Random Thoughts on Investing – October 2011

I have a lot of thoughts on investing I want to share with you guys. As you may know, I prefer to write long posts, and none of these individual thoughts take a long time to describe. So I’ve decided to group these thoughts together into the second, monthly Random Thoughts on Investing – September 2011. You may or may not agree with my thoughts, but that’s ok. It’s always good to read about others’ opinions. In the comments section, I hope to read your opinions too about my thoughts.

Are you trading the price or trading the news?

A really, really common mistake is investors constantly trying to find the reason behind the price movement. Stop doing that. There’s a reason, but it’s almost impossible (unless you have connections) to find the reason. Right now, I could give you a million reasons why I”m bullish, and a million reasons why I’m bearish (fundamenrallt). Remember, the price has already included all the reasons/pieces of news. Trade the price, not the news.

Flexibility is the key to investment success.

In our world today, flexibility is the most important thing to keep in mind when investing. There is no longer one singular “best investment strategy”. Today, it might be medium term investing, tomorrow, it may be long term investing (or short term investing). Today, fundamental analysis might work, tomorrow, technical analysis might work. That is why, when people ask me “what kind of an investor are you?” I say “a flexible investor.” I invest medium term-wise if the medium term investment returns seem most appealing. I invest long term-wise if the long term investment returns seem most appealing. I use technical indicators if they work right now, but if they don’t work, then I don’t use them. Not all investment strategies work all the time. Keep that in mind.

If you’re inflexible and stick to one investment method, sooner or later that method isn’t going to work, and you’ve just got yourself a real fast ticket to the poorhouse.

To me, investing is a full time job.

To get really good investment returns (20%+), I believe that investing should be a full time job. That means instead of spending 1/2 hours a day monitoring the markets, one needs to be a full time investor to get decent returns. If you don’t agree with me, let’s put this in a different perspective. Let’s say for example you play house league soccer, and practice for 4 hours a week. Can you beat the pros? Can you get anywhere near the pros? No. The same goes for investing. Sure you might have one lucky year in which you catch a huge bubble in some stock. But a quote that I’ve always believed in is “easy come, easy go.” The easier the money comes (you don’t know why you’ve made this money from the stock markets), the easier you’ll lose that money back into the stock markets.

I prefer not to short the financial markets.

Theoretically, one can have infinite loses if one shorts the market. If you buy into longs, you can wait out a storm if the markets temporarily drops. But you don’t have the luxury of time when you do shorts. If the market goes up (and you have a short position on your hands), then you can’t afford to wait for the stock to fall back down, because you’ll probably be forced to close your position. Like I’ve said before, timing is everything when doing a short, and no one can get their timing correct every single time. One mistake on the short side can be fatal, while a mistake on the long side isn’t fatal (as long as you’re not deploying leverage).

Go for a good return, not the best return.

I’ve always wanted the best return possible. It’s in my nature, as I always want to be the best. But now, I’ve realized that by calming myself down, putting less stress on myself, and aiming for a good investment return (20% annually), I’ll have a really high chance of beating what investment returns I would have gotten if I had wanted the best return. This is because in order for an investor to invest properly, he or she needs to be the right mindset. He or she needs to be relaxed and think clearly. Only by setting a clearly achievable goal can one have a chance at achieving what’s beyond his or her goal.

Why model portfolios tend to perform better than real portfolios.

I once had my friend’s son ask him “dad, why is it that my model investment portfolio performs better than yours and moms”? That is what inspired this section of today’s post.

The reason a lot of model portfolios tend to do better than real portfolios is because the person who’s controlling the model portfolio isn’t as concerned with short term market fluctuations as much as the person who’s running a real portfolio. A ton of real investors sell at the bottom of a great bear market because they’re overly influenced by the short term panic. But not so for the model portfolio investor. The person who’s running the model portfolio thinks “hey, this isn’t real money anyways, so I can wait for the markets to turn around.” Also, a good investor needs to keep a clear and focused head. Model portfolio investors tend not to watch the markets so often, hence they are less distracted by all the noise and clutter than do the real investors with real portfolios.

8 thoughts on “Random Thoughts on Investing – October 2011”

  1. Enjoyed your comment about why model portfolios perform better than real portfolios – so true! On another note, your targeted investment return of 20% is pretty amazing – would like to learn more about your asset allocation strategy and risk appetite in achieving these excellent returns.

    Thanks for sharing your thoughts on investing.

    1. Thanks! Actually, it’s not that amazing (especially with the modern, highly volatile markets). There are a lot of individual investors (it’s just that you don’t really hear about them, because they maintain a low profile) that target more than 100% annually.

      Actually, my asset allocation strategy is simple. I trade either SLV (silver etf) or an S&P 500 ETF. I don’t believe in trading individual stocks, because I don’t have any inside information.
      I’m an active investor, and can go months without an investment (100% cash). I just wait for opportunity to knock on my door.

  2. I agree with you Tony, and I realize this sounds redundant, but having a diverse portfolio and being flexible are essential to investment success. I remember when day trading was all the rage several years ago, and I knew many people that believed they would strike it rich, but unfortunately, some of them lost it all. There is no foolproof way to determine exactly what will happen in the stock market, but utilizing sound strategies, common sense, and working at it full time will yield the best results.

    1. “I remember when day trading was all the rage several years ago, and I knew many people that believed they would strike it rich, but unfortunately, some of them lost it all.” People tend to think that way when we have a major bull market.

  3. Enjoyed your thoughts Tony,

    I agree with you that one needs to go full time if he wishes to target high returns but even that is not guaranteed.

    My retirement savings are completely ignored compared to my actively traded portfolio and that is simply because the portfolio is indexed. It’s a good balance between passive and active…

    1. That’s actually a smarter strategy than I’m using. A lot of multi-million full time investors have part of their portfolio in safer, more passive portfolios. That way if they lose all their money on their risky portfolios, then they at least have something left to fall back upon.

  4. Thanks for this! Always interested in reading how others are thinking in various market situations. Personally, I would find investing full time to be pretty tough, however!

    On shorting… in theory, yes, you can lose an infinite amount. In practice, short selling is subject to margin requirements. Margin calls are no fun, but they’re better than unlimited losses.

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