The Big Boys, page-303

Hi Heraclitus,

I can see you’re passionate about your investing approach through our various postulations this week. I thought I would try and respond to your Wednesday post as it has been quite thought provoking for me. I’ve been reflecting on what is it about the various approaches to investing/trading that are key success factors versus what I believe doesn’t work.

So, say 100 people invest in buy and hold quality shares and say 5% make a lot of money by happening to buy the right shares at the right time. You could hence end up knowing 5 people who made a lot of money this way. But it doesn’t necessarily follow therefore that a implementing a long-term buy and hold strategy investing in shares and dividends will lead to great wealth.

I’ve been mulling over the key points in your post. I thought you were initially making an argument about fundamental investing versus TA. But then I thought you were making an argument about long term investing versus short term, but actually from your examples I’m not sure.

You say all the examples of people you know that built wealth in the stock market were long term investors and use this as an argument against technical trading and charts. Ok. But I also know people and of one in particular who lost millions in the GFC crash due to his margin loans, who was a long term share investor who’s never heard of charting. I also know of a successful long-term share investor who uses charts as a primary tool in guiding entry and exits.

It doesn’t necessarily follow that shares = fundamental analysis= long term =great wealth.

For me the conclusion from your commentary appears that you have to buy the right assets at the right time, and then I’d argue exit them if they are fully valued and heading down again, to maximise your gains. But the result doesn’t necessarily matter whether you bought an asset because of FA, TA, Intuition (see Pisces post above) or luck. If you buy any asset at the right time and sell at the right time and reinvest at the right time, you’re going to build that significant wealth.

If you asked your successful equity investors for their valuation spreadsheets on companies, how many of the retail one’s could do it? Maybe they actually used charts to guide investments!. More likely they just thought the companies were quality business because someone or the financial media told them they were and they bought on a bit of intuition or luck.

I’m on my way to writing a book here so I need to focus this post. I was reflecting on all this during the week as to what really drives significant wealth from markets given the various approaches available. I thought I would offer in response to your arguments one interesting aspect of what I think makes investing/trading successful irrespective of the approach and that is Volatility of returns.

Volatility:

First some basic maths. If your Portfolio goes up 50% Year 1, 50% Year 2 and then falls 50% Year 3, then you’ve made a total 3 year return of 12.5%. That is about 4% p.a. or roughly a term deposit. So a portfolio that bounces around a lot, with big wins and big losses is going to going to have pretty modest longer-term returns compared to a steady, incremental, compounding investor.

I think that’s part of why traders get a bad name, they mainly follow daily charts (being the highest volatility), enter shorter term trades, get stopped out, jump in and out of trades etc and the volatility of returns means they get a very modest outcome.

Those long term investors in larger cap shares where it’s fairly forgiving and stable, where they don’t have stops but just hold through corrections and allow the stock to play out can presumably sometimes get really good returns. But it’s not necessarily about whether you entered on FA, TA, Intuition or luck or even because you were in dividend paying shares. Success rather appears to me to be about creating low-volatility, consistent returns, allowing portfolio returns to compound by avoiding big drawdowns or losses, whatever the asset class or entry/exit approach.


Shares go up say for arguments sake 10% a year if they are in a bull phase. If you are investing in shares, then you need time in terms of years for the asset to really play out. So you need to buy at the right time (low), on what-ever basis (FA, TA, Intuition, luck), allow time appropriate to the asset class for it to become fully valued, and then sell when the asset has matured and reinvest in the next growth asset.

Alternatively for my TA trading, which is all derivatives (Options), I’ve reflected on how I apply the concept of consistent, low volatility returns to make technical trading with charts successful. The answer which I apply is: trade bigger picture monthly and weekly charts (lower volatility than daily charts), longer holding time frames appropriate to the security being 3mths to 2years, (compared to shorter-term day traders or multi-year share investors), correct position sizing in order to smooths portfolio returns (so no swinging big hit single trades that risk big single losses). There's no reason that sort of TA trading approach can’t build significant wealth vs buy and hold share investors. (I haven’t been trading long enough this way to prove it).

So it may be that neither FA or TA, or trading or investing, or shares or derivatives are necessarily the right or wrong answer in terms of the best way to build significant wealth from markets, but rather whether you can develop and apply an appropriate strategy for your asset class of choice, suitable for all market conditions, that can create consistent compounding returns.