Back in 2012, after almost eight years of working as a sell side research analyst, an unusual opportunity knocked at my door. I would remain focused on the stock market, yet my value investor thinking hat would be set on the sidelines, as I were to lead a research project addressed for traders.
I have heard that the preparation and discipline for marathon runners differs from the one that sprint runners usually have, and just to be clear, this was the case.
The project included really appealing elements: impact, projection, and challenge. Impact and reach, since a lot of customers had already placed their trust on our platform and even more people could grasp the value proposition. Projection, given the addressable market ongoing expansion given the speed with which financial services were adopting a digital orientation. And challenge, we can agree that growth is just around the corner of familiarity and effort is the fuel that pushes us beyond that border, I knew there was a new set of skills that should be developed and time was of the essence.
That’s how, the venture began, I brought my Fundamental Analysis arsenal to the table that included: Accounting and Finance, Business Valuation, and Economics. Then I ventured into the world of trading, where I was able to delve into issues such as Market Understanding, Investor Psychology, and Technical analysis. All these, valuable complementary tools.
The mission could be summarized as: communicate ideas in a clear and timely manner, with which traders could beat the benchmark, buying low and selling high, while controlling risk, and constantly optimizing the strategy.
Thus, for a little over five years we were sharing the “Trade Ideas” which managed to position themselves in the taste of many members of the community, throughout this time the learning was vast and fortunately the performance was attractive.
I would like to continue by sharing this learning and in the end tell you a little about the overall results.
1. Limit your risk. In trading, where we assume the time horizon is not so lengthy, you have a couple of allies: diversification and stop loss. In previous posts I have talked about the benefits of diversification, in this case I mean the size of exposure to each stock. You should not let an error wipe out your equity and push you out of the game. On the other hand, we have the “stop loss” or maximum tolerated loss, if in your strategy you decide to have 10 different stocks with a maximum tolerated loss of 5 percent in each of them, each “error” would yield a 0.50 percent draw down on your total portfolio—considering a 5 percent loss on a 10 percent exposure.
2. Respect your limits. Much has already been mentioned about investor psychology and the role it plays in their return performance. A plan is made to be followed and discipline will be of the essence. At some point we have all been victims of “loss aversion”. It is quite probable that while facing a loss, an inner voice tells you, this stock will bounce back, just hold on. On the other hand, when one of your positions is thriving, that little voice suggests to sell and collect the gains. That’s why you should fine-tune your model, incorporate stress scenarios or set trend-following objectives, automatize, and let it ride.
3. Write it down. Keeping a journal helps you travel through time, it gives you context of what you were thinking when deciding to buy a certain stock, and what were your initial assumptions. In case of reaching a target level or stop loss, you can analyze why one of these was reached, or if it actually happened because of something unexpected, if so, you can begin to increase your stock of “unexpected”.
4. Learn to learn and keep learning. Nowadays the sources are plentiful, there is an innumerable amount of courses, and the famous “Mr Market” gives a daily lecture, you better be in the classroom and listen carefully. Seek to learn from your mistakes, and also from your successes, they usually happen for unexpected reasons. Remember that performance is a mixture of luck and skill, remember to recognize each one of them.
Regarding the performance of this strategy, out of the 627 trade ideas, 63 percent were winners. From October 12, 2012 to January 16, 2018, our portfolio gained 62.9 percent, net of commissions, against an 18.8 percent hiker by the CPI in the period.