I study the numbers and focus on investing in companies that actually turn a profit but the fundamentals don’t help me with my decisions of “when to buy” and “when to exit”
Reading corporate financial statements is an excellent skill for every investor but making short term buy and sell decisions based from this information can be costly. In my opinion (yes, my opinion), a short term trade is less than one month but I focus on intermediate trades which can typically be held from a few weeks to several months based on the action in the stock. What most “average” bozos don’t realize is that a stock price usually breaks down well before the actual fundamentals turn negative and the official negative news hits the street.
You may now ask: How can I sell before the fundamentals turn negative? It’s called technical analysis, a study of chart patterns that allow the investor to determine if a company may be heading in the wrong direction or sideways pattern after an extended up-trend. Fundamentals make you aware of a particular stock to purchase as sales and earnings are rising quarter over quarter and year over year but they don’t get you out of the stock before the floor drops. Just because a company has excellent earnings or a perfect track record, doesn’t mean you buy immediately. You may be buying after an extended up-trend while the stock is due for a correction before its next up-trend. Nobody knows how long a correction will last; it can be 8 weeks, 8 months or 18 months. Why would you park your money in an investment that is stagnant or can possibly lose money for an extended period of time even though the bottom line is pretty?
Technical analysis can help investors spot red flags such as distribution days, breaking of support lines or the violation of key moving averages. Pure Fundamental investors will not sell or even be aware of the current situation on the charts leaving them vulnerable to costly drops in price that may take years to recuperate.
I use both fundamental and technical analysis to make decisions in the market and believe that both tools give you an advantage over the investor that only uses one of these tools. It’s just a matter of how, when and where each of these tools are used that can add to your overall success.
Investing for the long term in high quality companies. The logic of focusing on quality here is due to the following:
- High quality implies the ability for the firm to grow earnings by reinvesting capital (without too much debt) for a high rate of return.
- The long timeframe allows the company ample opportunity to deploy multiple rounds of capital and grow earnings considerably.
We also look for competitive advantages. Competitive advantages are required to protect current profitability and future growth.
Bruce Greenwald & Judd Kahn take note of the strongest key competitive advantages in their book Competition Demystified. In summary, they are:
Protected demand (e.g. network effects etc).
Supply advantages (e.g. government licences for special access to resources etc)
Economies of scale.
But one that is not mentioned was discussed recently by John Huber of Saber Capital on his blog – the customer moat. The idea being that the above noted competitive advantages are compelling for owners in terms of warding off competition but whether they create value for customers is another question.
This idea is interesting because if a firm can position itself such that it is high quality (i.e. earns high returns on capital), has structural competitive advantages and can deliver customer value over the long term, we can begin to see how this would be highly durable and create an immense amount of value for equity holders over the long term.
I'll be honest, in my 8 years of exploring my craft, it was only the last 4 years that i came to the realization that there was something deeper that needed to be addressed. All along, it was right there in front of me. I simply didn't pay enough attention to it... My Psychology.
Trading is all about accepting losses. So fearing failure can lead to impulsive decisions that leads to irrational trading.
If there was a common trait that i found with all of the books that i read again, it was this..."You have to be calm". I came across this sort of sentence many times in the books.
Yvan makes it very clear that in order to master trading you must be mindful
All along i am of the belief that i needed to watch the market and trade all the time, keep up with the new feeds, listen to discussions on the economy and how it affected each currency. NOTHING...I had to completely close off from trading if i was to give myself the chance of succeeding. There was no rushing around trying to catch every move the market made, no downloading podcasts listening to economists talking about how good or bad a currency was. No checking charts, no looking at moves that i have missed and feeling like shit about it. I felt free. It then made sense, in order to trade mindfully, you must eliminate any noise that goes on in your mind which could affect any of your trading decisions.
You will never rid your emotions in trading. You will always have emotions up until you die. Because no one dead has feelings, which means emotions are biologically triggered. Meditation allows you to control these triggers which in turn allows you to trade mindfully and avoid making emotional mistakes.
My goal as a trader is to be engaged with the market, trade light, monitor losses and understand that it is all down to the LAW OF LARGE NUMBERS. If you do something correctly 60% of the time, you will experience a 40% variance. The goal of every trader is to with stand the variance by keeping their trade sizes light and keep their mind calm during the draw downs. You must trade mindfully and remember its OK to be wrong.
For a lot of people, the key to achieving durable success in the markets has to do with hard work, focus, persistence, courage… but I’m here to tell that these are all by-products of something else — something much more powerful that we can all develop. It is this very special something that is essential for building any new skill. In fact, it is a critical factor in trading success and in any other performance-based field
Real learning happens when we are engaged in something! Engagement is the driving force behind success. It is that which makes us learn, build skills, and gives us results. And the principle is the same for any given skill, in any given field – and that includes trading.
It can be easy to assume that the gap between where you are now as a trader, and where you want to be in the future, is caused by a lack of knowledge. The presupposition is that if we knew about a better strategy or a better risk management technique, then we would get better results. We believe that good results require new knowledge. This is true only to a certain extent! You see, what I realized is that new knowledge does not necessarily drive good results. In fact, constantly educating yourself about the ins and outs of financial markets; buying courses, reading books, all these things don’t make you a better trader. All they do is increase your knowledge of financial markets. Knowledge doesn’t necessarily equate to results, just like knowing how to drive a car in theory doesn’t equate driving it in practice. Again, engagement is what creates results!
A good trader is not necessarily a financial expert. A good trader is someone who is proficient at placing and managing trades – which can, but doesn’t have to, entail in-depth knowledge of financial markets and the economy. If your goal is to become a better trader and not simply gain additional knowledge, too much theory can actually be a grotesque misuse of your time. You’ve got to create engagement!
Here’s what I’m saying…
⦿ The more signals you take, the better!
⦿ When you trade a proven system, every signal you get is worth taking. Therefore, engagement will allow you to learn faster than the masses who think they should be waiting for the perfect trade. You see, any amateur surfer out there can wait for that perfect wave, but only the pro knows how to ride it. In the meantime, while the masses are waiting for their perfect trade, you are building your capacity, trade after trade, to act in your best interest.
⦿ Engagement creates courage and confidence — these traits, when transformed into a habit, are very powerful!
⦿ Engagement creates opportunities. The more you trade, the more the likelihood of being at the right place and at the right time. You are not nitpicking anymore – you are there, available, and ready!
⦿ Engagement lowers your expectations and allows you to manage your trades with little emotional involvement. Because there’s always the next one. And the one after! For that same reason, you are also less prone to being disappointed if a trade doesn’t work in your favor.
⦿ Engagement will help reduce the significance of a bigger losing trade.
1. The inability to concentrate.
2. The pervasive habit of looking for short-term emotional gratification.
And those are the reasons why you keep failing in the markets.
Now, compare this with the feeling of “flow”: being immersed in an activity with uninterrupted concentration. Some might refer to this as “the zone.” The feeling of “flow” is what a well-trained mind is all about
Our minds crave information. That’s what they eat! Unfortunately, they also have bulimia, and they need a cure. And the cure has to take the form of a mental exercise.We live in an era of information and technology, and so, you can’t shield yourself from information. Instead, you need to learn an exercise that actively increases your powers of concentration. You need such exercise so that your mind can learn to focus on one thing, and one thing only. So that it becomes a master of emotional regulation.This is how you discipline your mind.
Good portfolios need several layers of protection. Where does this protection comes from?
1. Avoidance of what doesn’t work
The Importance of CONSEQUENCES as opposed to PROBABILITIES If a CONSEQUENCE of an action is NOT ACCEPTABLE to us, then no matter how low the probability, we must avoid that action.
Other Things We Avoid
- Complexity and Unpredictability
- Models Prone to Disruption
- Binary Outcome Situations
- Lack of Pricing Power
- Corporate Mis-governance
2. Seeking of what does work
Things We Seek
- Entry Barriers
- Owner Operators (Soul in the Game)
- Hard to Replicate,
- Admirable Corporate Culture
- Ability to self-finance growth
- Good Governance
- Reasonable Valuation
Qualities of a Good Checklist
1. It should focus on things that really matter
2. It should be short (for example you don’t need six ratios to determine if a business has strong balance sheet or not)
3. There should be some deal breaker questions while other questions may require tradeoffs
As in the past, the IML team remains focussed on finding quality industrial companies at reasonable prices that we are happy to hold for the long term
Lesson 1: Always buy quality industrial companies
Through market share growth, cost cutting, sensible acquisitions or restructuring, these companies can often grow off their own steam over time and aren’t beholden to macro events and the vagaries of the wider economy.
Lesson 2: Back a management team you can trust
“Before we buy into any stock, we are looking for honest, prudent and experienced managers. We like to back managers who make it a habit of underpromising and over-delivering – as opposed to people who know how to put a good spin on things – and there are plenty of those around! We also like to see Boards of Directors with a diverse skill set that mentors their managers and asks the right questions”
Lesson 3: Undervalued quality companies often become attractive takeover targets
Lesson 4: Stand aside from the bubbles and don’t listen to the noise
The other lesson I learnt from my early life on the land is to respect the cycle and to not make the mistake of thinking that just because a market has gone up it will keep running. When sectors in the stockmarket become over-hyped and share prices run well ahead of their fundamentals, experience has taught us that it pays to be very wary. It does not pay to get caught up in the hype of the latest fad or theme.
Traders are told to “let their profits run,” but unfortunately that’s pretty vague advice. Let a profit run long enough and it will eventually turn back into a loss. Traders need a plan that allows them to let their profits run beyond what they typically lose on a losing trade, but also realize that the market will not move in their direction forever.
The trailing stop is probably the most well know profit extraction technique. In simplest terms, as the price moves in your favor, an exit order moves along with it, trailing the price by some set amount.
Establishing a price target is a great way to establish your potential reward relative to risk. Commonly, price targets are used for trading chart patterns, with the target based on the size of the pattern.Price targets can be established for any trade using Fibonacci Extensions or support/resistance levels
Entry Criteria Disappears
If you’re in a profitable trade and the reason you were in the trade disappears, you have probable cause to get out.