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And it does always come back to having an edge, along with plentiful opportunities to exploit the edge.]]>
I have never considered the third investing style, because I do not have the time, resources, or inclination to do in-depth study and analysis of companies I might want to invest in. When I first got interested in investing, I went for style #2. I studied contrarian and P/E ratio strategies, and I read (and still really like) Joel Greenblatt’s little book. One nice thing about a style like this is that you don’t have to trade as much, so if you use a service like Zecco, you can get your trading costs to essentially zero.
Since then, I’ve drifted to #1. My skills (computer programming, math, etc.) are more suited to this, and backtest data is easier to get (I never found any free sources of historical earnings data, p/e ratios, etc.). And since trading on #1 subjectively feels like I’m gaming the market, that’s a plus as well. But trading costs are much higher, so there’s got to be a significant edge.]]>
But I do think the question is critical to ask oneself, perhaps even at some regular interval as you educate yourself as a trader.]]>
His basic approach seems sound. I think he’s advocating that you 1) find great businesses as though you want to own the whole thing, 2) do it when the price movement is showing you that the big boys agree with your sentiment, but 3) while it is still a good value based on forward P/E. Or something like that.]]>
Have you come across anyone teaching a combination approach of using fair value to find potential stocks and then using technical analysis to determine which are the most timely?
If you read my history of trading posts (my personal history, that is), you’ll see I’ve been evolving over time. This year, I’ve been through 2 distinct phases. Earlier in the year, I had a set ratio of longs and shorts, with more shorts than longs but with more put into each long. Sometimes I would have empty slots if, for instance, there weren’t enough shorts to trade that particular day.
At the beginning of August, with my major revision, I switched to a much more dynamic system. The past couple weeks, I’ve been almost entirely short (probably over 90%). In mid-August, I was entirely long for days at a time. It is biased toward choosing shorts if they are available, and probably ends up being around 60% short to 40% long.
I don’t really have a benchmark per se. I’m basically trying to see if I can generate returns that would make a conventional benchmark look like a flat line… not saying I’ll succeed in the long run, but that’s what I’m attempting to do. And I’m trying to be as uncorrelated to the market as possible. In other words, I don’t want the market’s move to have much to do with how I do on a given day. However, such a thing is challenging to measure… or it is for me. Such a thing might be right up your alley, come to think of it.
I haven’t tested my picks in the long run other than to confirm I do a lot worse if they are held for more than 1 day, which isn’t surprising to me, as I do not believe I have any edge at all except in the very short term.
Here’s a bit of my thought process. Which sounds more realistic: picking a stock that will go up 200% in a year, or picking a stock that will go up 10% in a month, or picking a stock that will go up 0.45% (after trading fees) in a day? To me, the last option was sort of intuitive, and so that’s where I ended up putting most of my time. If you haven’t guessed, I’m a big proponent of compounding…]]>