Investment strategies for toppy markets

Sun Lzu, in his definitive book The Art of War, does not attribute success to aggression, bravery, or even size. Rather, he suggests the greatest source of strength is unity.

I think there's a lesson in that for all of us.

If you liken investing to waging war, which I do, your success will be achieved from two preliminary steps: The first is making an accurate assessment of your enemy’s strengths and weaknesses; the second is having an objective catalogue of your own.

The enemy of course is yourself, your own greed and fear, which at times may seem like an overpowering force. The investor must counteract those with patience and self discipline, which are ultimately more powerful when acting in unison.

It’s easy to quote Eastern philosophy and it looks simple enough when you write it down plain. In fact, greed and fear come far too easily to all of us, while patience and self discipline are acquired skills which must be worked for, so the battle is lopsided from the start. Nevertheless, the best of investing strategies will come to naught without them.

The following is a brief list of how I think investors lose money from not adhering to what Sun Tzu called, ‘the Way’:


· Having an unreasonable time frame. Some investors think that if a stock gained a certain percentage last week, they’ll be up that much more next week. It doesn’t work that way.

· A self centered point of view. Don’t expect your stock to generate a return within a certain time frame because you want to take a trip or build an addition to your house. You’ll be disappointed, you’ll sell, and the stock will leave you at the dock. I’ve seen it happen over and over. The market does not follow your personal timetable.

· Making large trades. You’re better off accumulating a stock over time, on dips, than taking down a big slug of it because you got excited. Think about how uncomfortable you’ll be if and when it drops by half. You have to sleep at night.

· Not selling. The time to sell a stock is when it’s fully valued, not because you need the money or because it spikes or because you’re tired of watching it. But don't wait in vain for unrealistic gains to materialize either. Ride out the ups and downs. I like to set very low stops in volatile markets so I don’t get liquidated if the price hits a bump in the road or some technical factor causes it to sell off. If I recoup half my investment in the event of a downside blow off I’ll be happy – eventually. If I don’t get filled I’ll just stay underwater until the next cycle.

· Not waiting for a real buying opportunity. The time to buy is when the stock is at an incredibly low price, no matter how long it takes. I calculate what I consider to be the lowest price the stock will get to over a short or medium term, then bid lower. Never underestimate how far a stock price can fall.

· Refusing to take your lumps on the buy side. If the price whipsaws back after coming within a penny or two of your bid (it’s happened to me countless times), well that’s just too bad. Don’t chase it.

· Not being prepared to wait to sell. I once bought a stock mere minutes before it was halted, then waited nine years(!) for it to restructure and resume trading. I made a 300% return.

· Taking the small stuff too seriously. Insider shenanigans and cancelled or altered financings and expansions and mergers and capex plans are all part of the game and usually don’t affect the company’s fundamental value. Don’t let them annoy you. Hang in there!

· Not having faith in your own strategies and research. Many investors make careful, calculated investment decisions and then talk themselves out of them. Stick to your guns.

Kb