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Charlie Anderson
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I am currently a student. I use a mix of technical and fundamental analysis to arrive at investing prospects and then do in-depth analysis.
  • 2010 Performance Review 3 comments
    Jan 10, 2011 9:23 PM

    As the market marched up this year, I began to define a strategy that had worked for me on the ride up throughout 2009. I tried out lots of different approaches, and due to capital allocation I was able to end the year up 27.5% against a benchmark return of 15.6% over the same period. The market continued its rise steadily throughout the year except for during the summer, when the European debt crisis weighed on markets in the first major correction since March of 2009.

    The only reason that my year-end return wasn't negative was Alexander Elder's Trading for a Living. In it, he makes a very strong case, as O'neill does in his book, for cutting losses very short. O'neill advocates cutting losses at 7 or 8%. Elder's rule, however, accounts for position size. He advocates only risking 2% of total equity on any one position. After learning of these two ideas, I immediately implemented them; which was around March. This saved me from what would have been a very red year. My average loss was 5.2%, but my average gain was 17.1%. It was this disparity that kept me in the black.

    This spring, I was turning over capital like crazy. The buy-and-hold strategy that I had implemented for most of 2009 wasn't satisfying my own impatience, so I was trading very frequently. Even when the stocks that I bought were good companies, which they often were, I wasn't holding them long enough to see any return come out of them. My total return over the first quarter of 2010 was -6.2%, despite holding great companies like Ambev, BHP Billiton, and Rio Rinto PLC. The S&P 500 returned 5.0% over the same period.

    April and May saw the advent of my foray into the world of technical analysis. I picked up some very good books: Murphy's Technical Analysis of the Financial Markets, and Nison's Japanese Candlestick Charting Techniques, 2nd Edition. After reading some odd 1000 pages on technical analysis, I was sure that I knew it all. I made a contract with myself. I decided to test swing trading for a few months to see if I could do it profitably. After two months of trading mid-day and [literally] losing sleep over this, I decided that I needed to revert to stock picking. This approach was simply too time-consuming and stressful. I was swing trading the only 3x leveraged index ETFs that I could find with decent liquidity: UPRO and SPXU. These track the S&P 500 index. They were so volatile and I was so hung up on it that I was becoming obsessed with trading instead of continuing to learn about investing. I was putting all of my money into one of these two at any one time. This led to a long string of losses, and was roughly equitable to gambling. The second quarter got me back to my starting point for the year with a 9.2% return, primarily due to a large and very profitable investment in Dyncorp international before its buyout by Bucyrus at a 55% premium. I returned 9.2% in the second quarter as opposed to the S&P 500’s return of -12.4%. This was primarily due to the Dyncorp position and that I shorted the market down in May

    I kicked off my return to stock-picking during the summer doldrums. I began looking for perfect growth stocks, and found 5 [according to my highly quantitative screens]: PCLN, CTRP, INFY, BIDU, and LPHI. After looking at the technicals, I decided on two: LPHI and PCLN. I placed stops, and let these two positions sit. After a little while I realized the problems with LPHI, and got stopped out of it. PCLN was a winner. I bought at the bottom, around $180, right after the volcanic eruption crushed trans-Atlantic travel, and consequently the PCLN share price. [The price had come to $180 from $280] This is when; once again, I started to screw up. I continually moved up my stop order, and sold PCLN at $280. For anyone who hasn't followed its magnificent ride up since July, it is currently trading around $430. I made 60%, but I should have made double that.

    This is where my philosophy of when to sell comes in, or in this case, it doesn't. I have developed an investment style that isn't compatible with many of the sell [for a profit] rules that I have heard. I would love to have a conversation on sell rules with anyone interested.

    The third and fourth quarter’s booming overall stock market helped me have a much more profitable second half of 2010. My third quarter holdings still moved around a lot. I bought and sold UPRO three times, and lost all three, with an average return of -6.9%. Through this capital shuffling, I did have some winners. I should have held on to Atwood Oceanics for a 50% gain, but instead I moved my money into American Pacific for a 25% gain.

    Starting in September I began keeping a trade log with the following information: Date, Buy or sell, Ticker, Reason for buy or sell, and one last, very important one. For buying I would write a possible risk-to-reward projection based on my stop order [on the downside] and technical analysis [on the upside]. For sell orders I would write my actual realized return on the trade. This showed me just how many trades I made in September. This was a major reality check, and it was the backdrop to the fourth quarter. In the fourth quarter I brought my trading to the lowest level of the year.

    1st Quarter: 32 trades

    2nd Quarter: 22 trades

    3rd Quarter: 23 trades

    4th Quarter: 13 trades

    I also made each one of these trades more profitable, and I knew more about each company I was buying. This led to my best overall return of any quarter in 2010, at 22.8%. The S&P 500 return during the 4th quarter was 10.3% in comparison.

    I made a lot of improvements in 2010. 2011 will provide a great avenue to put these and more new ideas and rules into effect. I plan to continue with the stop-loss order rules and trade log that I adopted in 2010. I’m shooting for a drastic reduction in trading: around 90%. My goal for 2011 is less than 15 trades. I want to use the time that this lack of trading will create to really learn about my companies. I have published reports on Navigant Consulting and GMX Resources, and I plan to publish one on NRG Energy in the coming weeks. I plan to follow company releases and I will be writing about them as I see fit. 2010 was rough, and I came out on top with prudence and luck. 2011 should be much better assuming that the overall market continues its steady ride. 

    Disclosure: I am long NCI, NRG, GMXR.
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Comments (3)
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  • valuearb
    , contributor
    Comments (12) | Send Message
     
    Ok, I read it. You are a technical/swing trader who is too impatient to succeed as a value investor. That's fine, and I wish you luck with that approach. BTW, I'm a full time value investor and I have at least 30 trades a week, value is not incompatible with trading, most of my ideas are transactional in nature (mergers, aquisitions, recapitalizations, etc). But it's totally incompatible with stop-losses, you don't buy something at $5 thinking it's worth $10 and then dumping it at $4.50, you buy more.

     

    But if I were you I'd focus more on reading about trading and less about reading about Buffett, because you didn't get it the first time and his philosophy is not compatible with your desires to gamble.
    12 Jan 2011, 10:46 AM Reply Like
  • Charlie Anderson
    , contributor
    Comments (86) | Send Message
     
    Author’s reply » I would like to encourage you to be cordial. Just because this is over the internet doesn't justify being rude. If you read the entire article, I noted my emphasis on cutting down on trading and short-term technical analysis throughout 2010, and my commitment to continue this into 2011 and beyond.
    12 Jan 2011, 11:08 AM Reply Like
  • valuearb
    , contributor
    Comments (12) | Send Message
     
    I'm sorry if you found my comments rude, I was only being honest. If you want to continue to write your blog, steel yourself, because my comments have been extremely mild compared to what others often post.

     

    But I'm trying to educate you. Value works a specific way, when you try to ignore IV to meld in other approaches, you lose the benefits of the value approach. Stop-losses, TA, etc, are anti-Value investing tools. You should read all of Buffett's shareholder letters and see if helps you better understand what value really is, because again, I don't think you understand what Buffett is doing if you don't understand these basic concepts.
    13 Jan 2011, 11:23 AM Reply Like
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