitable and consistent over the 35 years horizon.Be patient and be prepared, and you will come out tops in the investment arena. If you are not patient and prepared, the stock market will be an expensive place to find out who you are.
Labels: Stock Trading System
