I see two verifying types of investing, buying businesses as stocks for the long-term and second stocks as short-term trading vehicles to profit. Both can be used to create a diversified portfolio and solid approach to investing. The key is to remember which one is which and not confusing the two.
Always have a thesis for why you are buying a stock. One thing that you will see with DWCM is our thesis or commentary as to why we bought or sold a position. If you’re buying a stock for a trade make sure you don’t get caught up in thinking it is a long-term buy if the stock shoots up in price. Or vice versa if the position does not perform as expected, have an exit strategy. Not every trade works and it is better to cut loses and live to trade another day. Sometimes the best trading ideas cannot outlast remaining solvent.
From a long-term perspective, investing can center on fundamental analysis or even technical analysis. At DWCM we use a combination of both. We utilize fundamental analysis in our initial stock search focusing on companies with low debt, steady cash flow, and consistent revenue growth. Technical analysis is useful in determining stock entry and exit point or support and resistance levels if you will.
Depending upon your position the Third Quarter Performance
was extremely painful if you were on the long side. Even if you were on the short side depending upon when you got in or what day could have been potential just as bad. With the extreme volatility we experienced in both an up and down direction it was tough place to be.
Verses the S&P all of the other major global markets performed worse. The only asset class to outperform was the bond market and gold of course which are both looked at safe havens in times of volatility and uncertainty.
A few ways to protect yourself in these turbulent times are option positions. Buying put options can help limit your downside exposure but as volatility increases it gets more expensive. Think of buying house insurance as your home is already on fire. One way to counteract this or lower the cost of a put is using a put spread which lowers your costs but limits your profitability. Although bonds outperformed they seem risky as price appreciation has gone parabolic as rates are at historic lows. With most countries in a race to devalue their currencies, gold can be a hedge against this volatility.
Bespoke Investment had a good post Welcome Q4
regarding the volatility over the course of the last few months.
Basically we are in a tight trading range but with action that would make you nauseas.
As the note points out, the average daily movement of the S&P has been +/- 1.9%.
This makes it even hard for trading professional to make money.
To me this data points out the critical importance of knowing what you own and why. Having conviction in a market like this is tough but will also help you sleep better at night. It can also open up small but quick pockets of opportunities to build on current positions and pick up stocks currently on your watch list.
This also brings up a good point about have reserves which benefits you in two ways. As the markets wip saw back and forth with a downward trend it helps protect your portfolio. Second it leaves you the opportunity to pick up positions at reduced entry points. Cash id definitely not trash in this market environment.
A good article posted in the WSJ a few weeks back regarding investor sentiment. Sometimes I find it helpful to read the paper a few days or even weeks after they are written. At times you can get caught up in all of the attention grabbing headlines produced by the main street media and lose focus on your investing objectives. For example I listen to CNBC on a regular basis but don’t let if guide my investment decisions. Instead I use it for some informational purposes and a little entertainment value.
One of the big drivers behind this week’s rally has been the speculation in Europe that the leadership there is close to devising a plan for their ongoing financial crisis. This has been a constant theme over the past week and has led to a good portion of the increased volatility. Perceived good new (work out plan) in Europe = rally in US stock market.
- Ongoing crisis in Europe
- Economic slowdown throughout the world
- US debt issues
All three are valid points but over the past two weeks as most major market indexes have climbed 10% and out of the red for the year it proves that once again to have some skin in the game can pay off with this increased volatility. This is where it is always handy to keep some cash on the side and a watch list of companies that you would like to own. Volatility can give you great entry and exit points.