The 5-year plan – What is it and why do we need it?
What should we realistically expect from our stocks and over what time frame?
Stocks wax and wane through waves of trends and corrections and from there a strategy will evolve and develop through all these stock swings over time, and only after a reasonable period, can we really judge the merit of the strategy.
What period? It’s a 5-year journey.
‘It is possible to make money – and a great deal of money-in the stock market. But it can’t be done overnight or by haphazard buying and selling. The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator.’
– J Paul Getty
Catching the right ‘up swing’ at the right time can be tricky, or pure luck, so a start point is what it is. It’s not something to fret over, time is on your side. As stocks swings between the emotions of greed and fear we play the probabilities driven by our analysis to try and use these swings to our advantage and generate a growing long-term equity curve as our 5 and 10- stock portfolios do.
Your strategy may be behaving the way it should, but sometimes you may not be making any money. It happens but don’t be put off any strategy needs time to prove itself. Stock trends ultimately dictate our opportunities, and the market can go through periods when trends are not developing and that means cash is the safest place. If we know the strategy works there is no need to react to the market conditions we must stay in control and remain patient until trend conditions return.
We need to endure the natural swings of the market to understand a strategy, its benefits, and weaknesses. Immediacy of returns over an initial 3 month, 6m 12m or even 2-year period may or may not give you what you want but to ‘give up’ before a strategy has time to develop and perform is the wrong thing to do especially if its soundly based on research and performance.
In extreme bullish phases stocks will exceed your expectations! I know we all want lots of money and ASAP, but you can’t hurry the stock market, it will do what it will do, so you control what you can because it’s the best we can do. The good news is the market spends most of the time going up. The response from the Covid collapse was nothing short of amazing but to capitalise you had to be disciplined and prepared to take signals as they are generated. Below we show long-term charts of the US and Australian stock markets. None of us are that old but it does make a compelling argument for patience. The dips don’t last long.
The long-term trend of the stock market is up and that is what the Stockradar strategy is designed to take advantage of – up trends.
For some perspective the ASX/200 (30/6/22) was -9% over 1 year, +9% over two years (back to square 1) and +2% over three years. A mix of returns but that is reality and it’s not especially enticing. So why do people tell me the stock market is a good investment? Because it’s measured in many years, not just 1 or 2 years. This year will end in the negative and we are lucky our exposure was (30/6/22) slashed to a low-risk equity exposure of around 12% equity and 88% cash as markets ease, trend dissolve, and stocks go down. It’s was a tough year, but we had the right settings.
FYI the ASX/200 topped out at 6749 on the 8/10/2007 and is currently 6508 on the 22/6/22. A 3.5% loss in 15 years averaging -0.28% pa. During that time BHP was worth $40.22 then, now it is $46.30 plus dividends but there have been big lucrative trend swings down to $14 and back up to over $50 during that time. By trading the probabilities of stock specific trends, we can keep on the right side more often than not – a positive probability worth pursuing.
There are 4 negative years and 14 positive years which keeps the cumulative total climbing.
We respond to stock specific behaviour/price action. A good strategy must deliver more good than bad, despite market downturns. Often at fearful low points is when investors mistakenly ‘turn off’ which costs them potential exposure to new and valid Trend Reversal signals at the lows. Trends begin from there and the post Covid rally was a perfect example.
It’s hard but patience and the right expectations of what can be achieved, and how we should behave, are essential otherwise you have a mismatch between expectations and reality.
We play the odds of the market rising most of the time. When it does it delivers many trends to follow and during sideways to down moves, we preserve capital as best as we can but always prepared for the next upswing. It comes when we least expect and we have portfolio strategies that are always prepared and ready. See home page chart with portfolio results.
Our Energiser portfolios have a higher equity exposure than our more conservative approach applied to Stockradar standard Stock Picks. The Energiser portfolios are constructed so they have a strong bias to trending stocks and are aggressively geared for an up move. This ensures the bullish money-making periods outweigh the bearish neutral periods which we control with our risk management process. It’s time in the market with a good strategy that leverages exposure during bullish times and time out of the market which minimises risk during bearish times.
During market weakness times there are often stocks bucking the trend. As bottom-up analysts we still take/hold those signals regardless of the market status as reflected by a major market index such as the ASX/200. Stocks currently (Aug 22) in that space are CPU and the big surprise coal stocks WHC and NHC.
We are often emotionally attracted to the immediacy of big winners ($$$$) which the media loves to report and they inevitably blows a story out of all proportion in the name of a ‘story’, and they should perhaps take some blame, but we must be bigger than that because the subsequent anxiety and Fear Of Missing Out that it creates and this distracts investors from their normal strategy and then the inevitable poor decisions follow. You should resist, don’t get off track, and stay true to a strategy through all market conditions.
The number of conversations with members and prospective members, many who are seasoned market participants, complain of the same weakness; discipline to remain focused and follow a strategy, and this is the most common flaw amongst traders. To teach yourself to become an automatic trader is the aim, to enjoy the stock market experience and be able keep your perspective and expectations real.
- Stock trading performance should be measured over a reasonable and time frame to assess its merits and that should account for both up and down phases.
- Trading trends based on our quant-based model with built in risk management provided solid outperformance over the last 19 years
- We don’t hold stocks that are going down – the index does. Recovering from losses is daunting and costly.
- Corrections are regular occurrences
- Every correction will be different in size and time.
- Ensure when you adopt a strategy that it is soundly based, can tolerate corrections, and has a solid historical performance.
- Your start date can be anytime – it is potluck.
The below chart shows the 1, 3 and 5-year returns from the ASX 200 starting in October 2001. There are some hits and misses but the general drift is strongly biased upwards.
Below the ASX/200 chart is the compound portfolio returns of Stockradar’s 5 and 10-stock portfolio since March 2003 using the strategy of maximising returns during upswings and retreating to cash during market corrections. The probabilities have provided good guidance and that does not ignore the current period of weakness. We reinvest both dividends and cash, but no allowance is made for trading costs. They can vary between investors, but costs are minimal now, and our portfolios are low activity.
The strategy is an aggressive weekly trading model based on the long term up trend of the stock market.
We cut our losses when predetermined risk limit is triggered thus, thus we avoid major corrections/crashes. This is based on our risk strategy of which the premise is set out below.
What Drives the Strategy?
A simple money management process that simply and effectively cut out the big losses and leverages stock trends.
There are four potential outcomes of a trade:
- Big wins (unlimited)
- Small wins
- Small losses
- Big losses – exclude (limited to a predetermined amount)
Small wins and losses effectively cancel themselves out. Big losses are excluded by our money management process so that leaves us with the big wins and that’s the key driver of our portfolio growth.
Major corrections occur on all stocks at various times. Over the years we’ve seen stocks such as BHP CSL AMP LLC BXB TLS Banks ALL and WES all rotate through big price adjustments. Capital preservation at these times is our strategy but corrections precede opportunities.
The strategy exits as the risk of greater falls increases and those sale funds are used to leverage better value deploying our cash into stocks that have adjusted to lower levels. This is why they say cash is king during these times.
As well as our stop strategy set at 15% the trailing stop process allows us to sell into strength by following up the trend strength. Often with an even tighter stop. As the price rises so must the stop as trends extend themselves. This process is a part of the risk management of a trade we employ that takes over once the entry signal is triggered, as opposed to trying to ‘pick’ the top through analysis. Money management is key to success
Entries are aimed at buying weakness through our Trend Reversal strategy or jumping on the momentum strength of existing trends that make New Highs.
A New High signal is triggered by a New weekly High that has been preceded by a Trend Reversal. This is the case if our stop strategy has taken us out at any time during a trend phase with a Trend Reversal origination. (See WHC below)
The second New High criteria is simply a New all-time High in price. As an uptrend trader we must be exposed to all up trends and thus the New High signal ensures we are.
The challenge is to outperform the long-term strategy of buying and holding. You can let the buy and hold run and you’ll probably do quite well especially an income-based portfolio or you can be more actively involved in selling into the strength buying the weakness and avoiding the big drawdowns and maximise your investment returns. It is essential that to make this process effective all outside influences are ignored.
Stockradar Premium Portfolio Service:
Traditional thinking says that the safety of diversification is a sound strategy and helps ‘trim the edges’ of mistakes, however, it seems, it may also ‘trim the edges’ of winners.
– Conviction is our best friend.
You can read about Stockradar’s Premium Portfolio Service here or watch our You Tube video here
We can leverage the probabilities of the market tracking higher by using our very disciplined buy the fear and sell the greed phenomenon to trade the stock swings within that longer term trend (See BHP example above)- it just takes some guts and a good dose of discipline. After all the market is on our side.
The answer of, why we do what we do, is in the chart above where historically over the last 122 years 81% of the time the market has a positive year as opposed to 19% negative years. The market has returned 13.2% over the 122 years and so far, Stockradar has claimed 17.9% in our 5-stock portfolio and 13.8% for our 10-stock portfolio over the last 18 years.
The original idea for building Stockradar came from two motivations.
- Stocks rotate through trending and non-trending periods but move higher most of the time and pay dividends for your trouble – how good it that.
- Using the analysis and management of price trends we can maximise that knowledge (point 1) and improve returns.