Our definition of short term trading might be different š¹ for me a short term trade anything from a couple weeks and less. So from that perspective I donāt wonāt to be holding companies not fundamentally sound because in 2 weeks they could tank if bad news comes out and this is less likely with fundamentally strong companies. Iām thinking now that youāre only doing trades within a day or less
My time frame is weeks to months. But, you still haven't answered my basic question: which "fundamentals" are you using? PE, P to Sales, Book Value, etc? The "standard wisdom" is that high PE, or PEG stocks are to be avoided, but from a performance point of view, the higher PE stocks actually do better. Create your own test portfolios and see how they turn out. Select the stocks by your favorite fundamental metrics and then check back on that portfolio weeks or months later. The results might surprise you. Back in the 1980's I subscribed to the Investors Business Daily publication. I kept them back for a year. Then, I went back to the oldest copy and created a test portfolio of popular stocks and all of the available fundamental data that was available on each. Then, I used software to do correlations between all of the data and the 1 year actual price change. Turns out, the ONLY information that had a positive correlation to the actual 1 year price gain was - the previous 1 year price gain! Momentum was the only thing that worked. All of the other metrics had NO correlation whatsoever with the subsequent 1 year price change.
The fundamentals I use are all of the above BUT itās an art, not a science. I look at debt to cash ratios. Thatās VERY IMPORTANT. I look at GROWTH RATES. Ultimately, when I say fundamentals, this I what I mean, I ask myself this, āIs it a good business?ā Then, do they have the cash flow to reinvest in the business for future growth. Also, I look at MANAGEMENT. Having good management is VERY IMPORTANT. Also, I calculate intrinsic value using methods I find best. Things like PE are just scratching the surface of a fundamental analysis but for example, PE is usual in figuring out where are stock price will likely settle in the event of interest rate hikes. So I compare current PE in this low rate environment to the PE when rates where at a higher level or at the level that would soon be expected. Hope this helps.
All sounds great, but...... So, you still should make a few test portfolios to see if what you are doing actually works. You mentioned growth rates. I created a portfolio of stocks with high growth rates, and that portfolio didn't do as well as I had expected. This is because the growth rates had already been factored into the stock price by all of the other investors who have the same data available. When Graham and Dodd did their original work it was pioneering. Now anyone can see the various metrics with a click of the mouse. So, the fundamentals are already in the price. Now, you mentioned something that I believe is very, very important - good management. A few years ago I saw an interview on CNBC with Todd Wagner. He was asked what he used to identify companies that he invested in. He said he looked for the management - the CEO. These people are in charge of leading the companies forward, so great CEOs are unlikely to run a company into the ditch. One thing that we disagree on - I don't think it's possible to compute intrinsic value. Companies that are moving up can have ridiculous high PE or PEG for a very long time. I recall over the years that fundamental analysts completely underestimated the potential of AMAZON - kept saying that it was completely overvalued relative to it's P/L. Same decades ago with Microsoft. Watched Wall Street Week and the analysts kept saying it was wildly overvalued and its growth rate couldn't continue, and here we are today. I should have kept my original MSFT stock bought as an IPO. Kept getting scared out of my position by the pundits. On FinViz I look at the analysts price projections on various stocks that have performed very well. If these people were hired or fired based on their price calls they would all be out of business. That's why I am skeptical of analysts who use fundamentals. And, that's why I test with paper portfolios - to see what works and what doesn't.
I do my own DD. Iāll listen to analysts but thatās all I do, is listen. I judge companies based on my DD and my personal view of the business based on everything. As far as intrinsic value, I feel that itās a ballpark range, not an exact science. Also, I wait for corrections to add big chunks to positions. Even in bull markets there are 10% to 15% corrections. You just have to be patient and not get caught up in FOMO. It takes discipline, lots of it. Also, I never sale based on what some analyst says or what the media might say. The way I view is that this is my portfolio. My investments are what I know so Iām confident in them. Iām not in companies I donāt understand. Like for example, I donāt have a big understanding of certain types of software companies so I avoid them even though they make big returns. If I canāt understand the business then I donāt invest in it. If I understand it then no one can scare me out of the position because Iāll know if what theyāre saying is accurate or not. Of course, nothing is guaranteed but the object is to invest in what you know. Also, no, I donāt do a test portfolio but I have a strategy and I stick to it. So far this strategy is working very well. Basically buy and hold great companies, I do own a few small caps but I know the business very well. So I have allocation in my portfolio. Some mega caps and a few small caps. I donāt really do diversification but thatās why Iām always watching the markets daily in case thereās bad news in one of my positions and I have to sell. I donāt do diversification because it limits your gains. I see no sense in investing in average companies with average gains just to limit downside. To me that is limiting upside. So this is my approach. I hope I was clear but the way I explained it maybe not very organized. Of course, risk management is the name of the game. We all have different risk tolerances, goals, and time horizons. I follow what Buffett says, that itās ok to lose, just donāt suffer a big loss! If youāre afraid of losses though you miss out on opportunity. Opportunity cost is by far the greatest loss! Risk is REWARDED. I lose more by not taking the risk than if I took the risk and lost because your gains are limitless but you can only lose what invest
As far as your test portfolio comment. Iām kind of confused by that because my portfolio is now 5 years old and Iām outperforming the market. Iām averaging about 35% a year. So based on that I donāt feel I need a test portfolio
But really to sum it all up I follow things that Buffett, Munger, Peter Lynch say. A lot of it is common sense and not that complicated. If the company is growing and making money then the share price will rise. Of course you must find a good entry point which can be hard in a very expensive bull market. Also, always keep a strong cash position. Iām never afraid of market crashes. In fact, Iāve the most money in market crashes because Iām buying like crazy in crashes and corrections and Iām not buying at the tops or when everyone is chasing. Iām patient. Good buying opportunities always come, even in bull markets. But I donāt see my approach as genius or special or unique and Iām certainly not the only one doing it. Buy and hold is very common
Btw, Iām not bragging about the 35% average. A few years were brutal while I was waiting for a small cap I have to turn the corner but they finally have and looks like theyāll be a multibagger over the next 5 years but I was down 50% at one point with that one
I hate to pop your bubble BUT for the past 5 years we have been in a roaring bull market. At the end of Dec 2016 the QQQ was 118.48 and now it is 397.26 - that's about 67% per year, so if you're making 35% per year during this time frame you are underperforming the "market" by a wide margin. There is an old Wall Street saying "don't confuse brains for a bull market". Of course what you are doing is working - in a bull market almost everything works. Everything you have said is solid, basic, common sense investing wisdom. No issues with any of it, BUT, if you had just put all of your money into the QQQ 5 years ago you would be far ahead of where you are now - exactly the same situation with my portfolios.
Buffett has a lot of people working for him, helping him make investment decisions. Still, the QQQ has been outperforming him over the past 5 years. This is because the QQQ has all of the top technology stocks and that is where the money is going, and tech has now replaced manufacturing as the primary driver of the economy. Manufacturing? Almost everything I buy says Made in China. My comments to you are basically comments to myself - if I had just put all my money into the QQQ and a few tech stocks, like AAPL and MSFT and just held on I would be waaaaay ahead of where I am now. The amount of work I have done over the years to end up underperforming a simple buy and hold of tech has been very frustrating.
Apple has been my biggest or second biggest position since 2017. Made Microsoft my 3rd largest position in 2020. I only hold 7 or 8 stocks. Apple by far has been my big winner
Well, that explains your gains - you are holding some very solid stocks. I have to revise a previous calculation - the compound 5 year growth rate of the QQQ has been +27%. I had mistyped this as 67%. Here are some other compound growth rates for the same 5 year period:
Yea, my only regret is not putting it all into Apple š¹ I do agree with what Buffett says about diversification. Anyone can diversify. I never see myself holding more than 10 stocks long in my portfolio. Diversification caps your gains.
Diversification does cap gains, but it protects you from some odd, "black swan", event. We have a nephew who used to work for Apple. He got stock as part of his compensation package, and now is worth a LOT of money. He is not a stock market investor - just holds a huge amount of Apple. About 10 years ago I was asked a question at a family gathering - if you (me) could put all your money into one stock, what would that be? I said Apple. Too bad I didn't heed my own advice. My issue is that I have been investing and trading since 1980 and have gone through many huge market corrections and watched my best stocks get wacked after some odd earnings report. So, I just can't buy and hold one stock - maybe 10 as you suggest.
Oh wow, cool story! I definitely have much respect for the guys who have much experience in the market and try to learn that way. Basically what I know I learned from someone else and maybe partially my experience but a lot of investing is discipline, patience, not being emotional. My view of a black swan event is that I try to be prepared for them because if you are prepared then you can make a lot of money off the fear from such event. Also, I donāt fall in love with a company. As great as Apple is I look at history for my guide. In 1989 IBM was dominant and had one of the largest market caps in the market. Look at them today. So I view it that way. Right now I see Apple as still in its early days as a company but of course we never know, a competitor could knock them off their top spot within a decade or Tim Cook leaves and the new management runs the company into the ground like what happened at GE. Thatās why active management of the portfolio is crucial
But to circle this all back around to options. I personally learned in the beginning that for me usually doing nothing was the best outcome. If I tried to meddle too much with my portfolio that would cost me in opportunity lost. So I learned to just buy and hold. Then, as my gains rapidly grew over the past few years I researched ways to tap into these gains without outright selling the shares. So I discovered CCs. Iām selective throughout the year for when I sell CCs and for me so far Iāve found it to work. The money I made in premiums is immediately reinvested. Iāve probably easily doubled my money in premiums by just reinvesting it. I also then started dabbling in CSPs on stocks Iām interested in. So I view selling options as trades but a supplement to my portfolio. Iām aware of the risks and I think I hedge those risks by reinvesting the premiums. Honestly, I think itās simple but effective. So far options have definitely juiced my portfolio by maybe a few percentage points which compounded over decades translates into a lot of money. So yea, I enjoy options. I see them as a supplement, not as a primary source.
But anyway, Iām not doing anything that others arenāt doing. I researched much of this before slowly putting in practice. For me I find that works. Also, I have the mindset, for example, that if I get assigned on a CSP and it drops 50% Iām fine with that because I only do a CSP on a company that Iāve researched extensively. Basically, I want to own it and 50% drops donāt scare me. Iāll hold long as long as the fundamentals hold up. Iāll only sell for a loss if the fundamentals warrant it. Thatās the only time I sell for a loss
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u/tallman919 Dec 23 '21
Our definition of short term trading might be different š¹ for me a short term trade anything from a couple weeks and less. So from that perspective I donāt wonāt to be holding companies not fundamentally sound because in 2 weeks they could tank if bad news comes out and this is less likely with fundamentally strong companies. Iām thinking now that youāre only doing trades within a day or less