My Refined Investing Strategy

After reading Unknown Market Wizards, I got the inspiration to refine my investing strategy for stock market. As I only invest in individual stocks on Bursa Malaysia, it is a refinement to my investing in Malaysia.



Look to the future

I feel that I was focusing too much on the past results previously when I invest. Thus, I would like to be more future-oriented. Though the past results can provide a glimpse into the future to a certain extent, the world is always evolving and the past performance might not continue. Furthermore, some industries might not be doing well in the present but might give a big gain once the outlook turns bright. Nonetheless, I will only act if I have a high conviction that the investment is going to be fruitful. I aim to reap a profit of at least 60% with my purchase price.



Position sizing

Previously I only had a vague understanding on position sizing. After reading the book, it suddenly hit me that I did not size my position systematically. All the sizing was based on my own whim. Thus, I have decided to put up to 20% of my equity in one stock only.

For stocks that I consider as fundamental holdings, they will form at least 60% of my portfolio. I call these stocks “The Stalwarts”. They have a low risk of going out of business and have been consistently dishing out dividends. For the stocks that I think have a bright future, I dedicate up to 40% of my equity to them. I name these stocks “Future Bets”. These are companies which have a fair chance of turning around their business or have a growth rate that might shoot up in the future.



Capital preservation

In order to preserve my capital, I have decided to set a strict cut loss limit, especially for Future Bets because my view might turn out to be wrong. I am going to cut loss once the stock value drops by 20%. This is due to my experience that once the stock goes down by 20%+, there is a low chance of recovery in the near term. The share price could drop further past this point and it would take at least one year just to hit back my purchase price. So, I think it is better to admit defeat and allocate the salvageable amount to more promising stocks.



Selling criteria

Other than the hard cut loss criterion above, I also set a few other selling criteria. One of them is to sell all shares if the company cannot hit my minimum earnings-per-share target. This criterion and the 20% drop in value are the hard sell criteria.

The following two are soft sell criteria meant to take profit. The first is to sell up to 50% of my shares if the share price is more than 30% of my estimated fair value. The other one is to sell up to 30% of my shares if the share price increases to twice my purchase price. I will continue to monitor and may sell another 5 – 10% of my shares for every 50% further increase in the share price. These two criteria will help to make sure that I do not have a popcorn trade where I have a profit on and then ride it all the way back down to my purchase price. This is a term used by Jack Brandt in Unknown Market Wizards.



Conclusion

This is my new investing system. It is clearer and more systematic now. But I would need to monitor and see if it will perform well in the future. I definitely hope this system is better but only the results can tell.

What is your investing strategy? Do let me know in the comments section below so that we can learn from each other.

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