The 3 Strategies for Investment / Trading Success

Dear Friends,

This article from the Wall Street Journal entitled The Stock Picker's Defeat provides us with one of the most valuable lessons that we should learn on Stock Picking. It also records the rise and fall of Bill Miller of Legg Mason, one of the most successful fund managers on Wall Street. Please click on the link to read the article.

I quote from the WSJ article: -

"The thing I didn't do, from Day One, was properly assess the severity of the liquidity crisis… Every decision to buy anything has been wrong." Bill Miller, manager, Value Trust

To this statement, may I add that there are three very important strategies that affect your Investment / Trading Profitability: -

First, the overall Strategic Economic Cycle affects the Primary Wave Trend Direction, i.e. if the economy is in recession, then the Big Wave, i.e. the Primary Wave will be a Downtrend, which means that with the passage of time, price will be lower than it is today.

This is what we are experiencing today, i.e. lower and lower prices. Contrary to the Pure Fundamental Analysis Investor (Fundamentalist), this approach is called the Global Macro Strategy, and it is the strategy adopted by George Soros. Contrary to popular beliefs, George Soros is first and foremost a Fundamentalist, but at Strategic Economic Cycle level, rather than Stock Investing Level.

I can tell you one thing - NEVER Argue with the Strategic Economic Cycle, i.e. don't buy a stock in a Primary Downtrend. I make one exception, i.e. when the market has crashed by more than 30%, in a Climb Back to Health Scenario. Even then, I would only consider the possibility, rather than to rush in.

This is probably the first strategy missing from most investment / trading system, and this is THE SYSTEM that was omitted by Bill Miller, causing his downfall.

The Second Strategy is the Market Sentiment, monitored in the form of Technical Analysis. Yes, even in Downtrend Economic Cycles, markets go up. However, the market tend to go down 100% and go up between 30 % to 67%, and then go down another 100% in a Primary Downtrend.

If you can't see the charts and the key waves, you will be confused because the market goes up and down. Market Sentiment allows you to win even when you buy in a Primary DownTrend, but when you win, you will a little, while when you lose, you lose a lot.

This is in contradiction with the Rules of a Master Speculator, as explained by Victor Sperandeo. in his book, Methods of a Wall Street Master. We should trade in the direction of the Primary Trend, so that we win more than we lose in terms of Reward / Risk Ratio.

Also, when economy is bad, good news doesn't move the market up by a lot, but bad news move it down quickly and by a significant amount. The only time when the market shrugs off bad news in a Primary Downtrend is when it is having one of its bullish sentiment bouts, and this is seen in the form of a Correction Wave. This wave lasts between 3 weeks to 3 months, and I think we are about to see such a Wave in the Dow.

Even if Bill Miller had ignored the Strategic Economic Cycle / Global Macro Strategic Outlook, he would have been saved if he had understood Technical Analysis. Most Fundamentalists tend to look at Technical Analysis as hocus pocus rather than a science, but as the saying goes, "Ignore what you don't know at your peril."

The third strategy, i.e. Fundamental Analysis, is the most popular and most believed in Investment Strategy. Fundamental Analysis is important only in telling you WHAT to buy, never when to buy. Only Technical Analysis and Strategic Economic Cycles can tell you WHEN. In other words, Fundamentalists for Stock Investing have INCOMPLETE ARSENAL of INVESTMENT TOOLS to make good decisions.

I really believe you need all three strategies. Imagine a Carpenter who only has a Hammer. I don't think he will make very good tables. However, another carpenter with screwdrivers, hammer, bolts and nuts, is likely to make a better table, provided he knows when to use what under which condition. To say that the Hammer is more important than the screwdriver is wrong. It depends on whether you are assembling the furniture parts with screws, or banging a nail into the furniture.

However, let's face it. If you buy at the right time, even if it is a rubbish stock that you know nothing about, you will make money. On the other hand, you may buy the best stock in the market, but if the overall market and economy is bad, even the good fundamental stock will go down. So, if we have to choose between knowing WHAT to buy vs WHEN to buy, WHEN is more important.

Of course, if you have both, you should outperform those with only one of the two skills in the longer term. Makes sense?

It's really up to you. It's your money, and you have every right to employ it any which way you like. Whether you make money or not, you will be the one that will have to live with the consequences of your decision.

I have been involved in the stock market industry for almost 20 years now, and have seen a number of market crashes, and various investment theories. I have also spent the last 1.5 years researching the various secrets of success of billionaire traders. I am merely sharing what I believe is the secret formula to success.

Best wishes,

Ooi