Friday, August 04, 2006
My Stock Trading System
I became a very successful trader after I developed my trading system, which is based on constant value investing.
I have made a double digit annual return for years now.
My complete system, along with information on possible variations, effects of commissions, and beneficial tax strategies, are detailed in my book, Stock Trading Riches, which is available on Amazon.com.
You can read more about my book (including testimonials) here.
Remember that this is my system for implementing constant value investing. Here, I explain how my system answers the Questions for Building a Trading System. Future posts will give ideas about even more variations.
I only invest in stocks, ETF's, or closed-end funds.
I don't want you to just follow my system - I want you to start thinking critically, and develop your own system, that you feel comfortable with.
My system is like zen or tao. The market fluctuates and I am at peace with whatever it does. The system has no optimized parameters - it simply uses the formula for each stock to see how many shares it should own NOW. It makes no assumptions about the future or remembers the past.
I am "one with the market" in the present moment, and buy low - sell high.
Here is an example with Amazon.com yearly prices. Just imagine having a whole portfolio, where you buy some stocks at the top, some in the middle, and some at the bottom, all feeding and pumping cash, as the markets cycle over years!
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10 comments:
So your theory is, compound interest is for suckers?
No, compounding is very power. But, since individual stocks fluctuate, and could soar and go bankrupt, I want to keep a constant value in them, and trade them up and down, by and sell them - and use the money to compound my portfolio.
You system seems to be based on holding the same stocks forever, but I think that for this to succeed, you need to keep track of the financials and the "story" of each stock. The drawback is that the more individual stocks you hold, the harder it will be for you to keep track of them.
Imagine yourself in 20 years, with hundreds of different stocks, each requiring an annual redistribution of a few hundred dollars, each trade costing $7. Is that really where you want to be?
The great thing about your system is that it forces you to buy low and sell high: when the value of one of your stocks drops, you will need to buy more. I would not suggest changing that part.
I would, however, suggest keeping a smaller number of stocks, between 8 and 15, and allocating a % of your portfolio to each. If they grow in tandem, the added benefit is that you might not need to waste your money on the $7 trade and on the capital gains tax.
There also does not seem to be a methodical system of picking stocks, other than "noticable high-tech" stocks.
If your only goal is to stay diversified and to reallocate the stocks to a certain % of your account, you might be able to find an ETF with a portfolio manager that follows the same strategy. If you believe you are a good stock picker, if you believe that the stocks you pick will outperform the market, shouldn't you devote more time to picking stocks and tracking them? And in that case, shouldn't you put more money into your best ideas?
If you want to do both, you could put 1/2 of your money in a diversified ETF, and 1/2 into your best individual stock ideas. That's what I am trying to accomplish in my own portfolio.
Good luck
JFTDMaster
Hi, thanks for leaving a comment!
I find that conversations in the comments sections of blogs add to their value. They help to clarify ideas.
As you mentioned: Imagine yourself in 20 years, with hundreds of different stocks, each requiring an annual redistribution of a few hundred dollars, each trade costing $7. Is that really where you want to be?
Actually, yes. I've worked through a lot of system tweaks over the years, but I keep coming down to wanting to keep the system simple. I predict that I will be in thsi situation - hopefully much before 20 years have passed.
I do want to have lots of stocks with $2000 in them. I do want to hold the stocks forever, and don't want to know the fundamentals.
To me, its all math. I don't think I can accurately guage each individual stock's fundamentals.
Why not just use ETF's? I use soem ETF's now, for foreign countries. I may use more ETF's, and I am thinking about keeping larger values in them.
But, basically, I want the safety of a mutual fund, but need the individual stocks, becuase they fluctuate more.
If I used ETF's or mutual funds only, or just kept one constant value for the whole portfolio, individual stock volatility would get cancelled out.
I'd rather compound my portfolio and keep adding positions, but rebalance individual positions to capture all the fluctuations.
So far, I am pleased with the results.
As far as expenses, if I make one $7 trade a year for every $2000 in the account (which won't happen because I have some cash and not every stock goes up or down 20% each year), that is a .3% expense ratio - which I can live with.
But, I'm not trying to get anybody to use my system - I want to encourage people to look at the principle of constant value investing, and invite them to develop their own personal system around it.
Goog trading blog!!! New Stock trading software stock trading
Thank you
Good day. I see you're familiar with Lichello's work. Where do you feel that you had to go in a different direction than AIM, which seems to be pretty well thought out and refined over the years? What are the advantages of your ideas compared to AIM?
In terms of discount brokerages, you may want to take a look at FolioInvesting http://www.folioinvesting.com - they offer totally commission-free trades in exchange for a monthly membership, trading in shares or actual dollar amounts via fractional shares.
Hi,
Thanks for leaving a comment!
My system is different from Lichello's because the AIM formula that is meant to be applied to the whole portfolio (which has less volatility to take advantage of), while my system captures the volatility of each individual position.
His formula could be applied to each stock, but then there is much more to track because his AIM formula is more complex and has more components (such as SAFE and portfolio control) that would have to be tracked separately for each position.
My system's formula is much simpler and is designed to be easily applied to any number of stocks without having to track separate variables. This allows my system to scale better as your account grows.
Also, a big problem with AIM is degraded performance over time as the cash portion of the portfolio grows.
My system has separate rules at the portfolio level that better regulate the amount of cash.
So, I believe my system outperforms AIM and builds better long term value.
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Miriam
http://www.craigslistdecoded.info
HI,
Thanks for your post and for your book on stock trading system.
Hi,
Thanks for the information on stock trading. It was really helpful.
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