Individual investors may find it increasingly difficult to make money in the global stock markets, as professional knowledge is needed to analyze the performance and prospects of listed companies, popular financial columnist and Hong Kong Economic Journal chief adviser Cho Yan-chiu said.
Before the global financial crisis in 2008, investors could make profits simply by speculating on bull and bear markets, said Cho, who is known to many by his nickname, “Cho Sir”.
But now, they have to examine each company carefully, as different firms can perform differently.
Investors also have to learn to “buy in fear and sell in a rally”, Cho said.
Professional investors always outperform the markets, as they know they should sell weak stocks and hold strong ones, so as to cushion against volatility, he said.
Under today’s conditions, small individual investors are better off trimming down their bets.
“You can’t fix stupid!” Cho wrote.
Even billionaire Warren Buffett’s “value investing” approach is outdated, as his large positions in IBM, Coca-Cola and McDonald’s have suffered from poor earnings performance.
Cho said Buffett should adopt Cho’s “trend investing” approach, but it would be understandable if Buffett failed to change his habits, as “you can’t teach an old dog new tricks”.
Here are the 10 rules that guide the trend investing approach:
1. Make sure your trades match the calendar. You should adjust your investment strategy in accordance with different economic cycles.
2. Price has a memory. Historical price trends will affect the future performance of stocks.
3. Stay away from crowds. In the United States, the top 3 percent of the population controls 31 percent of the nation’s wealth, and the next 7 percent of the people have 17 percent of the wealth. If you do not belong to the 10 percent, you only have a 10 percent chance of succeeding.
4. Follow momentum. Stock prices show upward or downward momentum 15 percent to 20 percent of the time and just move sideways the rest of the time. Make short-term buy/sell decisions that take advantage of price momentum.
5. Watch out for shifts in the trend. Trend shifts do not happen overnight, so stay alert if you notice that there is contention among market participants. Locate your point of exit before joining the crowd, and decide your loss limit before buying a stock.
6. Risk management comes first. One heavy loss may wipe out all the gains from 10 investments.
7. Blame yourself if you suffer a heavy loss. Before a big loss emerges, there is always a warning sign — either poor momentum or negative news. If you keep ignoring the signals, a heavy loss is bound to occur.
8. Invest in stocks above their 250-day average price and avoid those below their 250-day average. “Bottom fishing” is stupid, as prices may fall further.
9. Don’t overly trust price patterns. Sometimes, even a perfect pattern will lead to a heavy loss.
10. Your profit is real only when you pocket it. Don’t waste time counting unbooked profits.
The full story appears on pages 58-64 of the 453rd issue of the Hong Kong Economic Journal Monthly.
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