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How easy is it to make money trading individual companies?

I used to  attempt to identify companies whose stock prices were going to rise in price, as well as those that were going to fall, and place spread-bets accordingly. Unfortunately, it seemed that I was either wrong, or that I was incorrectly implementing my techniques, because it seemed that all that happened was that my spread-betting account went down in value. Yikes!

I was not alone, apparently According to the Financial Conduct Authority, 82% of traders using a product produced by the spread-betting companies, called CFDs, managed to lose money.

This impression was reinforced by an article that I read in MoneyWeek last week, written by Matthew Partridge. Matthew has been attempting to make money by both buying some companies (‘going long’), and selling other companies (‘going short’). This is a ‘market neutral’ strategy that, theoretically, would not be affected by a market crash.

Matthew has been very transparent about his trades. He has nine ‘long’ positions and these are in profit to the tune of a very modest £66. His short trades, however, are losing £254, so overall, his trading is making a loss. I do not write this to denigrate his efforts. After all, I was attempting to do the same, and lost much more money than that! I think MoneyWeek is a great read, by the way.

My trading these days tends to focus more on the different asset classes, looking to benefit from rises in their price, and exiting the market when they fall in price. For shares, I use a unit trust that is actively managed, and trends better than an index ETF. For property, I use an investment trust (a REIT), for gold I use an ETF, and for exposure to commodities I use a commodity investment trust. For bond exposure I simply use three differently denominated ETFs.

Why do I trade asset classes, rather than individual shares? Because it removes individual company risk. If one of the companies that makes up part of the ETF that I hold has a bad year, it will not affect the whole portfolio significantly. The downside is that stellar performance of a company will be hindered by lacklustre performance of others. The difficulty is identifying the stellar companies, and avoiding the lacklustre ones!

Next week, I will discuss the performance of my trading/investment strategies.

If you are interested in my views of the different asset classes this week, have a look my video: 

 

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Has the UK property market finally given up the ghost?

A few weeks ago, I was convinced that the UK property market has on the way down. It it had a bit of a reprieve however, until this week, where it fell further, finally closing below the average price for the year (the ma52), which is, for me, a good reason to liquidate the position. I shall be doing this on Monday.

(photo by Scott Preece on Flickr)

Surprisingly, there has been another trading signal! You’ll have to watch the video to see what that one is. I certainly was not expecting it! So this week I have two trading signals to act upon. Remember, I give myself no discretion here, I just follow the signals, just like the ‘Dice Man’. It’s much easier this way.

They will both be losing trades, by the way. I entered the property trade too late, so there is a greater distance between the entry and exit price than there should have been. I am telling myself that this is a reminder (albeit an expensive one): I need to take the signals promptly when they happen, and not wait ‘for confirmation’. The problem with closing trades at a loss, is that there is a temptation to keep them open, in the hope that they turn profitable again. Sometimes it does, but often it doesn’t. and the loss gets worse. Not a good feeling. I find that feelings are generally a bad thing for my trading…..

Have a great week! I’ll catch up with you again next week! btw: you can find me on Facebook here

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Line in the sand

My Mum likes to have a regular look at her investments and see how they are doing. ‘You just like counting your money’ said my Dad, (as if he doesn’t like counting his money)….

‘Why do you look at your account?’ I asked. ‘Because I like to see that it is going up’ she replied. ‘Would you sell your investments if they went down’? ‘Nope, well, maybe if they went down a lot….’

This conversation illustrates for me the benefits of having an investment plan. Of course, we all like to see our investments go up in value, but, in my opinion, we need to have a plan (ideally a written one) about what to do, if anything, if they go down in value, because at some point they will! I completely get the idea of buy-and-hold investing, and for many of us that is the best way to go, because otherwise many of us would (and do), liquidate an investment at exactly the wrong time, ie at the bottom of the dip.

The strategy that I use with this portfolio is to have a ‘line-in-the-sand’ point at which I will sell the investment and convert it to cash if it is dropping in value. Many investors use a 200 day moving average for this. I use a 1 year moving average. It probably doesn’t matter too much what I use, as long as I use it!

I use the ‘line in the sand’ to automate my decision-making about either being in or out of an asset-class. It is a binary decision making tool. There is no discretion involved. The reason for this is that I have emotional thoughts about how well or badly certain asset classes are going to perform. The trouble is, these thoughts are usually wrong. I have had numerous discussions in recent years with folk who feel that shares (equities) are over-valued and therefore better not to own them. They may be over-valued, but they have been going up in value for the past few years, and have been worth owning. I will sell my equity investment when they drop below the ‘line in the sand’.

If you would like to know my current opinion about the state of the five different asset classes that I trade, have a look at my video:

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Let the Dice decide!

‘I just want someone to decide for me!’ exclaimed my 18 yr old niece, when it came to deciding which university course to choose. Often we want to be certain about what decision to make in life. Certainty is, however, something that one can only have retrospectively. Should I buy, or wait? This was my dilemma in the example that I discussed last week.

Why do we want certainty? I wonder whether it is an ego issue? We don’t want to either look or feel foolish for making what, in retrospective might appear to have been a poor decision. We feel that the success or failure or our trades reflects upon us personally.
In the novel ‘The Dice man’ by Luke Rhinehart, the protagonist is a bored and depressed psychiatrist who decides to inject more chance in his life by using the roll of a dice to make a decision on his behalf. 
Picture from 0Four (via Flickr)
The book is , of course, an iconic read, but the point that I am making is that if I use my trading technique ‘like the dice’ in the book, then my trading decision-making is easy. Who am I to question the dice?…..

If you want to see my thoughts about the different asset classes this week, then have a look at this video:

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Are you feeling lucky, punk?

Dirty Harry was the best cop ever, of course. He was methodical and reliable, and had the odd hunch, which helped. He also reckoned that he had pretty good reactions if someone wanted to draw a gun on him. Hence the provocative phrase: ‘Go ahead, punk, make my day’… goading a low-life to try and pull a gun on him.

(Picture by Simon Ward, via Flickr)

As a trend-follower, I too need to react quickly. I thought I would give you an example of a trade that went against me. This does happen regularly to trend followers. The important issue here was that I ended up losing more money than I should have done, because I did not react quickly and implement my trading rules. I was not Dirty Harry!

Mistake number 1: I did not open my trade as soon as I got a signal (arrow 1) I waited ‘for confirmation’ of a trend starting. In other words I waited for the up-trend to continue before buying (green arrow). This is bad news for two reasons: Firstly, I’m paying more for something that I hope to profit by when I exit the trade, so it reduces my profits. Secondly, if I get a ‘sell’ signal, fairly quickly then the price will have fallen by a greater amount. Not good!

Mistake number 2: I did not close the trade as soon as I got an exit signal (arrow number 2).  I had hoped that the price would jump back up again and rise into a profitable trade. But no, the price continued down and I sold at an even lower price (red arrow), and ended up losing more money than I would have done if I had exited as soon as I got a signal.

Please don’t misunderstand me. My trading system is very simple. It is my emotions that sometimes get in the way and I sabotage the process.

Note to self: what is the point in creating a system and then not sticking to it?!

Anyway, my system has generated a new BUY signal in one of the asset classes. Which one is it? You’ll have to watch the video to find out!

My weekly review of the different asset classes and whether I want to be invested or in cash

 

You can follow me on Facebook here

See you next week!

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Lead or Follow?

Regular readers will know that I am a big fan of the ‘Big Issue’ magazine that is sold on the streets by the homeless. ‘A hand-up, not a hand-out’ according to it’s founder John Bird. The magazine has some great articles every week. This week the editor Paul McNamee was discussing the changes that the businesses created by the worlds’ richest people have had on society.

I was struck in particular by a statistic that he quoted about 43% of everything sold in in the US is bought online through Amazon. This is amazing. McNamee comments of the how one of the effects of this is that we no longer need to even go outside. As a result ‘the less we see the world in its brutal glory’.
I agree with this and think I think we should probably keep our thoughts about our own personal fortunes to a minimum. One of the ways that we can do this is by having a simple, robust investment system, that does not involve much time or headspace.  This then frees up our time to go out and see the world in it’s brutal glory, and do our bit to make it a better place.
btw: brutal statistic of the week (from Big Issue):  The average life expectancy of a homeless man in the UK is 47 compared to the national average of 79.
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How to Retire at 40

This Channel 4 TV programme was reviewed hilariously by Lucy Sweet in Big Issue this week. She is a very acerbic writer, with beautifully cutting comments on the various participants on the programme. ‘..you’ll probably spend your last 20 years creosoting everything and watching too many episodes of ‘Can’t Pay? We’ll Take It Away’….’  and …’they lived their lives in suspended animation, waiting for days that may never come’.
Like all humour, it was basically the truth, of course. Do we really want to retire at 40? What would you do all day? What would be the point? Does sitting around doing sod-all every day make us happy? No, actually, which is why most of us are much happier when we get home after a holiday.
Retiring at 40 sounds good in some ways, but the reality is that it seems a tragic waste of a life to put all of our energy into such a self-interested goal.
Mostly, our lives should be about everyone else, not us. So, keeping investments simple, sustainable, and mostly automatic, makes sense. Carpe diem.
A review of the different asset classes and whether I want to be invested or in cah
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Shares or commodities?

Yes, I know, I have talked about this before….  but I can’t help remarking on the divergence in price of shares (stocks) and commodities. Here is a 10 year graph of the US stock market, using the ETF SPY as a proxy, (yellow line)  compared to the ETF AIGC (black line) which is a generalised commodities ETF. Shares have risen in price, commodities have fallen in price. Will there be a reversion to the mean, or even a reversal? Well, of course, nobody knows!

Most investors never consider investing directly in commodities, but I think it makes sense to look at all the different asset classes and decide whether or not to be invested in them. At the moment, my system suggests that I should remain invested in equities and not be invested in generalised commodities, but this may change. When will this happen?

Here is a video of my impression of the different asset classes this week!

If you would like to follow me on Facebook, you’ll find my page here.

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Flat white or cappuchino?

We are all coffee addicts these days, it seems. Back in the old days, Nescafe Gold Blend was pretty sexy. You can see one of their adverts back from the 1980s here. These days it’s all flat whites, cappuchinos, moccachinos and Americanos, all very confusing!

I would have thought that with all the demand for coffee, that the price of coffee would be soaring. But it’s not! Here’s the graph:

Coffee looks like it’s just starting to rise from an all time low which in reached in June. This could perhaps be a good time to buy? Trying to call the low, however, is notoriously difficult – ‘catching a falling knife’ is the phrase used by traders. I’ve tried it on a number of occasions, and cut my fingers! I did well from a long coffee trade back in 2014. I’ll probably wait until the price closes above the average price for the year and then buy in, and see if it continues to rise, hoping to benefit from an upwards trend, if it develops….. Until then, I’ll mostly be drinking cappuchinos!

In the meantime, here is a video with my opinions about how the different asset classes are shaping up.

 

Do you use Facebook? Have a look at my page here, and follow along!

Catch up with you next week!

 

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Lessons from ten of the greatest trades of all time

I love MoneyWeek and read it avidly from cover to cover. In fact I recommend it to you. So it was with great interest that I saw in it this article by Matthew Partridge titled ‘Lessons from ten of the greatest trades of all time’. Matthew has written a book called ‘Super Investors’ and his article is a plug for the book of course.

Here are the ten lessons:

Lesson 1. Markets can overreact to events. Buying when everyone is panicking and prices are irrationally depressed can be very profitable.  David Ricardo 1815.

Lesson 2. Making profits from shorting is hard, as prices generally rise over time. Starting with small positions and scaling them up is a wise strategy. Jesse Livermore 1929.

Lesson 3. While it’s a good idea to stick to your strategy, it’s also wise to be flexible if the opportunity is compelling enough. Benjamin Graham 1948.

Lesson 4. It’s difficult to find a company that can consistently grow its sales over a,long period of time. If you can find such a firm, you should hold onto it. Philip Fisher 1955.

Lesson 5. Investing internationally is an excellent way to find new opportunities and to diversify. Local knowledge can help you greatly. John Templeton 1964.

Lesson 6. It’s important to keep an open mind and read information and opinions  that challenge your own views. Paul Samuelson 1970.

Lesson 7. You can learn a lot about a company’s potential by looking at the quality of its products, although you need to do in-depth research. Peter Lynch 1971.

Lesson 8. In technology most of your gains will come from a small number of investments – but it’s hard to tell what they are, so diversify. Eugene Kleiner and Tom Perkins 1976.

Lesson 9. Market perceptions of what is about to happen can have real world impacts, turning them into a self-fulfilling prophecy. George Soros 1992.

Lesson 10. Some of the best investment opportunities can come from companies and industries that have fallen out of favour, so don’t ignore these stocks. Neil Woodford 2000.

 

I think these are all good lessons. The difficulty that I have, however, is how to apply these lessons: One man’s opinion about a market overreacting to events, and buying stocks, is another man’s perceived opportunity to make money by shorting the market. What to do?

My feeling is that as an uninformed, lay investor, I need to have a system that I can apply to the markets that makes me take advantage of all of these lessons, by default. The system needs to:

  • Give me opportunity to benefit from the safety of asset diversification
  • Allow me to benefit from rises in prices
  • Protect me from market crashes
  • Be simple to operate, with black and white buy/sell signals.
  • Not be discretionary.

I believe that my trend-following, asset allocation investment system fulfills these criteria. If you would like to find out more about it click here. Here is a video of my opinion about the different asset classes this week: