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Nimble Short Term Investing
The term “Nimble Short
Term Investing” refers to a
particular investing style that is applicable to investing in the
equity markets (the share market). This investing approach
has several underlying assumptions, and adopts specific views and
interpretations. Some of it's underlying principles challenge
conventional wisdom. And there is a particular mindset that can help
an investor to be more successful.
The
information on this web page is NOT a recommendation for anyone to
adopt this
approach, and no guarantees are given as to the successfulness or
otherwise. The information here is simply a description of one
possible investing approach.
Overview of this approach
Carefully consider the following scenario.
Let's assume that we have some money which we want to
see grow in value. And we are happy to lend the money to one
(or more) companies by buying some of the shares in the
company.
Over time, we want to see the value of our money grow.
If the company struggles for any reason, and the value of our
investment is falling, we need to consider whether we will leave our
money in the hands of the company — and possibly watch it fall
significantly in value, and in fact the company might end up in such a
situation that our invested funds could end up almost
worthless.
If we could foresee this eventuality, then we might be
wiser to take our money back and invest it somewhere else where it
might have a greater chance of growing in value. If the company cannot
improve the value of our investment, then we might as well invest the
funds in a bank account where it is likely to grow (albeit by a small
amount), instead of reducing in value.
Bearing this in mind, the Nimble Short Term Investing
approach is based on the premise that we are looking for capital
improvement, and we won't tolerate any destruction of our capital. This
might mean that we invest, and monitor our investments, on perhaps a
weekly basis.
Investing objectives
The objectives that help to define this particular
investing style
and
approach include (also see eBook Article ST-7200, "Investing objectives",
for more details):
- Investment income (such as dividends) is not
important and will not be a distraction.
- Strive
for short to medium term capital improvement - over days, weeks or
months, and maybe for years but not necessarily. Hence "Nimble Short Term Investing".
- To maximise the returns by optimising the
investment position entry and exit. That is, we will strive to
time the market
(and this is possible, even though some self-interested experts will
try to tell you otherwise).
- To protect the capital from downside risk by using an
active approach. Hence "Nimble Short Term
Investing".
- We are genuinely interested in helping the company to
move forward by lending them our money. Hence "Nimble Short Term Investing".
Time frame and horizon
- Crystallise profits in short to medium term.
- Ignore the long-term buy-and-hold approach.
- Spend a maximum of about 1 hour per day, or
up to 6 hours per week, on this and related activities.
- Be
sensible with balancing the amount of time against the end results.
That is, we will not unnecessarily spend too much time on related
activities that don't contribute to the outcomes. See more information
about balancing
the time.
- Be
wary of over-analysis, and excessively complicated analysis.
This
applies to both fundamental analysis (to identify quality stocks and
reduce the risks), and to technical analysis (for timing of the entry
and exit).
Underlying principles
There are several principles that underpin this approach (also see
eBook Article ST-7400, "Underlying principles",
for more details):-
- The
opinions and emotions of market participants
are summarised in the price charts. The price charts tell a story, and
it pays to understand the stories in the charts. This is what technical
analysis is all about.
- Bias?
- Some finance industry
professionals are biased, or have a vested interest, or
deliver conflicted advice. So do not automatically believe everything
that we hear.
- Irrelevant
and misleading - Many
industry professionals and commentators provide advice and comment that
is irrelevant and misleading — so ignore it! For example, they might
talk about specific investment opportunities on the assumption that we
have adopted the now out-dated buy-and-hold approach.
- GEMs
- Be cautious about so-called Wall
Street words of wisdom and their clichés (eg. “a rising
tide lifts all boats”) because some are furphies. See a list of real share market GEMs.
- Intrinsic
value and value investing — These notions are
not helpful and are ignored. See more
details about these misleading terms.
- Cyclical
investing — This is not helpful and is ignored. See
more details about cyclical investing.
- Utilise
fundamental
analysis
but only to a small degree. Many investors firmly believe that
fundamental analysis is useful to a degree, but many people place too
much emphasis on it.
- Heavily
utilise technical
analysis to more accurately time the entry and exit.
- Utilise
sound risk and money management principles — It is very
prudent to pre-determine our risk
management and money management strategies.
- Inter-market
analysis is useful, so use it to further fine tune and
influence our investing activities.
Investing psychology
The topic of investing psychology is a very important aspect, which is
not often discussed. It is amazing how relevant it is. Here are some
initial thought-starters (also see eBook Article ST-7500, "Emotions and psychology"):
- One's own emotional
state
can strongly influence investment decisions and performance. So
understand the forces at play and stay calm. See more information about
the emotion
and psychology of the markets.
- Cognitive
and behavioural biases can sub-consciously sway investment
decisions. Be aware of potential biases and actively counter their
influence.
- We
cannot be 100% accurate with investment decisions. There will be losing
positions, so accept this, cut losses quickly, and move on.
- Some
closed positions will turn, and in hindsight could have been winners,
so accept this, stay calm, put it behind us and move on.
Stock, sector and market analysisThere are several key considerations regarding the analysis of stocks, the analysis of market sectors, and the analysis of the markets (also see eBook Article ST-7600, "Stock, sector and market analysis",
for more details):-
- The
fundamental details
of stocks are somewhat useful, but limited for the average retail investor - so be careful not to over-do
fundamental analysis. At the end of the day, the true value of a
company's shares is the value they are trading for on the market. There
is no point arguing with Mister Market (because the market is like
an elephant).
- Stock
valuations - These are theoretical, and assumption based.
Basically they are opinions, and different analysts will have different
values, so ignore them completely.
- Sector
analysis - Ignore sector analysis as it is not overly
helpful for the amount of time that one could commit to it.
- Blue
chip stocks? — This term is not helpful, so ignore references to blue chip stocks. See the real truth
about blue chips.
- IPOs
— Do not participate in IPOs. After floating, too many of them
are under water for too long. Without a trading history, investing in an IPO is somewhat akin to gambling. See more details about whether IPOs are
worth it.
- Dividends
— These are useful, but are not the primary objective for this
strategy, so don't focus
or rely on dividends, and be cautious about making stock selection
decisions based on dividend returns.
- Inter-market
analysis -
Different markets, and markets in different countries, tend to
influence each other from day to day. So it can be helpful to pay
attention to them and theirperformance.
Stock selection strategies
- There are many ways to select stocks, so decide on
one or two strategies and don't be distracted by others.
- One possible stock selection method for this approach
is trend following
(ie. stocks in a confirmed rising trend). Note that there are others.
- Utilise back testing and paper trading strategies
to increase the confidence of the strategy details.
Strategy details and possibilities
There
are many different investing strategies that could be deployed in a
nimble short-term manner as described here. The author of this material
has one or two strategies to share with the Share Market Toolbox
members. See some details in the public presentation
slides.
Money management and risk management
Wise money management is an essential ingredient to help with success.
Following are some key considerations (also see eBook Article ST-7900, "Money and risk management"):
- Confirm your own exit strategy details before
entering a position.
- Optimise the position size using a position sizing
tool.
- Some
investment positions will be losers - that's okay. We can't be 100
percent right with our investment decisions, but we can still be
profitable.
- We can still be profitable provided we keep the
losses small, and make sure the winners are large. A win/loss ratio of
only 40 percent can be okay (provided the losses are kept small and the
profits are relatively high).
- Let the profits run. If appropriate, take some money
off the table to capture profits.
- Don't
close a position just because it has met a price target, or because it
is making huge profits. In this situation it may be prudent to take
some money off the table.
Note the following key points regarding the aspect of risk management,
and also
refer to more details:-
- Consider
aspects of funda-technical analysis to minimise the risks ie. look for
low debt/equity ratio and consistent returns on equity.
- Stock
liquidity — Only invest in liquid stocks ie. daily trades > "x",
and
daily volume or value > 20 times the position size.
See more about
stock liquidity.
- “Risk” no more than 2 percent of total capital on any
one position (the “2 Percent Rule”).
- “Commit” no more than 20 percent of total capital to
any one position.
- Monitor
positions at least weekly, and if an exit condition (or stop loss) is
met, then action it according to the exit strategy.
Food for thought and more information?
Sensible Investing - ask yourself "does
that seem sensible?"
Contrarian Investing Redefined - a
revised approach to contrarian investing.
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