This is my first post of 2022, I want to start off by saying that I hope everyone is enjoying the new year. Over the last year, I had accumulated 560 followers on Trading view. Some of you may remember me as a swing trader, always pointing out short term opportunities in stocks. I want to take this opportunity to point out that my philosophy on trading stocks has changed.
I find that short term trading (day trading and swing trading) is filled with challenges and is subject to the unforgiving nature of the Pareto distribution. This type of trading does not work for most people.
I had some success with my swing trades. In reality, with a good risk to reward ratio, you only need 4 out of 10 swing trades to work out well in order to be profitable. But it is not that simple. Losing some money in the trades that did not work was not the problem. The real problems existed in so many different ways, which heavily inflicts a persons ability to be successful in generating capital. For an example, I once purchased NIO at about $7, on a breakout trend, I held NIO till about $9 and exited the trade when volume was cooling. I had technically executed the swing trade appropriately. The next morning, Nio reached $14. which was double the price I had purchased it at only one day prior. Obviously, NIO now became near impossible for me to purchase. I had just owned it at $7, and now the market wants $14 for it!
Before I knew it, NIO reached its highs of $60. My swing trade was successful (technically) but this would have been a 6 bagger in as little as 7 months.
Sometimes, its not the money you lose that you really lost. It's the money you left on the table. and although there are no realized losses in a trade, there really are.
Value investing going forward:
I had fallen for the concept of trading. I felt the need to be actively involved in it. I made mistakes over the last few years, but I am now moving into the long term value investing side of things. I will now buy stocks and think of myself as part owner of a business. I will buy with a holding period of 1-3 years for most stocks, and even longer time horizons for others. Going foreword, my ideas posted here will relate to opportunities that present themselves to be a value investor in a stock that is undervalued with great potential for its future.
The ideas I post will mostly be length and contain my research and due diligence.
Investing during periods of downturn:
The stock market has been trading sideways, or going down, depends how you see it.
The question is, what is going to happen? and how do you best prepare for it as a long term investor.
The stock market conditions have become very silly. Stocks had ran in a major way last year, and a period of cooling off may be necessary. It does not appear *so far* that there will be a sudden crash in stocks. I am not sure what type of correction we are looking at. I drew on the chart the various levels in terms of percentages should we reach them.
I do not see us correcting more than 20-25%. And one thing to be considered, a correction can take place in two ways. We could see a move down (rather quickly) followed by a return to normal market conditions. Otherwise, we could simply move sideways for a while, perhaps all of 2022, which, although there would not be any drops, it would account for the correction based on time.
An important thing to note: The stock indices are a poor reflection of what is happening to the stocks. Well, some people may not like that I am saying this. But hear me out, Peter lynch said, in his book 'one up on wall street'
"How can the S&P 500 be up 20% and my stocks are down? The answer is that a few big stocks in the S&P 500 are propping up the averages. For instance, in 1998 the S&P 500 index was up 28 percent overall, but when you take a closer look. You find out the 50 biggest companies in the index advanced 40%, while the other 450 companies hardly budged" (21)
It is true, that while the indicies may be going sideways, or even going down throughout this year, this may be the result of money leaving a small compilation of extremely overpriced stocks, whereas the remainder of the stocks may be up trending.
I think we all know the names. We know they are trading at multiples extremely out of this world. I do not hold the positions, and I would never tell anyone what to do. In fact, if you buy those positions now, you may make amazing returns over the long run.
Although I do not suggest that you buy or sell stocks, I personally want to take an approach where I am not buying into the 'stock market' as it were, but rather, into the companies behind the stocks I am investing in.
I want a strategy where I can invest without worrying about what stocks are doing this year. Rather, I want to buy stocks that are undervalued now, with great potential, so that, if they continue to go down this year, I would buy more, so that I can profit more in the future.
For all my positions now, I have a time horizon of 3 years. I think to myself:
Okay, I like this stock now at this price. If I buy it now, and it keeps going down, as long as the company is still doing good, I will buy more. It only makes sense to buy more when I am getting something cheaper, when I was paying to pay more for it!
In order to protect myself from stock market downturns. I am not presently invested in stocks which I think may be undervalued. Even if an argument can be made that an opportunity exists.
When you buy undervalued companies, a downturn in prices only benefits you more.
There are three important presumptions here:
1) You buy in smaller increments, allowing yourself the opportunity to buy more over time. 2) you buy and buy more only for as long as the price is undervalued in your opinion. 3) you buy into a company with growth prospects that are impressive, and you have a time horizon of 3 or more years.
I want you to consider this.
If you were a watch collector, and you purchase a Rolex today for $10,000. And 20 days later, someone who owns a Rolex that you want, is selling it for only $5,000, which is a 50% discount, simply because they want to liquidate the watch very quickly. What would you do? most likely, you will instantly take the opportunity to buy it, hopefully before another buyer gets it first!
If you know what you own in the stock market, and your conviction is strong, you should buy more as the price gets discounted. rather than sell what you already have!
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What I am doing:
- I am looking at what positions I have that are overvalued and liquidating. (booking profit to protect my capital and opening room for new investments) - Finding great opportunities (there are great, slow and long term opportunities that I believe are multi baggers, you need to find them!) - begin investing in those opportunities, determine how much your willing to pay for them, and what price you would be selling them at. Buy into them over time, no need to throw a chunk.
* Make sure you are able to re-invest in the positions! * In my case, I am thankful that I often have the opportunity to work overtime shifts, which allow me to make additional money, which I typically re-invest in those opportunities.
I will be posting more in the future about the investments I am in, and post research and etc...
Noooo you've gone to the Darkside. As. trader your advantage was your size and how fast you can be in and out of the trade. as an investor you have no edge because all the information is public. At best you can buy some solid companies where the sector is out of favor (based on technicals) but sectors can stay in favor and out of favor a long time. As someone who started in the fundimental world you'll still level money in the table and you'll wait longer than you should for value to be realized. Your issue wasnt your TA. Anyone can learn solid TA with about 1000-3000 hours of time spent studying charts (took me 3k hours but I did it in 1 year). The other half of trading is when to enter and when to exit. That is much harder. I now leave a runner and I put it on a trailing stop or I'll close a trade after a candle close below a key MA or EMA. I wish you luck on your journey. neither path is easy, I just found the gains to be way better with trading than value investing.
Madcaptains
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We are taking opposite roads. I started in value investing before to move to technical investing. There's good money to be made both sides in my opinion. I suggest you keep all your technical knowledge in mind during this new journey though. Sometimes on forums and online groups it seems like value investing and technical can't go hand in hand. So many investors say technical investing is worth next to nothing and they buy each and every price dips, not concern one bit with the fact they are buying a stock that's in a steady downtrend with no sign of strength on the horizon. Yes, they did their home work as they say and made sure to buy a business that should be strong in the future, but things might go down for another 6 months straight before they have to endure a long reaccumulation period and then finally see things go up.... 2 years later. At the end they will hold for 10 years and forget about their money not doing a thing for the first few years. All I want to say is you can avoid some of that crap with good old technical analysis and buy when things start to go up again.
While I think of it, I remember reading a book from Van Thrarp where he refer to a study (sorry I forget the exact book. All his books are good anyway) that concluded buying when the price broke above a 200 ma and selling when it was going back under the 200ma outperformed a buy and hold strategy by quite a lot. Sometime a stock could be held for a very long time with this rule so I guess we can call that investing long term.