Managing a Stock Portfolio – Thinking Out Loud

The aim of the Stockradar strategy is to make money in a bull market and to keep you safe in a bear market.

Creating a Winning Portfolio

Why start a stock portfolio unless you’re going to do it right? The answer is to follow clear steps and let the results unfold. You may be surprised just how easy it is.

Building a Stockradar Portfolio

Careful planning is needed to drive portfolio success. Today I answer the questions that will help you control the outcome and make a portfolio of stocks work in your favour.

Fostering Consistent Growth for your Stock Portfolio

The stock market can reward us or punish us. The choice is yours.

Stockradar’s Stock Pick Count and the Stockradar Portfolio

Stockradar’s Stock Pick count and Portfolio are generated by Stockradar’s process driven approach to price analysis. Our mission is to qualify trend behaviour of each of the stocks we cover by assessing market sentiment towards each stock.

A simple ready reckoner of fund strategies for Australian Shares and the Australian Stock Market

The ‘which’ fund or portfolio strategy conundrum. Here’s some basic tips you should look at to open the right door.

Exploding myths and your portfolio returns

The Fallacy of diversification

If you want to explode your portfolio returns a way of doing this is by learning how to ride stocks that are on the big momentum waves but doing it in a very unemotional and controlled environment. This will help you maximise the trend potential.

A simple and naturally occurring analogy is that of an ocean wave that breaks and subsides. You jump on (enter) the wave when it breaks, ride it as long and hard as you can, and get off (exit) before it subsides. That’s fun and very satisfying.

Explosive trends have mesmerised and taunted investors for years as stocks propel themselves ever higher. Getting on them and off them at the right time is the tricky bit. The perceived safety of diversification to try and capture these stocks is a fall-back strategy that only ever really generates average returns primarily because the losers drag the strategy back to average. Don’t lose heart, let’s now focus on the big winners.

Research completed on ‘wave’ trading over a 16-year period has exposed an interesting if not confronting outcome. Using a methodology of ‘conviction’ portfolios‘ that focus on a smaller set of stocks has provided superior results.

How do you find them, how do you run with them, and when do you get out of them before they turn nasty, so you keep those hard-earned profits? For this conundrum I offer a solution.

There are periods when stocks bloom and in characteristic fashion they surprise us all. Stocks propelled by perceptions of what might happen in the future nearly always exceed our expectations because humans can and will believe almost anything.

This period of euphoria rarely lasts however, and like a wave that breaks, it runs, but then it (always) subsides. The same effect repeats itself.

That period of excessive price euphoria, or momentum, is our target. To use our emotionally driven minds is rarely the best way to capture these stocks and in reality, a robot could do better given some basic trading rules. So, let’s test that theory.

Real examples: ALU more than doubled its price in 2017/18, A2M nearly quadrupled its price in the 15 months to April 2018. And more recently FMG increased 59% from Jan 2019 to March 2019. Annualised out that’s about a 240% return. These are big rallies which have all been robotically controlled with ‘break out and catch the wave’ entry techniques and money management exits.

There are examples across the market of this type of stock behaviour as stocks blow the valuations out of the water and capture our minds. I don’t profess that we can get all of them and we don’t need to – just some. This process is also not without periods of adjustment as no system is perfect but over time the accumulated profits have more than compensated for this. See Graph B below

The strategy used for this type of stock selection is driven by systematic process driven analysis to enter a position, while the exiting of position is executed and controlled purely by a risk management process. It is robotic of nature. i.e., if this happens, I do that, and if that happens, I do this. This is a systematic methodology that helps us more efficiently capture the major portion of excessive price moves.

That’s a good thing because emotional trading that occurs during market surges often doesn’t exit the market as a good risk management process must. The ‘hang on it’ll get better’ disease has no cure. You have to change your ways!

This process plays a numbers game of selection which quickly discards the weak and runs with the strong. Based on basic rules of investing that follows a process, and then testing various portfolio sizes i.e. number of stocks held, based on trading signals over a period of 16 years, it reveals that smaller conviction portfolios do this best because we place bigger bets on the winners. As our bias is always to winners this approach magnifies that effect.

I have tested various portfolio sizes over various market capitalisation groups from the top 200 ASX stocks with a selected 100 stock group yielding the optimum results. The results vary but the best come from the smaller conviction portfolios of just 5 stocks. See graph below based on a top 100 selected group and a smaller midcap 50 group.

Graph A:

Or to look at the top performing 5 stock portfolio based on the Top 100 universe another way:

Graph B: benefits from the compounding effect

So rather than trimming the edges of mistakes as a diversified portfolio does it seems it also trims the edges of the winners by spreading the risk too far. What we want to do is leverage the winners by placing bigger bets on them and riding them hard, but at the same time not losing the objective of still keeping capital safe.

What are your thoughts on how best to manage and run a portfolio of stocks?

A comprehensive research document is available on the Stockradar home page under the About menu. Stockradar Premium Portfolio Strategy

The majority of stocks underperform the index – fact. They provide average returns and by holding them put a drag on portfolio results and this is primarily what index managers do. As stocks go higher, be it miners or banks, their large market capitalisation dominates index moves and masks the lower capitalised big performers. It also means index fund managers need to hold more of these big stocks in your fund, and when they eventually go down, which they always do, you go with it. This aspect of index fund management needs to be properly addressed because it causes unnecessary capital decimation and means they follow indices down and miss the big moves by being underweight lower capitalised top performing stocks. Why the obsession with the index?

The attraction and challenge of the stock market is the lure of the dollar and the stocks that offer these riches. Some investors have found a way to capture and ride these profitable waves. Stockradar’s methodology of selection and stock management quickly discards the weak and runs with the powerful.

Stockradar’s Premium Portfolio Service

Low cost, Safe, Simple to Understand and Easy to Manage ASX portfolios

The psychology that drives stock prices

Normal human behaviour easily attains the emotion that anything is possible and that the sky is the limit, and this is very much propelled by the crowd behaviour phenomenon.

It’s the choices we make that shape our stock market investing destiny.

Portfolio Strategy – How does a profitable portfolio work? How do we keep our capital working hard? How do we make money in up trends? How do we survive during downtrends? Is your portfolio in good enough shape to weather all storms?

The Stockradar portfolio has been increasing in value over recent months, as have most other portfolios I would imagine. That has been a symptom of a rising market and that’s great but there is a reality that reminds us that although things are going ‘swimmingly’ we actually have to deal with all types of markets. A complete strategy must be robust enough or your portfolio will not survive. It is not necessarily about being a smart stock picker but rather being a good penny pincher. It is easy to build a survival portfolio if you take the necessary steps.

Corrections, big or little, occur regularly and that’s a fact. Another fact is we don’t how big or how long, just that they occur. How can we successfully ride these bumps not knowing? One of the fundamental truths of trading is that you don’t need to know what’s going to happen next to make money. Once we have a clear comprehension of that fact we can then move forward and develop a profitable process driven strategy that is prepared for all eventualities.

The key is to be prepared, as any good scout will tell you. And it’s very true we must always be prepared trade with a trend but also to protect our capital, as it’s our lifeline.

You can choose the safe and steadily profitable or the risky and most likely unprofitable. One way is controlled and relaxed and the other uncontrolled and stressful. These are the some of the many choices we make if we are to engage with the stock market as an investment vehicle. A good investment process by definition means one that makes money and the bad investment process is the one that loses money. That’s also a choice.

It comes down to this. If we intend to use the stock market as a good investment vehicle we have to do it properly and be very systematic about our investing. A choice.

A positive starting point is healthy and relaxed mind. It leads to successful investing. We then need to understand that we need to observe the market not predict it. We will win and we will lose; we have to have discipline to observe and respond appropriately so that winning becomes the norm.

So yes corrections come at regular intervals. You should have the confidence to be fully invested in a rising market but be prepared to get out take some small losses, wear some pain, and also lock in profits along the way. The good stocks will whether a storm best and they’re the ones you hold. The stocks that fail (at stops) need to go. The returns built up using a systematic process insulates you from serious damage and generates a steady profit profile, and ongoing absolute returns. That’s how a sound process must work.

It will all depend on how prepared we are and how we observe and react to signals generated. Our portfolios did navigate the sharp correction of the CFC in good shape because of observation and the ability to act appropriately. No guesswork and no hopeful praying! i.e just get out when stops are hit and don’t ever carry large drawdowns. It was one of those corrections that we didn’t know how big it would be but it certainly wasn’t one you wanted to ride out so taking that capital preservation route proved to be the correct decision as it always will, be the correction big or small. This also means you portfolio recovery will be strong coming off a much higher base then the market in general contracted to.

As an individual investor or SMSF manager you have a huge advantage over big funds.You can be nimble and move fast. Most funds are ‘stuck’ and are too big to sell. They have to ride the bumps and it’s the big ones that kill them as we have learnt. So to manage your own investment and keep the money in your name and your account is a huge advantage. It helps in many ways. As well as being nimble and having the ability to protect our capital at anytime, the next advantage is cost. Costs and fees can kill profitability, and there are many ways to pilfer your account – unless you manage it yourself. Online trading comes at a pittance these days. Why fritter away money when you don’t have to.

The next step is to have a process driven stock selection strategy that will ensure your capital is growing but at the same time keeps you safe so your investment process becomes a good one. Again it’s a choice. There are many common sense steps we can take. At each step we take we have a choice and this is simply a cognitive approach to realistically achieving our goals. Provided you make the right choices you will achieve them.