Develop an investment strategy

Drawing up your personal investment blueprint

Computers are useless they only give you answers – Pablo Picasso

Too much investment information clouds judgment and this is what Internet investment data gives you. Your head will spin around because of too much choice. What you need is a strategy for buying and selling assets to make money. Instead of a flood of information in your brain, you need to always be asking ‘why’? You need to contently be asking yourself why am I buying and selling, and is this action in agreement with a general strategy. This is better than looking for some tactical win of making a good trade or day trade. Today everyone is looking for the best day trading program or some piece of information that will give them the tactical edge. My mantra is to develop a general strategy for trading; start thinking strategy over tactics.

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat’. – Sun Tsu

Do not believe the big investor has the edge over the small investor

The issue today is there is too much information. Even ten years ago to obtain the same stock market data, we have now at our fingertips , we would have to have been a professional. The good news is: now the little guys have the same information the big guys have, at least in theory.  Maybe with the exception of flash trading or unethical investing, that is acting on insider information. However,  investment guru has no edge on you in terms of information, nor do they have a monopoly on brainpower, trust me on this one. Therefore, there is no reason you can not get rich making money on trading stocks.

What I saw at 50 investment firms

Need more convincing? I set up investment systems for traders and portfolio managers. Over the years I spent time in almost fifty different investment firms. Most were in New York. I was intimately close to the details and flow of information as I was the one setting up their systems. I even designed workaround for the information, when the proprietary software did not have the functionality. Therefore, I was the key-master for investment. I know what I am talking about when I say most investment professionals are not geniuses. Further, they do not have better information than you have now.

They are just like you. The one thing stock market gurus have that you might not have is an investment strategy.

If you are a small investor there is no reason you cannot make more than Wall Street investment houses, hedge funds, in percentage terms. I know this is a bold statement but it is true.  You just need an investment strategy.

However, the challenge investors face is filtering the wheat from the chaff and not getting thrown off course with your investment strategy. Further many people are lazy in thinking and want to just charge ahead, rather than take time to develop a strategy. Here is the first and maybe the most important take away from this post:

  • If you want to beat the market, you need to stop looking for the edge in terms of information or day trading software and start having a concrete, even written plan for investing. You have to think more like a strategist than a tactician.
  • I can highly recommend the book by Gary Kasparov – How life Imitates Chess – Making the right moves from the board to the boardroom. It is not about investing but how to develop your own personal way of thinking about your goals, money or whatever. This book has made an impact on me in terms of the way I think about stock trading. And yes this guy is a genius.

Why investment strategies do not work

I use to play chess at Harvard square. One of the chess masters there explained to me, the reason chess is so hard is:

It is not just what white does but also what black does. – Harvard Square chess master

Such simple words that mean something. I think can have greats ideas and plans and my own style and strategy but they fail if I do not consider the dynamic nature of the playing field. It is just not what I am thinking but what is changing around me.

The problem many investment managers are they have a plan of attack, but it is not dynamic. It is one dimensional. Again like the chess master mentioned above, it is just not what white does, but what black does also.  They have a plan of attack something like ‘I like to screen for low P/E stocks’. Or ‘I look at earnings momentum’, or’ valuations now seem a little high’.  I can not tell you how many countless times I have herd fund managers repeat these mantras and their market returns were less than stellar. The stock market like the chessboard or battlefield is messy and rarely textbook.

Even if they react to the new market conditions, which is good, they do it with the same old investment strategy or thinking, which is bad. They have not changed their thinking process. This is why you can have a solid investment strategy that has worked for years but, then stops working under a new set of market conditions. The issue is most investment managers I know have huge egos (because of some title like chief portfolio manager for XYZ hedge fund) and pride blinds them. As a disclaimer, many do not and many do better than I do, but I am talking abstractly not personally.

  • Focus on changing your thinking to trade stocks better –  To get good returns in the stock market over the long-term (different market conditions) you need to change your brain’s software or pattern of thinking not just react. You need to stretch your brain and see the world different to be able to develop a good investment strategy.

George Washington and the stock market

Consider this example. George Washington was fighting in the French and Indian War as a junior officer. His commander General Edward Braddock who used traditional European British tactics. He lined up his men and fired volley after volley into the forest under the command ‘ready, aim, fire’. The enemy would be safely undercover at this time. If you saw the movie last of the Mohegan you will get the picture. It was a tactic that worked in one environment but not another. Braddock even changed the formations and the tactics in reaction to his environment, but still used his old 18th-century thinking. He was shot in battle and George Washington replaced him. Washington immediately started thinking like the native Americans, using the forest for cover. He did not just change his tactics but his whole way of seeing the world.

The same holds for investing. What works when you are in a bull market might not work in a sideways market. If you are getting beaten in the market, remember the lesson about Washington.

Changing your investment strategy too often

Changing your strategy all the time is like not having a plan.  This is clear and I do not have to go into this, other than if you are in the learning process, you will change a lot,  but you need a general plan of attack. But if you are learning do not worry about his as everything is new.

Not having an investment strategy – Many people buy a stock because they want to make money. This is like a chess player who starts to advance pieces in an attack, without knowing why he is moving the pieces. He knows how to move, but not why.

The person who knows how will always have a job. The person who knows how and why will always be his boss. – Emerson

The point is thinking and awareness takes humility. Asking ‘why’ am investing this way and is there any way to improve it?  I do. I am always reading books on everything from Fibonacci numbers to less esoteric trend analysis with moving average. I am always looking at other people’s strategies and learning them. Maybe someday I will see a situation I can deploy it, like a chess master or a battlefield tactician can respond to a situation.

Investing as a maverick – consider this

Trying to reinvent the wheel without having solid experience is a bit foolish – when I worked for Merrill Lynch I remember this new fund manager. He was trying to be a maverick. The first year he did great, by luck, the next three down and then he was out. Similar to chess, people try crazy things when they are inexperienced. Trying to pull something over on an advanced player. These unorthodox variations are not played for a reason. Kasparov would meet young guys trying to play unorthodox movies to trick him. These line of attack were not commonly played for a reason.

The virtue of innovation only rarely compensates for the vice of inadequacy. – Gary Kasparov

Yes innovate, but first, have many arrows in your quiver. Learn several different strategies and then you can deploy them in different market situations.

If you want to learn how to invest I again recommend the book by Gary Kasparov. This is not an investment book but gives you ideas on how to develop your own style of thinking strategically in business. For general advice or motivational business book, it is one of the best books I have read. It is brilliant in its simplicity and really motivates you to look at your thinking process.

How do I pick stocks?

My general plan is I use the moving average for the market as a whole, then use quantitative picks (not just stock screeners). Then from this pool of assets, I use my own judgment about the company, such as do I personally use the products. It is my basic plan, but from there I drill down with tactical ideas. But I need to start from something general. In conclusion, the purpose of this post is to get you to start thinking not how to make money in stocks but why are you investing the way you do.

If you have any book recommendations or investment strategies please leave a comment.

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2 responses to “Develop an investment strategy”

  1. Erik

    I like the comment about Washington. Changing your approach in relation to your environment. I think it is different than changing your principles. More changing your strategy and/or tactics. This insight is good not only for investing but in other areas of life.

    Also about changing your way of thinking. We do inadvertently train our minds to react in one way. Again good food for though with investments and money but also in other realms too.

  2. Mark Biernat

    George Washington’s revolutionary change in strategy changed history. If you can do the same with your thinking applied to personal investing than you will change your future.

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