I have done quite well investing this past year as a portfolio manager on Covestor. I do not know how the next year will work out.
I do not know whether my portfolios will be near the top or the bottom of the pile – although I prefer to hope that they will once again be near the top!
But I did want to share with you some basic thoughts on my investment strategy.
Investing Precepts
1) Do not think too much nor think you can out-think the market, the next investor, or even your past performance.
Thinking is overrating. We use our observations to conform to our own bias.
It is better to concentrate on observing. Watching. Monitoring. And responding.
Momentum Plays
2) In order to make money in stock market investments buy stocks that are moving higher.
This sounds way too simple. But I like to say my favorite stock charts are the ones that start lower on the left and end higher on the right.
The first instinct is to suggest that one is too late if one buys a stock that is already high.
Isn’t it better to buy a stock that is low on the chart and then hope that it moves higher? Not in my book.
Momentum investment suggests that things in motion stay in motion. And they tend to go way past where they seem to be heading.
Both on the upside and the downside. I like to buy stocks moving higher and then climb on board and ride it as far as I can.
Limit Losses
3) In order to make money try to keep a small loss from becoming a big loss.
Sometimes that means admitting you have made a mistake. Even if you have literally just purchased shares.
Recognize your ‘mistakes’ and act.
Limit your losses by selling them quickly and maximize your gains by selling them slowly.
Spread Risk
4) Diversify: I don’t like to pile up all my chips on a single stock. Like the shippers of times past, spread out your cargo in multiple vehicles.
That way if one goes down, you haven’t lost the bulk of your portfolio.
I know, you aren’t always going to look brilliant if you have diversified, but it may reduce the chance of looking pretty dumb too.
Fundamentals
5) Try to think of the underlying fundamentals.
What do I mean? I view stock pricing as a vast system of experts all over the place trying to figure out the proper value of an investment.
They want to buy when it is cheap, and sell when it is overpriced.
News affects stock prices. Especially news that is better than expected – as in earnings that beat expectations, and guidance that is positive.
Conversely, when things are not as good as expected, don’t buy into any rationalization of the event.
Maybe it was indeed the weather, the shorter selling season, the exchange rate, or a typhoon in the Pacific. But just step aside.
You do want to save your equity for another day.
Humility
6) Be humble.
Realize you are at best lucky when you do well.
As soon as you believe you have a key to success, you are likely to fail as your own confidence will blind your powers of observation.
7) Never, ever, write a “7 tips for investing column.”
Oh, well.
Please note: All investments bear a risk of loss. There is no guarantee that this or any investment strategy will be profitable.
Photo credit: Michael via Flickr Creative Commons
