Self-driving portfolio

I’ve always been motivated by the idea of finding an ideal mechanical strategy in investing – a magic formula. One that doesn’t require much thought to implement once the groundwork of setting it up has been done.

I’ve got pretty busy recently and am looking for ways to manage my time more effectively. One of the things I’ve been considering is whether there are any ways to simplify my approach to investing to something more mechanical. Continue reading

Selling into strength

For a little while I’ve been meaning to write a post on selling into strength i.e. selling when a share is rising in price. A couple of things have prompted me to consider whether I should sell into strength more often. The first is some of my experience last year, where I gave back most of the gains on a few profitable positions, when the market became a bit choppy. The second is reading a couple of books published by momentum investors (O’Neill and Minervini) who seem to swear by it. Continue reading

Keeping in control

Undoubtedly one of the keys to successful investing is discipline. Rules are needed to consistently implement a strategy, while guarding against the influence of emotions and behavioural mistakes.

I have an investing strategy with some fairly clearly defined rules. The difficulty I, and most other investors, face is the lack of certainty as to whether the rules we are following are the right ones. As important as discipline is the ability to learn from mistakes. Things not going to plan may mean a rule needs updating. However, being open to updating the rules too readily can undermine them when you most need them. The balance is a tricky one… Continue reading

Edgy Businesses

I only invest in very high quality businesses. Part of this is about the business economics, which can be captured in financial metrics: I like businesses that are highly profitable relative to their costs and how much they need to invest in capital. Another more qualitative part of my assessment is whether a business has an edge. Continue reading

Fat tails

I’ve often read that over the long term the most important factor driving equity returns is valuation. While share prices experience momentum over the short to medium term, eventually investors become more conscious that valuations are becoming ‘detached from reality’ and prices revert to mean.  Along this line of reasoning, momentum following is a dangerous game that can lead to bubbles and then crashes, such as the infamous ‘Dot-com’ crash in 2002-3. While there is truth to this analysis for the stock market as a whole, it misses a key nuance when you look at what is going on underneath. Continue reading

Broadening horizons

There has been one a rather obvious way to improve my investment performance that I haven’t yet exploited. It has been on the back of mind for some time. This is to broaden the universe of stocks I invest in to beyond those that trade on the London Stock Exchange. I think the benefits of this have the potential to be quite dramatic. Continue reading

Using stop losses

I’ve decided to have a more detailed look at my use of stop losses. By using a stop loss I mean selling a share if its price falls to a predefined level. Stop losses fit naturally within a momentum based strategy, as they discipline you to sell shares that lose momentum.

My current use of stop losses is a bit ad hoc and I’ve been wondering whether and how to be more systematic. In particular, I’m concerned that I might be applying them a bit too vigorously. There have been a few occasions recently when I’ve sold a share on price weakness only to buy back again a couple of weeks later when the price has bounced.
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