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The Intelligent Trader's - Long and Short of It
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From: Robert A. Christy Editor/Publisher, ‘The Intelligent Trader’ http://www.intelligent-trader.com http://www.christyinvestments.com
Date: October 23, 2008
Today’s topic is about the investment process.
Over the years, I’ve learned that investors choose investments in many ways. The most common are: (1) scientific; (2) art form; (3) hobby; and (4) dart board or some other shot in the dark.
The most important tenet of any investment process is that it be a personal one. You have no one to answer to but yourself. You should, however, know how and why you choose the investments that you do.
Over the years, I have searched high and low for the perfect process. I can report that none exist and if there was one, it would never be for sale at any price.
The one that I use today is a product of evolution, cut and paste, and trial and error. The important thing is that it works for me.
My Five Step Investment Approach
Step One: Market Analysis.
The first step that I take is to determine whether to be in the market at all or on the sidelines. Do I want to be on offense (capital appreciation) or defense (capital preservation)?
The primary market indicator that I use utilizes the concept of bullish percent which has been in use for more than 40 years. Bullish Percent measures the overall risk in the market and dictates the strength of our long or short positions.
Step Two: Sector Analysis.
Step 2 deals with market sectors. The market is made up of 12 major sectors and roughly 40 sub-sectors. My goal in this step is to determine which, if any, of the sectors offer the best chance of success. Industry sectors, like the seasons, move into and out of favor. I want to be a buyer (long) of the most favored sectors and to avoid (or short) the least favored ones.
Academic studies have shown that up to 80% of your portfolio’s return is determined by the sectors that you choose to invest in. Sadly, most investors pay lip service to sector analysis and spend most of their time divining which stock to buy or sell.
Step Three: Fundamental Analysis.
I then look to find the best companies in each of the favored sectors. I’ll readily admit that I am not a nuts and bolts guy. I also am not enamored with a lot of the work that is peddled as research on Wall Street. I get my “fundamental analysis” from sources that are more than reliable. These folks are paid to make money first and foremost. They aren’t paid to publish “pretty” research that might lead to future banking business. They get paid to be right on the stock – which means owning it when it goes up, and getting out of it or shorting it when it goes down.
I have put together a list of money managers that are time tested and battle scarred. They cover large – mid – small cap names as well as growth, value and blend. I go to Morningstar each month and download their portfolios. This gives me an idea as to what they are buying and selling. These names are then placed on a watch list by sector.
Step Four: Technical Analysis.
I then apply technical analysis, specifically Point & Figure analysis to these fundamentally sound names. I am a technical analyst or chartist by trade and have found that using P&F charting eliminates most if not all of the noise surrounding stocks and indexes. I’ll also add here that I am a position trader. I tend to hold positions from a week to a year or more.
What I am looking for here are catalysts that are causing investors to buy or sell.
I am looking for names that possess a positive Relative Strength and show an above average probability of outperforming the market. In other words, I am looking for investments where demand exceeds supply.
Once found, I then determine each position's entry and exit points. I do this in advance so as to not get caught up in an emotional binge that might lead to mistakes. By also making these decisions in advance, I know exactly how much risk I am taking on.
Step Five: Risk Management.
The last step is managing the portfolio. I do this using my proprietary state of the art risk management tools. Without going into a lot of overkill, I am willing to risk 2% of the portfolio value on any one trade and have a limit of somewhere between 6 and 10% downside risk in any given month. I use stops and option strategies to create synthetic hedges when appropriate.
This final step is what sets me apart from my counterparts. Very few investors really ever make it this far. This to me is the most important step. The getting in is easy, acting correctly when exiting is more important.
There you have it. This investment process works for me. Now you need to sit down and write one out that works for you.
That’s about it for now. Let me here from you if you have any questions.
Robert Christy
P.S. Are you interested in trading along side me? There are 2 ways to do so. The first way is through my stock trading service, The Intelligent Trader. For just $249 you get a front row seat and the chance to get up close and personal with the market. Just click to learn more. The other way is through my dynamic forex trading service. If you have an interest in trading and/or learning about forex, just drop me a note. I am in the process of finalizing a new mentoring service geared to just trading the forex markets. In your email, please let me know when would the best time to get in touch with you.
P.S.S. Please fee free to forward this to your peers, friends and associates you think would benefit from its contents. They will thank you for it - and so will I!
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Robert Christy is a professional stock/currency trader, money manager, author and speaker. Mr. Christy is the President CEO of Christy Investment Group, Ltd., a registered investment advisory firm. He is also the Managing Partner and Portfolio Manager of Crabapple Capital Group, LLC and the editor/publisher of The Intelligent Trader, a subscription based long/short trading service. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Christy Investment Group Ltd, Crabapple Capital Group, LLC or The Intelligent Trader has a position. In such cases, appropriate disclosure is made. Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@intelligent-trader.com .
Robert Christy The Intelligent Trader c/o The Christy Investment Group P.O. Box 625 Alpharetta, GA 30009-0625
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© Copyright 2008 Robert A. Christy
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