Wednesday, January 18, 2012

Nusbaum: Stock selection is 10% of the game

Roger Nusbaum writes about his investing approach (link) and how his style may not be useful for all readers. He has this nugget:

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Stock selection, the studies conclude, only accounts for 10% of the eventual return. Top down would say it is more important to figure out to avoid France, own China and be correct about oil prices (just a random and abbreviated example).
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Long time readers know that for the past couple of years I have mostly traded options on the major ETFs: SPY, TLT, TBT, GLD, GDX, EEM, IWM, mostly selling puts, but occasionally doing more complex trades. Once in a while I will venture into a stock, usually on news, sentiment and in the case of BRKB a stock buy back. Being long or short on the major asset classes, long or short volatility give me plenty to look at without going into individual stocks. Popular stocks such as AAPL have thousands of very smart people doing short term trading and sniping off a point here or there.

Another point from Nusbaum:
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... investing is a pursuit where you can put in as much or as little time as you want ...
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I do not sit in front of the screen all day, but am very far from a buy/hold/rebalance indexer (even though I admire the indexing approach and recommend it). I always tell people interested in the markets that there are a 1000 ways to make money, a key point is finding one that works for you. For novices, the inward looking psyche work is near as important as the market work. Again, keeping a trading journal (what this blog is), can be a powerful inward looking tool.

As for my approach, I like options. I like the complexity, the ability to hedge, the ability to bet on various probabilities. Most people I meet do not like the complexity, and find all the possible combinations overwhelming. I use a variety of indicators, charts, technicals, fundamentals, sentiment, seasonality. Some focus more on one area than another. I tend to look at it all and get a big picture view.

A side note: my most recent put sale (sell SPY Feb 113 puts) was like stepping into a pile of dog poo. It happens, but it isn't pleasant.

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