I say I'm not here to give advice. I'll bend that on this page. Sometimes people ask for investment tips or advice. There are different types of investors, those that have an aptitude and/or a passion for it, and those that are mostly interested in the returns while doing a minimum of reading and maintenance.

For the latter, the Vanguard way, also know as the Boglehead way is a good path. For those that are not familiar with this, the basics are to live under your means, have a high savings rate, invest simply in low cost index mutual funds or ETFs (exchange traded funds). The Boglehead Wiki is a good place to start (link1). Especially those that inherit a large sum or win the lottery or similar, would do well to go with the Boglehead approach.

For the golfers reading along, one analogy is being able to shoot par on a difficult course with the minimum of practice. A full 80% of investors and an even higher percentage of short term traders underperform the returns from low cost index funds favored by the Bogleheads.

A variation on indexing is the Permanent Portfolio (link2).  Basically it involves a fixed allocation of 25% to cash, 25% to stocks, 25% to bonds, 25% to gold. A single ticker solution is PERM. The arguments against this approach might include that bonds and gold are near all time record highs and sure to go down. Some may roll their own, and keep their gold in physical form.

For those that are like me, and enjoy the activity, I tell folks that there are a thousand ways to approach the markets. Find one that works for you. A trading journal (that's what this blog is, a public trading journal) is a powerful tool to find what works for you. What works for me, may or may not work for another person. What works for another person may not work for me. Personality and temperament have a lot to do with what works for any particular person. Motivational books such as the iconic Market Wizards from 1988 (link3) can give novices an idea of various trading styles. Jack Schwager has written several books, and the latest is Hedge Fund Market Wizards.

The world of options can be overwhelming. I find that only a small percentage of people have the mental make up to become active options traders. There are conservative strategies such as buy-writes (buy a stock and sell the out of the money call) which attracts a large percentage of option traders. There are exotic strategies that can only be sorted out by computer programs. I tend to use hedging strategies with a high probability of success and maybe 10% of stock market people seem interested in the kind of trading that I tend to do.

I aim for an 80% win rate. The person on the other side needs to average a 5-to-1 payout to break even if they are only winning 20% of the time. The other side of high probability is low payouts. For any horse players, it is like betting on the favorites, or even doing a wheel on several favorites.

There are certain things I would tend to avoid. I would avoid almost anything that gets pitched on late night TV, whether it be stock market systems, exercise equipment or anything else. I would avoid high fees, expensive newsletters. It is difficult to stay even with the markets, when a person is paying a decent percentage in fees, and that would include trading costs, and spreads, and subscriptions.

For those that want to learn a trading system, the CANSLIM (link4) method is a good one to learn because it combines fundamentals and technicals. CANSLIM stocks tend to be high flying momentum stocks, so the method may not be suitable for some personalities. The opposite might be value investing. The opposing opposites in technical trading might be trend followers vs. range traders. Again, all these methods can be successful, find something that works for you.

Keep in mind, that there is no holy grail. Well, maybe a few dozen people have found a set of master keys, and they are ones that get featured in the books. Some tactics or styles tend to work until they stop working. Sometimes a person or firm has a great track record for a period of years, and then the tide turns and they lose money, sometimes all their money. The target is always moving. Traders and investors are always adapting to new realities. Computers are always scanning for new profitable pattern trades and they never sleep, never need a break, never take a vacation.

For those that are interested in financial history, and theory, I recommend a free online course, Yale Economics 252, taught by the famous Robert Schiller (link5). I learned what a swap is, what a credit default swap is, more about how and why AIG failed, and a lot more about the history of finance, and various financial instruments.

* Standard disclaimers apply to all the above. I am not making any recommendations to buy or to sell. Past performance is not an indicator of future results. I am not responsible for the information in the links. Each person must do their own due diligence before investing money.

No comments: