In theory I take a disciplined approach to investing. I have a basic system I follow and it has been very good to me. I have never calculated my returns however, my investment accounts have steadily increased and I have basically avoided the recent downturns in the market in the last few years.

How I got interested in investing

I started to first investing my teens with my summer job money. I can not believe I did not spend it on records etc and saved every penny and invested. I invested in the GT Asian Pacific Fund, then I bought stocks.  I do not think my Dad even knew about it the fact his skinny geeky son was taking his summer money and investing it and playing the market. I remember doing my tax return and all the trades made it very difficult to determine the cost basis on all my trades. This was before computers.

It is 30 years latter and after working professionally in the investment world for many years I do other things, but really still love investing.

The first book I read was “How to make money in stocks” – not the one by Bill O’Neil but one by the author I can not recall.  I think I was about 16 years old. I read scores of investment books from Market Wizards by Jack Schwager to Stan Weinstein book, which I think is the best. And of course the classics like Security analysis and the intelligent investor by Benjamin Graham. I wrote a paper for my high school English class called Stock options Put or Call.  I remember my teacher giving me a strange look.  I got a Master’s in economics and worked buying and selling stocks. I started my CFA like many people did, but go bored. I did not want to be an analyst or trade on someone else’s account (Although my brother is the President of the CFA association in the UK or something). I clearly decided I like to trade my own stocks, rather than just work for a big Wall Street company.

I really want just obsessed with the idea of the stock market and trading itself,  more than making money. Think about it. At any one given moment during the trading day, almost all the assets of the country are on the auction block for sale in the investment markets. Wow.

I perfected my system for investing with the idea that investing with a disciplined approach should be very simple and easy to implement as I have better things to do all day then watch the ticker quotes. Since I am also a programmer I thought of developing my own trading system but I have no interest in this. Why? A lot of this work has already been done and we are at the next generation of investing. Modern quant shops already incorporate and have back tested ideas. I did not want to try to squeak out another 1% after years of programming work. I decided my time would be better spend exploring applying leverage to investing or getting a more steady return than trying to hit a home run or a ten bagger.

One of these days, I think I should someday calculate my returns but I am always adding new money in about out, therefore, it would take time. I would have to factor in a lot of variables like stock splits and dividends and the fact I have several accounts and in different countries. But where is the way I invest in the equity markets going long.

My disciplined approach to investing in the Stock Market

The bottom line is I have a system for investing.  Not a rigid computerized system of investing, but a basic plan and discipline.

  • Step 1 – I am in the market when the S&P is trading above the 12 month moving average and I start to pull money out as it drifts below this.
  • Step 2 – I use quantitative websites like valuengine (five star stocks) or MSN stock scouter (top picks) to do the number crunching or grunt work in narrowing the field.
  • Step 3 – Then in the universe of stocks,  based on my own selection criteria (usually companies would I personally buy from and has good management and cash) and I make some subjective investment decisions.

I do not think you can beat the big firms out there in flash trading or high velocity trading. This is why I take a more easy going strategy, using a long-term model with very easy to read buy and sell signals for trading with most of the work done by a third party.

The reality of my investment strategy

If I followed this system exactly it would be great. Investing would be a very simple thing and I would not worry too much.  I mean based on MSN stock scouter or you would do very well (they have incorporated a lot of the wisdom from the above mentioned books on investing). But I have a few added twists.

The issue is I am not disciplined, at least 100%. Sometimes investing when the moving average is below the 12 month moving average for the S&P and sometime choosing stocks that are not in the top stocks for these quantitative research shops. Why then do I not always follow a disciplined approach to investing?

Why I do not always follow my own trading system?

I am only human. I have ego, pride, I like to test new ideas(which is not all bad). When you go to the gym do you sometimes skip a day or you do follow a disciplined system of fitness?  However, I think the main reason is I have a system and a reasonable level of wealth so I do not have to worry too much. Therefore I like to test and experiment. In experimentation I feel I can improve, but if I follow the same old approach then I am stuck.

Lately my experimentation has been more in the form on perfecting my system then using leverage. After a certain my point it gets harder and harder to increase your return by another percentage point. You can do it but for sure. But an easier way is leverage.

Stocks options or Leaps or margins are very dangerous. I have traded these in the past but at this point back to the experimentation phase. If you can find a discipline approach to investing that works and then add leverage you would be rich much quicker as it amplified your returns. Think about it is you have a 20% return times 5 you have a 100% return. The only thing is you have a huge potential for loss. I use dollar cost averaging and diversification and relay heavily on “quant shops” to give me a feeling of comfort. But I am still not sold 100% on leverage as I have seen many people get burned. I for the last 30 years have only been testing this.

These are my thoughts on a disciplined approach to investing and I am curious about yours or your approach or systems you might use.