How to profit from our trades

26 Jul 2017

As outlined in our investment strategy, we focus on identifying fundamentally undervalued stocks and holding for approximately 12 months.

While that’s simple enough, there are many other important things to consider when managing an active portfolio of investments.

When should I enter a trade?

The best time to enter a trade is when we first recommend the company. This is when the differential between the current value and future value is at its greatest.

All our trade recommendations must have the potential of achieving a 100% return within 12 months. If a company moves up 5-10% from our initial recommendation, there’s still a good 95-90% value remaining. Provided you plan on holding for 12 months, there’s significant value available remaining in the trade.

We recommend:

  • Entering a trade as soon to our recommendation as possible

When should I exit a trade and manage risk?

Our trades are based on extensive fundamental research. We only invest in companies trading at a significant discount to their underlying value. Due to our 12 month time horizon, short term market volatility and technicals are of little concern to us.

As such we don’t use stop losses. We exit a company when its price appreciates to the point other companies provide better value. If the fundamentals of a company change revising its value down, we will consider selling (and notify members).

Diversification is an integral part of your risk management strategy. Putting all your eggs in one basket, while fun if the stock is going up, is a quick way to lose capital. See How many stocks to own?.

Note: It’s critical you don’t jump in and out of companies. You are investing for months at a time - which is the secret to huge profits. If you really feel the urge to actively trade, do that in a separate account with a separate pool of funds.

We recommend:

  • Don’t use stop losses
  • Diversify your holdings (see below)
  • Keep abreast of any change to the fundamentals of your investments
  • Buy and hold, don’t trade in and out
  • Rotate out of a company if your portfolio is full and you want to switch it for a better trade
Premium members get same day notifications when we think a stock’s fundamentals have changed and you should consider selling the stock.

How many stocks should I own?

You can put all your eggs in one basket with a single company or you can create a diversified portfolio of multiple stocks across multiple industries, purchase some bonds, and hold some cash.

We’re seeking aggressive growth and hold anywhere from 8 - 12 stocks at any given time. This offers a certain amount of diversification and allows us to focus our money on high growth opportunities.

As a result of our high quality companies, this strategy allows us to wake up most mornings with a net increase in value of our portfolio - with minimal effort.

We recommend:

  • Start with 5 stocks that make up 50% of your trading capital
  • Scale your portfolio up to 10 stocks over the next 3 months as your portfolio value increases — giving you a profit buffer

How much money do I need?

The more money you have, the more you can diversify, reducing your risk. It also reduces the impact of trading costs such as commissions.

We focus on a buy and hold strategy, rather than active trading, which has an added benefit of minimising commission costs.

We recommend:

  • $10,000 as a solid starting point if you use the diversification approach above
  • There’s nothing preventing you starting with $2,000 and choosing just four stocks to start with ($500 each), however the reduced diversification increases your risks - especially when you’re starting out

How much of my portfolio should I allocate to each company?

This is a function of how many stocks you plan on holding. Assuming you plan to have a portfolio of 10 companies, it makes sense to split your capital evenly. So allocate each company is 10%. This is the recommended approach if you’re just starting out.

We use a slight variation of this strategy, where our portfolio is split into 5% chunks. Anywhere from 2 to 4 of these chunks are allocated to each trade. For example, if our portfolio value is $1m, we purchase anywhere from $50k - $200k in a stock at any given time. This allows us flexibility to apply a higher weighting to some companies. However, if we get it wrong, it introduces additional bias risk.

We recommend:

  • Allocate 10% of your capital to each company, assuming you aim to hold 10 companies at a time

Contact us if you have any further questions and we’d love to help.

Posted by Chris
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