An incomplete list of my investing rules
Eric's question includes several misperceptions about my methodology (not Eric's fault, but mine); thus, his question inspires me to offer more information than it requires. (Sorry, LOL.)
Rules for my methodology include, but not limited to...
• Long side investments only.
- Rising market trends typically endure for 2/3 of a given epoch (a measurable interval between two time points; specifically, a beginning and ending), whereas declining market trends typically endure for 1/3. I attempt to be on the 'right' side of the then-current trend.
- What better time than during a general market decline to perform due diligence on my investments and opportunities? (Especially for a long side only investor.)
- Balance. I seek balance in my life via pursuing other interests. General market declines offer the opportunity to enjoy the gains from the previous up trend. Too, I suffer no need to be all things to every market climate.
• No options. Options are not a method to invest, although many shrewd investors develop savvy techniques using options to obtain their investment positions.
• No mutual funds. Each investor can create his or her own mutual fund -- without the ridiculous expenses and fees.
• Company shares exclusively. I seek intellectual excitement, in addition to the possible profits, if I risk my savings. Finding companies that lead their industry in advance of Wall Street satisfies this urge.
• Management is crucial. True talent in the executive ranks is rare.
• Fundamental and valuation measures are key, but not crucial. Most such measures fail to reveal as much as their proclaimers believe they do.
• Charting and technical analysis tell me only when to buy, not what. I have zero use for any person who claims the role of professional investor but refuses to use all the tools available.
• Invest in companies, not general market direction. I consider company shares to be the true investment whereas 'investing' in market averages qualifies more as a directional bet, expressed as a function of time. But that is just me.
This all is just one person's investing methodology, mine; inappropriate for everyone else. We each seek more information and understanding about our investment opportunities; I believe we should know most everything before we invest. (Investigate first; then invest.) I must note that when I post to this blog about a company/stock, it does not follow that it qualifies as an immediate purchase, no matter how compelling I, or anyone, makes the opportunity seem.
Back to your question. After all the foregoing commentary, it should be no surprise that I do not "trade the SPY or similar." As for those trend breaches and tests -- How do you know they would not continue in each direction, except in retrospect?
Here is a test. Print a daily basis bar chart of anything -- stock, market average, etc -- but one with which you have no familiarity. Take a piece of dark paper and cover over the chart. Now reveal the chart one bar at a time. Ask yourself as you reveal each daily bar, "What action do I take today -- buy, sell, or hold?" This exercise on the hard, right edge of the chart should reveal many core lessons re chart action, and your real time interpretation of same. Market oscillations will no longer appear to be random. (Such as Tuesday's big rally, which, considered alone, did nothing to change the market's setup.) The exercise also will help you develop a set of chart patterns that you can rely upon; you will know how the pattern fulfills itself based on historical precedent. You will seek them out for your favored opportunities. Ergo, the market comes to you (your price and value) rather than you chasing after the market's runaway express.
Finally, and more valuable, the exercise will reveal your core truth as an investor.
-- David M Gordon / The Deipnosophist