What is your stock market investing strategy?

[SDREMNGR]

If you are a pure index investor and don't believe that "beating the market" is possible, then please do me and anyone interested in discussing this topic a favor and refrain from saying the same thing that is all over this board.  Thank you.

I for one believe that it is quite possible to beat the market and strive to do so on all my real estate purchases.  I try to buy below market by finding special situations (short sales / foreclosures / tax sales) and I consider that to be beating the market.  I think it's just as possible to do so in the stock market and people do it all over the world.  Most people here assume and believe that Warren Buffett does it, but he is not the only person in the world doing it or is capable of doing it.

My personal belief is that asset prices are all a product of supply and demand curves meeting.  People decide that they like stocks more than bonds, more people buy stocks than are selling, prices go up.  Pretty basic stuff.  They may decide they like stocks in general (index), or a particular stock specifically, either way, if people are buying a stock, it's prices will go up.  The reasons why people decide that they like that stock may be specific (company is doing well and it is fundamentally making more money and growing), or herd mentality (stocks are doing well, it has historically done better than bonds and other asset classes), or just the economy is growing (all boats rise and sink with the tide).  Anyhow, it's predicting or anticipating the broad money movements between stocks, real estate, bonds, cash, gold, currency, etc. that the big time traders do to try to make big bucks.  What's a little investor like us to do?

Well for one, we have the benefit of being able to buy smaller companies.  Small caps move up and down so much because the float and liquidity is much lower than the big caps.  We can buy or sell them without worrying about affecting the market.  Also we can get in and out of stocks with a click of a mouse instead of taking hours or days or weeks to clear out a position.  Also our trading costs can be close to zero if we are using Vanguard etfs to play the market.  As an aside, more and more "professional" traders with multi-million and even multi-billion funds are using commission free etfs to trade the market these days.  This helps us eliminate costs often associated with sub-optimal high frequency trading costs.  Also, the use of low fee Vanguard funds or etfs helps with liquidity because these things are huge with millions of shares trading daily, like a big cap stock.  We are able to stand on the shoulders of giants when it comes to investing in stocks.

Armed with these simple but highly effective trading tools at our disposal, the small investor is no longer at a disadvantage to the large funds, we actually have a built-in structural advantage if we know how to use it.  The index investors have historically beat the "average" investor because of trading costs and fees.  By definition, the average return of all stock market participants (excluding trading costs) is the market return itself.  And taking away the pure buy and hold investors, who by definition make the market return, you are left with "active traders" that are also on average (excluding trading costs) also earning the market return.  It is only due to the high trading costs (on the order of 1-3% per year) that these active participants consistently lose to the buy and hold index investor.  This is the 85% of people that can't beat the market return due to the trading costs.

Now, if you can smartly trade actively to actually make alpha (returns above the market index return) and you eliminate your trading costs, then you just made yourself an above average investor!  Great!  Now, it's only a matter of finding out how!

I'm curious as to what your personal investing strategy is.   I'm looking for something beyond 1) buy and hold, 2) rebalance periodically.  It doesn't have to be exotic or fancy, but perhaps something novel or unique? 

[warfreak2]

This is the 85% of people that can't beat the market return due to the trading costs.

I don't think fees are the reason that such a large proportion of active traders do worse than the market. By definition, the average of all investments' returns is equal to the market return, but this is a weighted average where the investors with the most money (presumably, those with better strategies) are significantly more represented. It's certainly not the case that the average investor's returns must equal to the market return, even if we ignore fees. (Also, if the distribution is significantly skewed, it could even be the case that most returns are below the mean, even if we ignore fees and weighting, though considering how many people get -100% returns we'd expect the skew to go the other way.)

[SDREMNGR]

Regardless of the skew of the distribution, mathematically, the weighted average of all investors' returns is still the market return.  It doesn't mean that the market return is received by the average investor or even that such a person exists.  It could be that theoretically, 60% of the stock market was owned by 1 person and the remaining 40% was owned by the remaining 99 people (assuming 100 people total investor base).  Even in this situation, any investor who bought the market index at the start of the analysis period and held the index got the average of all investors returns for that period and any investor who bought or sold anything made either above market returns or below market returns.  The secondary stock market is no more than the sum of the participants and the skew of the distribution doesn't affect what the market return is.  It is just the weighted average of all of the participants.  And the only way to get something other than the market return is to have bought or sold some stocks during the analysis period.  And then you subtract the transaction and holding costs.  In this way, if you had every person in the market buy and sell the stocks that they held 1000 times a day until their entire holdings were wasted on trading costs and they completely ran out of money,  then quite simply, the price of all stocks would reach zero, and all money from the market cap of the stock market would have transfered to the market makers who got paid to transact.

[KingCoin]

I'd argue that broadly:

1) Your best chance of beating the market is finding situations where you have an informational advantage.
2) Your best chance of having an informational advantage is looking at situations where you have little competition (as you mentioned, real estate foreclosures and very small cap stocks might be fruitful territory).
3) Developing an informational advantage takes time and expertise, even in investments where you have little competition.
4) You have to measure the additional extracted value as "compensation" for the time put in. Beating the market is great, but not if the marginal "beat" doesn't compensate you for the time it took.

I started a "Trade Idea Thread" where I highlighted trades that I thought I had an edge in. Usually these come in the form of small notional debt securities, exchange traded structured notes, and other exotic situations where institutional money doesn't have an incentive to investigate because they're just too small. My win rate in these trades is around 95%.

As a recent example, last week I bought an exchange traded structured note (MBF) at 11.00. At that price (it's subsequently gone up enough that it's no longer quite so sexy) it delivered an astonishing 41% (near risk free) return annualized if delta hedged properly. Of course, this type of trade isn't scalable to institutional size, which is why I do these trades in my personal account rather than a billion dollar fund.

I personally think the average Joe has a very limited chance of beating the stock market, especially trading big, liquid securities. Even trading small stocks, how many people have enough experience in corporate finance to be able to properly value a company, especially when doing so often requires specific industry knowledge, doing probabilistic risk analysis, and evaluating management teams? In my example above, how many people without a Bloomberg terminal and a few years of finance experience can price up a one-touch knock-out option and hedge it properly? Therefore, I consider the enthusiasm for indexing perfectly reasonable. Maybe some of you out there have a PhD in applied math and can find some sort of quantitative edge to exploit, but you're up against a lot of other PhD's trying to do the same (many doing it as a full time job and with massive institutional backing).

[SDREMNGR]

Good points.  I like that mentality.  By the way, what do you think is the best way to get into hedge funds?  I'm in San Diego and there are a number of small hedge funds.  What's the nest way in?

[KingCoin]

Good points.  I like that mentality.  By the way, what do you think is the best way to get into hedge funds?  I'm in San Diego and there are a number of small hedge funds.  What's the nest way in?

As an individual investor, I don't think investing in hedge funds makes makes a ton of sense to be honest.  The combination of high fees, negative selection bias, and potentially long lock-ups mute their attractiveness. To major institutional investors I think they can be a valuable diversifier.

[warfreak2]

Regardless of the skew of the distribution, mathematically, the weighted average of all investors' returns is still the market return.
[...] any investor who bought the market index at the start of the analysis period and held the index got the average of all investors returns for that period and any investor who bought or sold anything made either above market returns or below market returns. The secondary stock market is no more than the sum of the participants and the skew of the distribution doesn't affect what the market return is.

Uh, yeah, that's what I said. But the "85% of active investors underperform the market" is not weighted. The few rockstar investors who beat the market, do it with a lot of money, so the market return is much more weighted towards them. I didn't suggest this affects the returns, just that it explains why "85% of active investors underperform the market". It's reasonable to expect such a result, even if there are no trading fees. (Investors who bought and held the index aren't included in that 85% figure, by the way, by definition they aren't active investors.)

And the only way to get something other than the market return is to have bought or sold some stocks during the analysis period.

If someone has all their money in Tesla and Facebook, for example, they are not going to get the market return; even if they didn't buy or sell anything during the analysis period. The vast majority of active investors are not jumping in and out of an index*. Most underperforming active investors are picking stocks which underperform.

*Though, if you are just jumping in and out of the index, even without fees, you're still likely to underperform, simply because your asset allocation, averaged over time, includes a proportion in cash, and cash usually underperforms.

[KBecks2]

I am investing under the paid advice of the Motley Fool, primarily taking advice from Motley Fool Pro and Options services, and a little bit from Stock Advisor and Rule Breakers services. 

It's to early to say if I am beating the market, but I believe that long term, I will grow assets and beat inflation while taking on less risk.  I am having a lot of fun learning about options in particular, and options to generate income.

I like having control over my stock trades and I enjoy getting what I feel is some very solid advice and analysis.  Pro and options are great services.  SA and RB are growth stock / momentum stock oriented and those stocks are having a hard year so far.

I have enough assets that I don't want to take on tons of risk, and I like to feel confident that the investments will make money.

Karen

[KBecks2]

*Though, if you are just jumping in and out of the index, even without fees, you're still likely to underperform, simply because your asset allocation, averaged over time, includes a proportion in cash, and cash usually underperforms.

I write put options against some of the cash I am holding.  It is fun and interesting, and, profitable.

[KBecks2]

I started a "Trade Idea Thread" where I highlighted trades that I thought I had an edge in. Usually these come in the form of small notional debt securities, exchange traded structured notes, and other exotic situations where institutional money doesn't have an incentive to investigate because they're just too small. My win rate in these trades is around 95%.

As a recent example, last week I bought an exchange traded structured note (MBF) at 11.00. At that price (it's subsequently gone up enough that it's no longer quite so sexy) it delivered an astonishing 41% (near risk free) return annualized if delta hedged properly. Of course, this type of trade isn't scalable to institutional size, which is why I do these trades in my personal account and work at a hedge fund as my day job.

King Coin, I will have to check out your trade idea thread.  Thanks for mentioning it. 

[KBecks2]

I for one believe that it is quite possible to beat the market and strive to do so on all my real estate purchases.  I try to buy below market by finding special situations (short sales / foreclosures / tax sales) and I consider that to be beating the market.  I think it's just as possible to do so in the stock market and people do it all over the world.  Most people here assume and believe that Warren Buffett does it, but he is not the only person in the world doing it or is capable of doing it.

What kind of real estate investing are you doing?  Do you buy and hold rentals, or do you wholesale, or something else?   I am very interested in real estate, however, for now I have chosen to use stocks and options (with a service).

I use a service for assistance because I don't think I can achieve the returns I want on my own.  I do feel that with the services I use, I will do well and achieve my goals.

ETA:  I am discovering that I am more of a value investor.  I like options income, dividend income and buying low for appreciation.  :) 

Karen

[Boomers]

I have also been using the Motley Fool Pro/Options investment service for the past 5 years. I love the specific advice on stocks, ETF, options to buy/sell and the indepth analysis on the reason behind each trade. The cost is reasonable for the valuable lessons learned. I now have a much better sense of how to use options as a way to boost income when I need it in a few years. Plus, the online communities are engaging and helpful, just like they are on this site. Worth a look if you want to learn and have fun doing it.

Tim

[SDREMNGR]

What kind of real estate investing are you doing?  Do you buy and hold rentals, or do you wholesale, or something else?

Karen

I'm a simple buy and hold investor.  Most of my purchases were during the 2009-2012 market and I plan on holding them for the foreseeable future.  I bought then for cash flow (my 4 purchases totalled $665k in purchase price and I put in about $50k in rehab for all of them.  They all returned well above 15% in net cash flow and principal pay down at purchase so I wasn't worried about prices going down because I wasn't planning on selling anyhow.  My investment amount was $270k and I have probably more than tripled my investment in the 2-3 years.  I'm just enjoying the cash flow and paying down the highest priced loan so that most will be paid off in 10 years.  The cash flow alone from the properties in 10 years after the loans are gone should be well in excess of $50k.

I went through the years in 2003-2007 doing lots of condo conversion deals (essentially specialized flips) and although I made almost $650k dollars during those years, I paid a lot of taxes (flips are taxed as income) and also lost about $300k of it in bad deals that went south during 2007-2008.

At this point, I am all about easy deals that don't take so much work.  Just like in stocks, buy and hold won't make you the most money, but it will make you good money if you are OK with that. 

I have some money that I could invest that is sitting in stocks right now but I am just not seeing deals right now.  I think there may still be room for a run up in real estate, especially if there is an exodus from stocks and bonds in the coming few years.  But I don't like to buy anything that isn't cash flow positive and things in San Diego are no longer cheap.  I looked at out of town deals but I'm hands on and I'd be frustrated at bone headed property managers that don't manage as well as I could.

[surfhb]

Can I ask how long the OP has been investing and what is your return?    Were you in the market in 2001 and 2007?   

Beating the Indexes in a 5, 10 or even 15 year period isn't that big of an accomplishment I'm afraid. :)

[Another Reader]

A lot of us in real estate did "stupid with zeros on it"* in 2005-2007.  I sold my last flip at a loss in early 2008.  I was talked out of keeping it as a rental, luckily, because the market got a lot worse.  I bought more rentals between 2009 and 2012, but I could have bought even more if I had not taken on that flip.  Now I deposit rent checks, pay down mortgages, and wait for an opportunity to pick up the next class of depressed assets.

*Another Dave Ramsey colloquialism.

[KBecks2]

You are a more experienced / better investor than me, and your rentals and cash flow future sounds great.

I have a suggestion that you may want to look into some more boring, steady dividend stocks.  It really depends on your goals and your risk tolerance though.  Do you need to beat the market, is it for your ego because you want to beat it?  I have a strong preference not to lose money.  If the market goes down, I do not want to lose as much.  I will start to learn about hedging, and I believe I am getting good advice.

Best wishes for your continued success! 

[SDREMNGR]

Can I ask how long the OP has been investing and what is your return?    Were you in the market in 2001 and 2007?   

Beating the Indexes in a 5, 10 or even 15 year period isn't that big of an accomplishment I'm afraid. :)

I'm assuming you mean in stock market?

I was in the market in 2001 to 2007 but only with very minimal amount from a rollover IRA from my 1st job that had ~$19k in 2002.  I think it now has about $25k.  I now have it in Vanguard for the past few months, before that in Fidelity in various index funds.  I really started getting more into stocks just this year.  I had only focused in real estate investing up until now, but because the real estate market is a bit saturated right now in San Diego, I have been looking outside real estate.  I learned a lot about tax-sheltered stock market investing from here and other linked sites so I've been pouring a lot of money into stocks right now.  Thus my obsession with trying to get better returns in the stock market.  I have about $140k in the stock market right now and hoping to add about $100k a year for next 3 years so I want to try to learn about it as much as I can.

I would argue that beating the SP500 over a 15 year period is a pretty big deal.  I would say that I have pretty much tracked the market since I have been in index funds over that time.

[bigchrisb]

I take a mixed approach.  Much of my capital is invested in boring, buy and hold investments.  However, I play with part of it, and to date have done better than market, but only over a 7 year timeframe.  The strategies I use are:

- Apply leverage when crisis appears, pay down leverage when everything is calm.  My stab at market timing.
- Shop around the small caps (I'm in Australia, so I've played in that market). I take the view that these have less index exposure, and less coverage from the larger brokerages.  A bit of fundamental analysis may be able to provide alpha here.
- Invest in what you know.  My day job is in providing advice on commercial property.  I feel I have specialist knowledge in this space.  I invest in REITS with commercial property exposure, based on my knowledge of the sector.  I've been able to generate some out-performance here.
- Invest with your active management.  I've bought substantive stakes in the companies that I've worked for (micro-caps), as I've been able to understand the business, and also been able to apply my efforts into improving the company.  Be careful about compliance with insider trading and lockout rules here, and be aware that you are putting your investment and salary eggs in the same basket.

So, with the exception of investing in what you know, all of these have involved a trade off in increased risk for increased potential return.  I suspect I'm a bit higher up the curve with my risk tolerance than average, so have been able to profit from this.  I sleep at night because I have enough in boring passive investments to get me through.

[bobmarley9993]

I have about 15 years investing in individual stocks, albeit in my spare time.  I agree with the other posters that in general it is very hard to beat by a significant amount.  However, I think with a reasonable effort (5 to 6 hours per week) you can beat the market by 1-2% over lengthy periods, following a value-approach and investing in mid-cap & large-cap stocks.  That is about where my returns are, just under 2% above the market last I checked.   It's not great at all but if the market only returns 2 or 3% it's a big difference.

I agree with the prior posts that you need to have some kind of advantage to beat by more than a small margin over a long period of time.  I supposed it is possible to do this with small-caps but the time requirements are daunting.  If you are only investing 10 or 20k and are comfortable having that in 3 or 4 small-caps you could probably do well but once you get to a 6 figure portfolio you are going to want more diversification.  However, I find it takes a lot more digging to find the bargain small-caps as there are fewer summary articles to quickly filter on.  At current market levels I could probably spend 30 or 40 hours just to find 1 idea (just a rough guess), maybe even longer.  I mean to really understand a company, you need to read the last few 10k's, the most recent quarterly, listen to the conference calls, then go and find and research their competitors, probably do some googling on various industry terms during the process, it is really time consuming.  Most of the time you do this and the stock is in the zone of where you think it should be priced so you have to start again.  I think to beat the average with small-caps it's nearly a full-time job.

[brewer12345]

I have moved a significant portion of my equity investments to index vehicles to reduce risk.  However, the rest is in my best ideas.  I am a dirty bottom fisher by nature, so I like the broken, bruised, hated and left for dead.  I also like picking good management teams in such industries when I buy.  If an industry is seriously out of favor and widely hated, I will at least take a look at it.  If I can figure out the industry and find some value I will buy a large hunk and be willing to hold for years. Sometimes these are tiny companies or obscure companies, other times they are names on the front pages.  But you definitely need a strong stomach for this sort of thing because there are a ton of people dying to tell you why your chosen bet is a terrible investment.

The other way I like to add alpha is in the junk bond market.  Credit analysis is in many ways a heck of a lot easier than equity analysis.  Can this company keep up with interest payments?  Can they roll over or pay off their debt when it comes due?  Get these right and the rest does not matter.  Add to that the fact that the junk market periodically blows up and there are suddenly a lot of forced sellers who have to liquidate regardless of price or value.  Since I am not running a junk bond fund I don't HAVE to be in the junk market when people get stupid.  That is a huge advantage because it isn't tough to figure out when the junk market is irrational and it is obvious when the market is in disarray (and right for the picking).  When things fall apart, stroll in, do some credit work, and pick the good stuff right out of the bargain bin.

[lano]

If you put all your money in just one stock then you have a 50% chance to beat the market.

I don't mean this as a joke.  This is a very simple idea that a lot of people forget about.

[SDREMNGR]

If you put all your money in just one stock then you have a 50% chance to beat the market.

I don't mean this as a joke.  This is a very simple idea that a lot of people forget about.

I'm pretty sure that's not how it works.  It's like saying that you have a 50/50 chance of living or dying when you play Russian roulette with a 6 shooter and 1 bullet. 

[SDREMNGR]

A lot of us in real estate did "stupid with zeros on it"* in 2005-2007.  I sold my last flip at a loss in early 2008.  I was talked out of keeping it as a rental, luckily, because the market got a lot worse.  I bought more rentals between 2009 and 2012, but I could have bought even more if I had not taken on that flip.  Now I deposit rent checks, pay down mortgages, and wait for an opportunity to pick up the next class of depressed assets.

*Another Dave Ramsey colloquialism.

Luckily good lawyers got us and the investors out of financial liability despite loan guarantees.  God I hate personal loan guarantees.  I think I will pay more to not have to do that in all future deals with investors.

What are your thoughts on where buying opportunities are?  Real estate or otherwise?  I have about 100k that is burning a hole in my pocket and if I don't find a good place to put it, it may just have to go towards this. 

http://m.ebay.com/itm/151305228016?nav=SEARCH

J/k.

[Another Reader]

Ah, the fast car crowd.  You need to get to know people like Mark Ferguson over at Bigger Pockets (goal is buying the toy this year) and Kenric over at Live Learn Invest (did the real estate investing, opened an on-line business, and bought and sold the toy).

Seriously, I have cash to put to work, but I haven't found a home for it yet.  I'm past the toy stage, and I drive a Toyota Corolla.  If I were younger, I would start a business.  Not a property management business, though, service businesses are hard to leverage.

[Bbqmustache]

Read Daniel R. Solin's book, The Smartest Investment Book You'll Ever Read.  After you do, your attitude about how you invest may change.

I cannot comment on real estate investments. I touch real estate in directly through REIT ETFs.  Someday, after being FI and able to buy rental property with little or no debt, I may consider direct investment in real estate.  Until then, I read and learn.

[Roland of Gilead]

My hypothesis is that the efficient market hypothesis doesn't hold for thinly traded small caps and sometimes doesn't hold for short time periods in large cap stocks during volatile news events.

I have seen evidence of this time after time in stocks that get oversold on fear.  My investing strategy is to identify these stocks and buy near the low point.  Because I see as through a glass darkly I buy in increments so as to capture an average low.  I also sometimes sell in increments to capture a local high and try not to get too greedy.

You may not be able to beat the market long term, but I have averaged about 28% per year for the past decade in my trading account.  This year alone I am up 36% YTD and the index is what, 3%?

[Bbqmustache]

I use DCA for my index ETF purchases and don't pay too much attention to short term results.  Heck, when  am buying, I want the shares going down, not up.  I'll worry about returns five years out or so, doing quarterly rebalancing to keep from getting too heavy in a particular investment.

[hodedofome]

I have 2 strategies currently. In my IRA and 401k accounts, I trade between US stocks, Int'l stocks, and US Treasury bonds based on relative strength, rebalanced monthly. You can read about these types of strategies here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 and here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585517 and here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750 and here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2244633. Interestingly, Gary Antonacci published his 'Global Equities Momentum' backtest about a year after I had started trading essentially the same exact strategy. http://optimalmomentum.blogspot.com/2014/01/introducing-global-equities-momentum.html and http://www.optimalmomentum.com/trackrecord3.html and http://www.optimalmomentum.com/chart.html

I chose this because I don't have to check it more than once a month, and most of the time I don't need to switch the allocation. In a bull market like we've been experiencing, I've been 100% invested in US stocks for a while and obviously enjoying the ride up. I don't have to worry about when the next bear market is coming, I don't wonder how long this is all going to last. I just follow the system (after thousands of hours of research developing it) and trust that it will let me know when the time is right to sell US stocks and either buy International stocks or treasury bonds as a flight to safety.

For my trading account, I buy stocks the way Buffett would buy them in opposite land. I buy all time highs, stocks trading at high P/Es, stocks that have doubled or tripled before I buy them, stuff like that. I buy stocks and have no clue what they do, how they make money, and sometimes I can't even remember their name. I just know ticker symbols. It is all price based, because to me price is the only thing that will pay you. You can't trade P/E's or cash flow statements. In the end, a fundamental investor is looking for some historical correlation between fundamental performance and price performance, and expecting that to continue in the future. I skip all that and go directly to price.

Note: I'm not knocking any fundamental and value investors out there, I love value investing, it just doesn't fit my personality at this time. And I can make money without it.

So I look for stocks making all time highs, and many of them have doubled or tripled in price before I look at them. I like the stocks I buy to be relatively new, in a new industry that is changing how we live and do business. The best time to do this is after a correction in the market. These new stocks are typically going to be the market leaders for the next bull run. I look for a logical entry point (called a 'base' by technical analysis folks) with a relatively tight stop and buy with no more than 1-2% risk in any one stock. I will not buy a second stock until the first stock has moved up a bit and I have moved my stop loss to breakeven. This means that I'll have never risked more than 2% of my portfolio in stocks, ever. So after I've moved my stop to breakeven, I'll begin looking for a second stock to buy, and so on and so forth. If a stock I hold makes another 'base' I may add to it, risking no more than the money I've already made in it. I'll keep buying stocks as long as the market is trending up and my stocks are trending up. As soon as a stock I buy stops going up and begins trending down, I sell it immediately. If the bull run is over and everything starts going down, then I'll let my trailing stops take me out of the market. With no new stocks making all time highs, I WILL NATURALLY LOSE NOTHING IN A BEAR MARKET. If there's nothing to buy and all my stocks are sold, I wait in cash until the next bull run.

As an example, let's say I buy a stock XYZ at $50 with a $100k account. Perhaps my stop loss is at $48. Risking 2% means I'll risk $2,000 for every trade. So with a $2 difference between my entry point and the stop loss, this means I'll buy 1,000 shares of XYZ. Yes that means my position size is $50k but my RISK is only $2k. Then let's say it goes up to $60. I've just made $10k - 5x my initial risk. I'll move my stop loss up to $50 and either look for more stocks to buy or try to add to my current stock XYZ. If I add to XYZ, I will not risk more than what I've made, which is $10k. If my new stop loss is $10 away at $50, then $10000/$10 is 1,000 more shares to buy at $60. This brings my position size to $110k, which is 100% of my account, however the most I will lose is what I've already made ($10k). If the stock flies up to $100, then $100 x 2000 shares is now $200,000. I've just doubled my account on one stock, and never risked more than $2,000 to get there.

This is nothing new. Jesse Livermore traded this way 100+ years ago. Nicolas Darvas did it 60 years ago. William O'Neil has been doing it for the past 50+ years. Dan Zanger and Mark Minervini made millions during the crazy tech bubble this way. And little old me is doing it today. There's probably only 3-5 good bull runs every decade. My job is to double or triple my money during those bull runs, and lose nothing during a bear market. Recent examples of stocks that fit my criteria are TSLA, FB, YELP, VIPS, YY, FLDM, HZNP, ICPT. I typically have only 30-50% winners, however my winners can be much, much larger than my losers. I try to lose as little as possible when I am wrong.

[SDREMNGR]

Thanks for sharing your strategy.  I've started using stop orders to make sure that I get taken out of the market if I'm out on vacation or something and not aware of what's going on.

Although the potential problem with the strategy is still that you have to pick winners consistently enough to offset your losers.  If you keep picking losers and keep getting taken for 10% losses, they sure do add up.  So your technical analysis criteria still has to identify winners in the long run.  But it seems that they have been doing so for you.  Congrats.

In the end, I'm of the belief that whether we were good or just lucky, the results are the same, and it may be nearly impossible to know which we were, although I'd side with "good" the longer we are able to do it.

[Roland of Gilead]

As an example, let's say I buy a stock XYZ at $50 with a $100k account. Perhaps my stop loss is at $48. Risking 2% means I'll risk $2,000 for every trade. So with a $2 difference between my entry point and the stop loss, this means I'll buy 1,000 shares of XYZ. Yes that means my position size is $50k but my RISK is only $2k.

This works great until that weekend where the CEO runs off with his 18 y.o. secretary and half the books are discovered to be fudged.  On Monday XYZ opens 40% down and your 2% stop is meaningless.

[hodedofome]

It is a risk, yes. What I've found is that most of the stocks I'm in have plenty of insiders supporting the price and that is very rare. But it is a possibility for sure. Most of the time that bad news is after the stock is already on the way down, not while it's consistently making new all time highs every day. If it's a pump and dump, those are fairly easy to spot.

[Roland of Gilead]

AZN would be a good example from today.  Reaching new highs on buyout from Pfizer, then over the weekend Pfizer makes  final bid and they reject it, stock opens down 12% from Friday's close of $80.  If you had purchased on the momentum at say $79 with a stop at $77, what do you do on Monday when it is trading at $70?  Do you sell for a 12% loss or do you reset your stop to $68 and hope for a rebound.

[hodedofome]

Well for one, AZN is not a new company in a new industry so I would have skipped it. 2) AZN is not a very fast moving stock. 3) AZN broke out to an all time high but then traded back below it - this would have probably killed any desire I would have to buy it. I only want stocks that break out to all time highs and stay there.

I haven't (and won't) posted all my rules here but I'm pretty selective. Only a few stocks ever meet my criteria, and that's by design. I don't want to trade very often. In 2013 there were probably 10 or 20 stocks that I would have considered, and that's above average.

To answer your question though, if I had bought AZN at $80 and it gapped down to $70, I would have sold immediately and taken the loss. I never know if it'll come back up, so I cut losses quickly. It would probably not be as extreme as you think however, most likely the stop loss would have been in the $72-74 area. So even if I had risked a full 2% on it, in reality I'd be sitting on a 2.5-3% loss. Which sucks, but it's recoverable. It's the 30, 40 and 50% losses which are hard to make up, and that's what I'm trying to avoid here.

[AlanStache]

did Gary Antonacci publish a book, cant find for sale on amazon.  found the pdfs of the publications.

I feature Global Equities Momentum (GEM) in my forthcoming book, so it is time to introduce it on our website. GEM is a simple but powerful model that switches between the S&P 500 Index, the MSCI

[Insanity]

I haven't (and won't) posted all my rules here but I'm pretty selective. Only a few stocks ever meet my criteria, and that's by design. I don't want to trade very often. In 2013 there were probably 10 or 20 stocks that I would have considered, and that's above average.

Why wouldn't you post all of your rules? 

I'm not doubting the rules, I'm just genuinely curious about the risk of posting it.

[hodedofome]

Gary's been talking about a book for as long as he's been blogging. I'm wondering if it's ever going to come out.

I don't post all my rules mainly because trading is a zero sum game. For everyone that's a winner there's a loser somewhere.

There is also the trader effect where the more people trade the same strategy, the less effective it becomes. Not that anyone would actually follow my rules if I posted them, but it still doesn't make sense for me to put them out there and run the risk of my strategy becoming less effective. When you are given the option between pleasing a few people on the internet or selling a few books vs making money, take the money...

[SDREMNGR]

One question I have with momentum investing is it seems to me that momentum strategies are exactly opposite to reversion to mean strategies, but I just read that Gary utilizes both in his strategies.  Is it a matter of time periods?  Isn't all portfolio rebalancing taking advantage of reversion to the mean?

[hodedofome]

Typically momentum and reversion to mean/countertrend/value investing strategies are uncorrelated which is why you see guys running both of them together. In fact I may use a systematic value investing strategy one day to compliment my momentum strategies. A momentum strategy works best in a smoothly trending market, while a countertrend strategy works well in choppy/trendless markets. Obviously, the most profitable strategy is to be able to determine which regime the market is in, and put 100% of your money in the strategy that works during that type of market. However I'm not that good. I'll just run a few uncorrelated strategies at the same time and hope that at least one of them is performing well. As an example, momentum strategies killed it in 2013, but now all those stocks are destroyed. Meanwhile value had a pretty good 2013 and a lot of those stocks are still doing well in 2014. Rebalancing between the two at the end of 2013 would have you in a lot better position than momentum only.

So, you might put 50% of your funds in momentum, and 50% in countertrend and rebalance quarterly or annually or something like that. Reversion to mean happens not only in stocks but in strategies as well, so it's good to rebalance your strategies.

As far as Gary is concerned, I don't know all his reasons. Some guys run the same strategy but on multiple timeframes, as those can be uncorrelated as well.

[Pylortes]

I'm going to try and sum up a little on my philosophy without writing too much, and I apologize in advance since this is somewhat rambling.  I look for companies that I would feel comfortable owning for 10,20,30 years plus.  I need to be able to understand the product/service and have some reasonable idea as to whether it can be eclipsed by a competitor.  I want companies that are #1 or #2 in their field.   I also try to look for companies that are on sale, maybe they had a rough year last year, but before that had an long track record of growth (and I feel comfortable that they can return to that growth).  I also look for companies that have diversified revenue streams, and/or sell globally to hedge against decline of the dollar or inflation.   What I like to do is pull up the annual reports/Mornigstar charts and look for the following quantitative factors:  Return on Equity needs to be consistently strong (I can accept a dip or two but generally over 15%),  I try to ignore PE/ reported earnings and focus in on cash flow from operations.   I like to use Enterprise value/cash flow from operations or free cash flow to understand current valuations.   I want to see cash flow from operations that exceed reported net income over a number of years. I want to see revenue growth and growth in cash flow in a consistent pattern over the past 5-10 years.  Enterprise value takes the market cap and adds debt and subtracts cash on the books to give you a more true value.  the best business in my opinion are ones that grow at a reasonable sustained rate (say 10-15%/yr) that are selling cheaply and that have had a long track reecord of growth.  I also prefer a decent dividend yield, as I trust this over share buybacks which are often used by management to pump up earnings per share so they can hit their performance bonuses.  I like to see an Enterprise value/free cash flow of 7 or less, the lower the better in a dominant industry position.

[DoctorOctagon]

100% stocks, only businesses that I'd be happy running myself that I understand.  See below, my outperformance of the S&P 500 since Dec. 2012.



:)

[innerscorecard]

100% stocks, only businesses that I'd be happy running myself that I understand.  See below, my outperformance of the S&P 500 since Dec. 2012.



:)

What portfolio tracking platform/software is that graph from?

[DaKini]

What portfolio tracking platform/software is that graph from?

...And what would be the correct benchmark for your selected portfolio?

[matchewed]

That is a photo from Mint's investment tab. I have no clue what DocOc's benchmark should be.

[AssetGrinder]

My stock market investing strategy is pretty simple.
- concentrate on long holds 5 year to life as people that trade too often have inferior returns
- Invest into dividend yielding growth stocks as history has shown stocks that pay a dividend outperform ones that do not
- Invest into a diversified portfolio covering the globe and sectors
- Keep reinvesting dividends back into the market whether hot or cold cause nobody can time the markets efficiently
- Do not use my margin account unless their is a severe buying opportunity like a big market crash
- Do not panic when there is a big correction and ride things out by staying invested in the market

I myself dont always follow my own rules and make silly mistakes but i am learning to control my market emotions as I get older. With this plan I am managing a 450k portfolio that's spread across 55 diversified stocks that is yielding me an average of 3.55% a year in dividends.

Its a conservative approach but it suits my needs. In my younger days I would throw hundreds of thousands in single stocks at a time taking on enormous unneeded risk. I know a bit better now. At least I hope LOL!

[Middlesbrough]

Buy small to mid cap companies.
Buy with the intent to never sell.
Sell only if you see the company chiming the same story, but not producing.
Dividends and dividend growth is also a good way to go.
If a company becomes a large cap you don't really have any problems.
Every big dip or market overreaction in the wrong direction is a time to buy.

[Bbqmustache]

There are professionals who spent years on their Masters or even Doctorates, who spend their entire career studying stocks.  (Some of them are called Mutual Fund Managers).  And computer geeks have created automated buy/sell algorythems that leave any technical system in the dust.

So self directed stock investment is not for me.  Stock Index ETFs allow me to hang on for the ride, and I never pay commissions.  $6.95 or $9.95 stock trades are a drain on your returns.  There are even REIT ETFs. 

[Roland of Gilead]

There are professionals who spent years on their Masters or even Doctorates, who spend their entire career studying stocks.  (Some of them are called Mutual Fund Managers).  And computer geeks have created automated buy/sell algorythems that leave any technical system in the dust.

So self directed stock investment is not for me.  Stock Index ETFs allow me to hang on for the ride, and I never pay commissions.  $6.95 or $9.95 stock trades are a drain on your returns.  There are even REIT ETFs.

You pay a fee when you hold a ETF (usually around 0.2% per year).  For a $100,000 investment, that is $200 a year.  That is 20 trades at $9.95.   Just sayin.

[Bbqmustache]

You pay a fee when you hold a ETF (usually around 0.2% per year).  For a $100,000 investment, that is $200 a year.  That is 20 trades at $9.95.   Just sayin.
[/quote]

My ETF expenses are a bit lower than that, but let's run with $200.00  20 trades is less than two trades per month.  Can you manage your portfolio, buying low, selling high and rebalancing on 1.67 trades a month?

I can't.

Oh, I just checked.  Two of my ETFS are .32%, the remainder where most of my investments reside are .07% and .04%.  Weighted, I probably pay about $138 a year in fees.  Thats only 13 $9.95 trades a year.   I like my low costs.

[Roland of Gilead]

My ETF expenses are a bit lower than that, but let's run with $200.00  20 trades is less than two trades per month.  Can you manage your portfolio, buying low, selling high and rebalancing on 1.67 trades a month?

I can't.

Oh, I just checked.  Two of my ETFS are .32%, the remainder where most of my investments reside are .07% and .04%.  Weighted, I probably pay about $138 a year in fees.  Thats only 13 $9.95 trades a year.   I like my low costs.

Ok, good point.  I also own a lot of ETFS and Vanguard funds, mostly in our 401K.  I do trading at Wells Fargo (100 free trades a year, can't beat that) and OptionsHouse ($3 stock trades).  For $138 I could trade about 140 times a year across both accounts.  That is over 10 trades a month which actually is about what I do trade.

[Bbqmustache]

What about the other part of my problem with buying stocks:

"There are professionals who spent years on their Masters or even Doctorates, who spend their entire career studying stocks.  (Some of them are called Mutual Fund Managers).  And computer geeks have created automated buy/sell algorithms that leave any technical system in the dust."