To Anonymous people of the world (who can understand Tag-lish),
The right type of financial advice differs because each of us has a different kind of make-up in thought process and conviction in stock winners and losers.
Also – read this link – (HIGHLY recommended – easy reading within 5 minutes)
Strategies of Amateurs and Professionals
I’m proud to say that there are essentially around 2 types of people in the markets but these are just my personal observations- (Think of it like what Psychologists use to identify people’s personalities – INTJ Myers Brigg test etc.)
Type A: High Conviction Value Investor
Trading Style – Accumulates Values
Person must have a very strong fundamental backing that even if the stock falls 10-25% from the time he’s buying, he will have already discounted his bear case scenarios and plugged that possibility in his strategy. Hence, this person buys over time. He never fires his cash ammunition gun in one price nor in one time. This person believes in buying within a certain time frame and a certain price range only (often the price range is 25%- Example I’d buy 8-10). This person normally has a bias on checking all the downside possibilities. This person never asks what his reward will be. He values how much he will stand to lose if he is wrong. These people have a strong handle in their free cash flows. Just as the way he trades, this guy never goes on margin. This guy never borrows money, nor believes in leverage despite low interest rates. These types of people are normally cash-rich. Almost similar to a Warren Buffett type where he can hold companies he likes for three years or even more. This person is a very rare type of species in the trading/investing jungle. These people are the ones who I’ve seen can talk on and on about the company’s dividends, earnings per share, growth ratios etc. These persons know more than what analysts write in the research reports. These people can tend to suffer at times from analysis paralysis. These people know their numbers, read annual reports and will put the analysts to shame. They have a very conservative approach in valuing companies and are willing to wait until the market realizes what they have known longer than everyone else.
Time Horizon – Normally more than 2 years
Characteristic – Loves Low Volatility Setups and is VERY Patient
Style – Mostly Contrarian –
This type of trader/investor does not like to buy stocks when there’s a lot of trading volume and traded value in his/her stock. This person likes to buy companies when no one even pays attention to the company. Most brokers will not recommend the stock this person is buying primarily due to lack of liquidity, lack of institutional sponsorship and lack of immediate catalysts or drivers for the stock to move up. If there may be any catalyst, the timing can be 1 year from now or 2 years from now, hence for most clients who are underfunded, they’ll shy away from these types of stocks despite perceived value. Long term clients will normally have an accumulator strategy good for 1 year and buy values in a span of at least 3 months. This client almost hates it when his stock breaks above a certain range that he/she is accumulating. The client is unnerved if the client he accumulates breaks down. Despite his fundamental judgment, if his thesis for owning the stock is not true, he is emotionless and knows how to cut his losses. This is what separates the value investor from the “forced ipit investor.” In fact, this client probably buys his companies 20% higher on the next box consolidation. This is not a client who averages down on a breakdown. This client simply buys over time. There’s a difference in tranche buying knowing there’s a range of 10-20% as his market timing may be off, versus a client simply averaging down without any plan in mind. If you know Nicholas Darvas, this client loves box breakout setups. Those boxes and consolidations are where this person buys and accumulates a lot of shares. You can call your strategy “bodega strategy” in that you really keep stocks almost in an invisible inventory cabinet that you will only unload maybe years from now. Someone asks you in that game show – Kwarta o Kahon? And you always answer kahon, kahon, kahon. You put your money in kahon. Type B will most likely say Kwarta, Kwarta, Kwarta. You’ll understand what I’m saying as you read along….
Type A will most likely choose Kahon. Type B wants instant gratification and will likely answer Kuarta.
Since there’s a lot of waiting time involved in this strategy, this client loves to be paid even just pocket change first of his investments (2% yields, 3% yields) while waiting and will look for companies that are values and dividend paying.
Typical Stocks in this Client Profile:
Utilities, Telecoms, Consumer Staples – Most of the time – Dividend Paying. To put this into perspective, this is the client who accumulated Manila Water Corp when it was consolidating and doing nothing for most of the year and never selling any of his cheapest shares. He just simply adds more and more in his account without giving a sell order, and this keeps on happening every year. (If he does sell, he often switches it to another dividend paying company). This client does not look in the daily charts. This client looks at weekly and monthly consolidations.
When this client makes money, you’re normally talking about multiple baggers (100%, 200% etc). Perhaps the famous fund managers of this type will be the likes of Peter Lynch or Warren Buffett who’s famous for saying (My holding period is forever.)
To put this kind of client in the extreme sense , this is a client who still holds his PLDT shares since P100 days and has bought even more at P500 days. This is someone who has bought his Sun Hung Kai share during the Mao Tse Tung era during which Chinese people were getting killed and Sun Hung Kai shares were trading for HKD$1 (and now over HKD$110++) . This is the kind of person who still holds shares from 20 years past. He holds it not because he bought and forgot about it. He’s not the buy and forget type. He bought and hold mainly because he saw value and that the company is still growing. Very few can attest to themselves that they bought more and more of the shares after rising 50% in a span of a few months since 2009 of the Philippines without selling a single share (or in their terms, “top slicing”). This is the kind of people I’m talking about. Less than 1% of the investing/trading world can do this type of style because this assumes client is cash-rich and never needs to utter the word sell (or acts in trading as if selling was not in his vocabulary). The only person who can do this kind of style is the one who trades as if he never needed money to begin with.
Retail investors who try to mimic this strategy are coined with styles of peso cost averaging investors (EIP- easy investment program investors) but this retail investor hardly is the Type A profile. Type A profile knows exactly the values he is buying which is why he’ll overexpose his funds on a stock sometimes. It is very hard to find a retail investor who will buy a company at say P100 and buy more even when that P100 doubles to P200 already. Retail investors who understand values are VERY few. There are very few people who can actually claim that they kept on buying Visa, Mastercard, Apple as it rose (and sells when the trade is not working anymore). In fact, the gut reaction of normal retail investors is to sell on a 10-20% return even when they claim they accumulated the company. Instead of being more confident with the rise in price, most retail investors actually trade their “investment position.” when they make 20% returns.
It’s easier said than done. Statistics show time and time again, the people who make money by sitting are VERY, VERY few.
Type B: Chameleon
This type of person is not solely a chartist who follows textbook rules. Contrary to what people think, this person understands people’s behaviors and has a very solid macro understanding. This person may not know all the details an analyst knows, but he knows the overall big picture very well. He knows that people can get excited or panic extremely and uses these emotions to his advantage. He is not emotionless. In fact, emotions are part of his arsenal/ trading weapon tool kit. This kind of player knows when to buy breakouts, when to shift gears into buying pullbacks or even sometimes, catching “falling knives” and selling those breakouts. This player is a chameleon. This client does not have one trading style. You cannot copy this client’s style. This client can be very quiet and not trade for a single month, and then buy a lot of shares the next two months. It is actually fun being a broker of this type of client because this client doesn’t stick simply to values. This client buys all kinds of stocks – speculative and non-index companies et al.
About half of the time, the time horizon of this client will last in just a month or less. Chameleons have a time stop as well as a price stop. When the trade isn’t working, these people are out most of the time. People call them “Hit and Run” because of the way they move in the markets. Famous people who have done this type of strategy effectively are Richard Dennis and his turtle traders during the Momentum markets of the 80s. Linda Raschke, Jeff Cooper normally fall here. George Soros is a very effective Macro-Manager. That’s where he made most of his gains. He knows the big picture very well. Don’t mistake Client B types for just holding stocks in a month or less though. Sometimes he’ll hold his stocks in a year or so. This chameleon, upon knowing that the trend is in his favor, normally makes the most money in a bull run as he oversizes, overexposes and leverages his gains and makes a lot of money (as the trades goes in his favor). Just as client A, the chameleon averages up. He buys up. He doesn’t buy on the way down. He loves buying new highs. Jesse Livermore and Paul Tudor Jones can be said to be chameleons especially when they both shorted a lot of companies during the 1929 Depression and 1987 Black Monday. Both made billions in a span of a few months back in their time. The problem of chameleons is that leverage is part of their game. These people trade other people’s money and leverage can sometimes kill the cat during black swan events. Remember that a chameleon can get wiped out mainly due to leverage on an adverse move. Due to his limited holding time period, this client can get killed before he’s proven right. A 10% drop can be magnified easily to 20% and will result into a difficult year. John Paulson is like a chameleon. He made a lot of money shorting housing stocks and overexposing in gold, but this personality made him lose the most money the next year as well when he loaded up on the financials too early. He may have been right, but he’ll be wiped out due to massive margin calls.
I think there are a bit more chameleons than value investors that I’ve met in my lifetime, and they’ve also done well.
Anyway, it’s cool thinking about the many types of strategies you can employ in your trading and investing journey 🙂
There’s a post that Mr. Joshua Brown states amusingly when traversing the financial blogosphere, and he actually segregated them based on their preferred styles. No one is really 100% Value investor or 100% Chameleon. Most are really hybrids.
Below’s a quick summary of them:
The Kinds of People You Meet in Finance (Kung Fu- Parallels)
1.) The Deadly Venoms: Traders, Technicians and Disciples of the Guild of Charts
“Choose the sword, and you will join me. Choose the ball, and you join your mother…in death. You don’t understand my words, but you must choose. So… come boy, choose life or death.”
2.) Warrior Monks: Stockpickers, Fundamentals, Analysts, Research, Investing
“Toad style is immensely strong and immune to nearly any weapon. When it’s properly used it’s almost invincible…”
3.) Legendary Weapons: Tools of the Trade, Charting, Data, Analytics, Aggregation, Research Providers
“The sword it’s the best weapon of all. Two sharp edges and a long spine. The blade is very thin. And it’s easily damaged, you remember that. The vital thing is the point. Pay special attention to it. Your life can depend on it.”
4.) Master Killers: Elder Statesmen, Investment Companies, Macroeconomics, Professors, Abbots of the Monastery
“At the height of their fame and glory, they turned on one another, each struggling in vain for ultimate supremacy. In the passion and depth of their struggle the very art that had raised them to such Olympian heights was lost. Their techniques, vanished.”
5.) Blog Networks: Clan of the White Lotus
“He looks determined without being ruthless. He has something heroic in his manner. There’s a courage about him. He doesn’t look like a killer. He comes across so calm. Acts like he has a dream. Full of passion…”
6.) Shaolin Rebel Intruders: Anonymous Assassins, Outliers & Wild Cards, Jokers, Upsetters of the Status Quo
“Golden Arm never uses weapons. Says he doesn’t need ’em. He says using his bare arms is the best. And he’s probably right. Nobody’s beaten him yet! Just using his arms, he beat us all then. We had no chance. He had us cold.”
7.) The Dynasty: Bloggers for Mainstream Media and the Government
“One is invulnerable. In fact it involves strenuous breath control and of all techniques it’s the most difficult. The human body has a 108 pressure points. 36 of these can be fatal, the remainder paralyzing.”
Okay, hope you had fun reading this despite being long. So long grasshoppers and may we find our way to financial Zen-ith 🙂
P.S. Joshua Brown’s Reformed Broker Blog is a really good site to read. It’s both entertaining, up-to-date, summarizes and filters most of the financial nonsense in the financial blogosphere and best of all it’s free 🙂 His recommended financial blogs are also oozing with great reads and valuable insights.