Warren Buffett says:
"You can get into more trouble with a good idea than a bad idea"
There's really only one 'Stock Trading Strategy' to use Warren Buffett would say. And long term, he's right.
Who would argue with him?
But there also exist lots of other 'Stock Trading Strategies' and mini-strategies that you can make profits from.
This section of the website will try to portray some of the more long term strategies.
'We must make the distinction between these 'Stock Trading Strategies' and the 'Short Term Trading' techniques. Short Term Stock Trading is just that - only intended for the short term.
And, as explained on that webpage, they are not always suitable for a Pension Fund - because of their short term nature. They are included for those investors who may want to add a little bit of excitement to their retirement fund.
But, as also explained, they are intended for only a tiny proportion your Pension Portfolio.
Most Pension Investors will want to follow the tried and proven strategy and that is long-term investing.
Now here's a moot point.
Do you buy shares and hold them come what may?
We're strong advocates of investing for the long term - just like Warren Buffett.
But, and here's where we want to be different, we do not, and cannot, bring ourselves to hold shares forever. A.K.A. the buy and hold strategy.
[Warren Buffett has but one strategy. Buy and hold for the long-term. And for him, long-term means forever]
On this website we write about 'forever' stocks but our definition of 'forever' differs from that you may find referred to in books and magazines.
And that's where 'Technical Analysis' has served us well.
We write on this site ad nauseum about using 'Fundamental Analysis' and 'Technical Analysis' in tandem with each other.
We use 'Fundamental Analysis' to tell us what to buy and 'Technical Analysis' to tell us when to buy (and sell).
So, going back to forever stocks, let's use a real world example:
Glaxo Smith Kline (GSK)
Everybody's heard of them, and if you haven't, it's certain that you will have used at least one of their products. Be it a pill or a potion or just a bottle of Lucozade or a Beecham's Powder.
They really are a growth and income story to behold.
We're getting a little off track here except that we want to labour on the point of the type of shares you need to invest in.
And there are lots of them.
And new one being discovered all the time.
It's our job, and yours too as investors, to identify these type of share and buy them - but only at the right price.
That last piece of information is the first 'Stock Trading Strategy' that we'll look at.
Warren Buffett and his followers (or Buffettologists as they are affectionately known) are continually on the look-out for these "forever stocks"
What most investors do is buy them and then hold them - forever.
That's O.K. but ...
If you do that, you're leaving a lot of money on the table.
Take a look at the chart of GSK below:
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You can see immediately that there are numerous peaks and troughs in the share price but the overall trend is upwards.
Forgetting dividends for a moment (which for a share like GSK are not insignificant), if you had bought in 1990 then today you would be showing a healthy profit, but over that time there were many, many opportunities to "get out" and get back in again.
Cynics may say that's all very well in hindsight.
Now we can empathize with the above except that history is on our side.
The forever stocks that we identify are all highly marketable, high liquidity shares, with a high-ish market capitalization.
Which roughly means you can easily buy and sell them in decent quantities and with a very small bid-offer spread.
And when you are buying and selling using your Stock Trading Platforms the cost of your trades is minimal.
In the bad old days of having to telephone your broker, you not only perhaps got a bad price, you also got a bad bid-offer spread, and you certainly paid plenty in commissions.
A deal is a deal. Buying or Selling. It's only a transaction.
We can remember paying lots of commissions, sometimes in the hundreds of pounds because commissions in those days were percentage based. The higher the consideration, the more commission you paid. Hideous. And such practices go on still to this day on the basis of non-discretionary accounts.
Well, when you are doing your own stock picking you don't want that kind of account. You want to be paying a flat commission fee.
Now who's being cynical?
You can now, and should, only pay a flat fee of around £12 to trade and frequent traders can pay as low as £5.
And it's all done online. No phone calls. No hefty commissions. And just low, low spreads.
Way to go!
Right, now take a look at the graph below:
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We've superimposed a "moving average" on the last graph. Again, all done on our computer with simple, easy-to-use software.
But wait a mo!
We're forgetting to get across to you our thoughts on price.
Let's just play with numbers for a bit. Take another look at the above charts. You know from your 'Fundamental Analysis' (or however you get your data) that a share at any given time has a fair (or intrinsic) value and a market value. The charts show us the market value.
Now look at the charts and pick a peak. Any high point will do. Now look at the low point before and/or after that peak.
Would it be fair to say that the shares intrinsic value is somehwere between these two points? We'd say so.
If you agree, then at the peak the share must have been over-valued and at the low point (trough) the share must have been under-valued. Would you agree with those two statements? Yes, or yes?
A share cannot be valued at the high price and the low price in such a short space of time. It is only the market's perception of the value of the share at that particular moment. Sometimes the market's perception is high and sometimes it is low.
Using common sense then, upon knowing the fair value of a share, why would you want to pay more? Surely, logic would say that you would prefer to pay for a share when it's undervalued.
You may have heard the expression buy low, sell high. Easier said than done. Some investors, called 'Momentum Investors', buy high and sell even higher.
But 'Value Investors', which we in the main want to be, will identify "forever" shares and use 'Technical Analysis' to show us when to buy low, and when to sell high.
This is but one Stock Trading Strategy.
But it is the simplest strategy and the best strategy. It should be the basis of most of your trades.
You are investing for your Pension so you accept that most of your investments are going to be long term. Which means you have to be patient.
Using the GSK shares again as our example, you may have to wait for a buying opportunity. But as sure as eggs are eggs, one will come along. And sooner than you think.
Now here's the really good news.
At any point in time, GSK may not be a buy using this strategy. But there will be many shares on the market that will be a buy. Remember, we don't just want any share, we want one that fits our criteria. You need to refer to the section on 'Fundamental Analysis' to know how to pick one.
Also, the section on 'Sector Rotation' will put you straight on which Sectors to look for at any given time.
It all sounds so simple doesn't it? And it is. It just requires patience and discipline. Two human characteristics that are not easy to conquer (see section on Stock Market Psychology).
If you stick to the rules that you have set yourself, (and you have haven't you?) then, given time, watch your Pension Pot grow.
Don't lose sight of the fact that Pension Investing is long term. The longer the better.
In the Spring of 1988 a US magazine published an article on what makes a good investor.
The article's objective was to scrutinise 220 stocks that had really good returns between the years 1970-1983 and find out what they had in common.
Here's what the survey found :
As Jim Slater once said: "Start with the basics, select a system, work at it, read regularly, monitor results and keep striving to improve. If you have the nervous energy, and the stamina, your efforts will be fully rewarded."
Here's a good Stock Trading Strategy that presents itself every decade or so.
Most investors, especially inexperienced ones, only think of Stock Markets rising. And, over time, we all hope that is what they will do.
Markets do not stay in a Bull phase forever. At some point a correction gives the market a pause.
This may be just a short correction, or it may be a full-blown Bear Market.
How can you tell when a market turns from Bull to Bear and vice versa?
That's a difficult question to answer.
The best we can come up with is on your charts (see Technical Analysis).
We use, and so should you, end of day charts. A simple bar chart showing the high, low, open, close and volume for the day is all we need to see.
But we need to super-impose "moving averages" to our charts. To get the "30,000 foot view" on the market, we would use a 200 day moving average on both the Dow Jones Industrial Average and the FTSE100 Index.
If the Index were to turn down, and, cut through the 200 day moving average, we would consider that a sell signal.
But, in conjunction with that, we would consider the mood of the markets. What are other Indices telling us? What is the economy doing? Are there any crazy things going on such as a pandemic like the Corona Virus.
When that "perfect storm" is present, we would not hesitate to sell all of our holdings, and move into something that will rise. And we would stay invested in that "something" until such a time as the markets recover. Markets always recover.
History has taught us that markets stay in a Bull phase considerably longer than a Bear phase. Take a look at any long-term chart and you will see that the overall trend of markets is up (Bull phase) lasting years - with the occassional market dip (Bear phase), lasting months or just a few years.
So what is that something that we would switch into?
We switch into Exchange Traded Productss (ETPs). Sometimes referred to as Exchange Traded Products (ETPs).
Of course, you do not have to switch into anything during Bear phases. You can stay invested. Warren Buffett does.
Your other alternative, given the onset of a Bear market, is to just sell and wait for the good times to roll around again.
But whatever you do, only switch out of the markets if you fear a substantial downturn. Do not switch out for every little decline, in the hope of getting back in. You will lose.
Stock Trading Strategies by William L. Anderson
Strategic Stock Trading by Michael Swanson
Trading Secrets by Simon Thompson
Stock Picking for Profit by Simon Thompson
Successful Stock Picking Strategies by Simon Thompson
are you a forever Stock Trader?
A Long-Term Trader?
A Buy and Sell Investor?
Or a combination of some of the above?
Get that sorted before you start to invest in your 'Self Invested Personal Pension' (SIPP).
If you've been paying attention, it's obvious which type of investor we advocate on this website (Psst! You need to be a Long Term Stock Trader).
Want to join us in our philosophy?
Chris and Clem Meet Up - hopefully, the last time before lockdown easing
Chris and Clem Meet Up - at last! They can meet in the beer garden
Chris and Clem Meet Up and it is Chris' turn to do most of the talking. Chris' little windfall has allowed him to widen his portfolio. Chris vows of more.