4 things the best investors do

Today’s blog is going to provide some brief insights into some of the concepts covered in my Online Technical Analysis Course. This blog cannot cover the depth and scope that the course does. However–hopefully you still get some ideas to improve your portfolio management within my 4 points discussed today. This blog will, I hope, stimulate your cranium to solidify your investment structure. It all comes down to creating rules that you, as an investor, will abide by.

As an aside, I struggled on the title of this blog – originally thinking about the points in reverse structure: AKA- calling it “The 4 Mistakes Most Investors Make”—aka by not following the concepts discussed.

BTW–for more info on the concepts discussed below, click here: Using The Power Of Technical Analysis in Any Market (thinkific.com)

Concept 1: Money Management

Money management consists of 3 factors. They are: Asset Allocation, Position Sizing, and Hedging Risk. These rules are discussed in detail in the Online Course. Here are things to think about as you create your own rules surrounding these factors:

Asset Allocation: Your cash vs equity weighting rules surrounding your macro analysis (next concept to be discussed). Your rules surrounding country exposure, sector exposure, beta adjustments and hedging.

Position sizing: What are your maximum and minimum individual stock or ETF position percentages? Do you buy a position all at once or in stages?  When do you trim positions?

Hedging: Assuming your macro analysis (next concept) suggests a higher risk environment, how will you adjust the beta (volatility) of your positions? Will you incorporate negatively correlated assets or non-correlated assets? If so, what are your maximum and minimum position sizes of such vehicles?

Concept 2: Macro Analysis

Macro Analysis can be done via Trend, Risk or Fundamental analytics. We use all three at ValueTrend, and have created rules that surround them. Again, these rules and how to create them are discussed in the Online Course, but the nuts and bolts you need to consider if you are creating your own rules include:

Trend rules: What chart length are you using (daily, weekly, monthly)? What constitutes an uptrend, a consolidation, and a downtrend?

Risk Evaluation: Beyond Trend analysis, what other factors do you incorporate to determine macro risk? Eg: Momentum studies, sentiment, breadth?Do you have rules telling you to raise or lower cash or hedging according to these observations?

Fundamentals: What are the market valuations vs. long termed normalcy? What “wave” is the market likely in (EWT)? What is the Fed doing that might influence the market? Do you have rules telling you to raise or lower cash or hedging according to these observations?


Concept 3: Buy Discipline

Having a buy discipline covers both where you will find investment candidates, how you will screen and qualify for the best ideas from that source, and what triggers you will use to initiate a buy. Again–I offer specific ideas in each of these categories in the Online Course.

Finding opportunities: What pre-screened list will you use, assuming you don’t have the time to look at every chart of every stock on the TSX & SPX with any regularity? Eg: do you subscribe to a fundamental research service or have an online screening tool to do the legwork for you?

Qualifying the best ideas: How will you identify the best stocks from your pre-screened list (eg–a research service)?

Triggers: Do you have specific buy rules such as my 3-day rule after a breakout? What about fundamental catalysts – are there any you need to see before buying?


Concept 4: Selling Discipline

Ah – the hard part of investing! Its hard enough to evaluate the market, then find good stocks. But how do you know when to sell?

Target: How do you know when the profit you’ve made is enough? Do you use technical resistance targets? Do fundamentals matter? Measured moves? State your rules!

Taking a loss: The ugly part. How do you know when its time to say uncle? Do you use rules surrounding breaks of technical support? How do you avoid being whipsawed? I use a 3 day-3 week rule – do a search on this blog to read discussion on that topic. Do fundamentals matter – if so, what factors might inspire a sell? Bad earnings news, or black swan events effecting a stock – do you hold and hope or take your money and run? Stop-loss policies – do you use mental or physical stops…or none at all?

Macro’s: What do you sell when your macro rules suggest the trend is breaking or risk is rising? What are your rules on determining which stocks to keep vs. which to sell? Beta, fundamentals, technical weakness, and proximity to a target may come into play here. What about selling with sector rotation – how do you identify moneyflow moving from one sector to another?


Of note

Next week, I hope to post a seminar that I just did for the Canadian Association Of Technical Analysis. This is the retail investor organization for investors interested in Technical Analysis (not to be confused with the professional organization for CMT’s like myself known as the CSTA). The seminar covered Concept 1 in greater detail – it was very well received, and I think you will get a lot out of it.



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