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Investment strategy
Dian
Posted: 13 June 2018 06:17:23(UTC)
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Lately, I am thinking about buying stocks when they are very bearish or out of favor and avoid them when they become overcrowded and very active to minimize risk involve in markets. I found, buying quality companies punished by the market is safer than buying them when everybody is chasing them. I also would like to keep an eye on 52 weeks low stocks than 52 week high stock as well. From now onwards I would like to stay away from current glamour stocks. I will buy any quality company which meets my criteria on the basis of value and growth after doing some careful study to avoid mistakes that I have been making in markets. For more safety I would like to buy stocks before I see research reports. In short, I like fundamentally sound attractive bearish stocks.

What do you think about my strategy? Thanks.
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Sara G on 13/06/2018(UTC), Mr Helpful on 13/06/2018(UTC)
Sara G
Posted: 13 June 2018 07:49:58(UTC)
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I think that's a sound strategy, Dian, so long as the company prospects and fundamentals are still intact. I do think there is a place for 'glamour' stocks, though, so long as they are bought either on temporary weakness (as happened with facebook earlier this year) or where the company is smaller with strong growth prospects that may not be fully reflected in the price. I have 3 strands in my share pf currently:

1. Out-of-favour sectors (telecoms, oil & gas - although the latter has been recovering of late)
2. Oversold companies (the sudden drops that have occurred recently on bad news, as was the case with ALFA, SOLI)
3. Strong future prospects that mean the current sp represents good or fair value (I've just bought PTEC and BGO* on that basis and already hold PRSM. PRU also fits into that category although is clearly a very different company)

* thanks to Chris Ould and Jeff Liddiard for highlighting this one. Good piece of news today regarding deal with Entel Chile.

I'm currently reading 'Invest like a Guru' as recommended by King Lodos... the author emphasises only buying good companies, whatever the circumstances. There is a good section on the need to avoid 'turnarounds' that are never going to turn.
8 users thanked Sara G for this post.
King Lodos on 13/06/2018(UTC), Dian on 13/06/2018(UTC), Mike L on 13/06/2018(UTC), Jeff Liddiard on 13/06/2018(UTC), john_r on 13/06/2018(UTC), Keith Hilton on 13/06/2018(UTC), kWIKSAVE on 13/06/2018(UTC), mcminvest on 15/06/2018(UTC)
King Lodos
Posted: 13 June 2018 08:12:21(UTC)
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I'm glad you're reading that one .. The author, Charlie Tian, is such a pragmatist, and you won't find many people more immersed in research .. Some of the things in there that have been completely new to me.

I'm starting to see Facebook more as a long-term bet .. I'm starting to see its moat as pretty wide.

Re: the strategy .. I'd be cautious on 'swing trading' .. I don't think the market presents great opportunities very often .. You really need a crash of some sort .. The bargains for a fundamentals-based investor are down to the market not seeing the full potential in something – even if the price has been rising: maybe it's not been rising enough? Prices are useful for traders; but valuations tell you what you're buying



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Sara G on 13/06/2018(UTC), Jeff Liddiard on 13/06/2018(UTC)
Tom Bards
Posted: 13 June 2018 08:32:09(UTC)
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Sara G;63791 wrote:
I think that's a sound strategy, Dian, so long as the company prospects and fundamentals are still intact. I do think there is a place for 'glamour' stocks, though, so long as they are bought either on temporary weakness (as happened with facebook earlier this year) or where the company is smaller with strong growth prospects that may not be fully reflected in the price. I have 3 strands in my share pf currently:

1. Out-of-favour sectors (telecoms, oil & gas - although the latter has been recovering of late)
2. Oversold companies (the sudden drops that have occurred recently on bad news, as was the case with ALFA, SOLI)
3. Strong future prospects that mean the current sp represents good or fair value (I've just bought PTEC and BGO* on that basis and already hold PRSM. PRU also fits into that category although is clearly a very different company)

* thanks to Chris Ould and Jeff Liddiard for highlighting this one. Good piece of news today regarding deal with Entel Chile.

I'm currently reading 'Invest like a Guru' as recommended by King Lodos... the author emphasises only buying good companies, whatever the circumstances. There is a good section on the need to avoid 'turnarounds' that are never going to turn.



I have read the book also and this isn't really correct, he emphasises buying good companies, yes, but also reiterates the fact multiple times that if you buy these companies at increased valuations that it will seriously affect future returns. That it why he spends a lot of time on fair price valuation.

Furthermore, his standard for what qualifies as a 'good company' is very high. Cyclicals don't qualify, companies with no track record of at least 10 years also do not qualify (ie PRSM).
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Mike L on 13/06/2018(UTC)
King Lodos
Posted: 13 June 2018 08:45:47(UTC)
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My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns
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Jeff Liddiard on 13/06/2018(UTC), Jenki on 16/06/2018(UTC)
Tom Bards
Posted: 13 June 2018 09:19:53(UTC)
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King Lodos;63795 wrote:
My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns


My thoughts exactly and that is why Invest Like a Guru is such a valuable book because it lays out exactly how to go about identifying that 25%.
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King Lodos on 13/06/2018(UTC), Jeff Liddiard on 13/06/2018(UTC)
7upfree
Posted: 13 June 2018 09:52:48(UTC)
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Dian;63788 wrote:
Lately, I am thinking about buying stocks when they are very bearish or out of favor and avoid them when they become overcrowded and very active to minimize risk involve in markets. I found, buying quality companies punished by the market is safer than buying them when everybody is chasing them. I also would like to keep an eye on 52 weeks low stocks than 52 week high stock as well. From now onwards I would like to stay away from current glamour stocks. I will buy any quality company which meets my criteria on the basis of value and growth after doing some careful study to avoid mistakes that I have been making in markets. For more safety I would like to buy stocks before I see research reports. In short, I like fundamentally sound attractive bearish stocks.

What do you think about my strategy? Thanks.


Many years ago, I had a similar strategy. I bought a PC program called metastock and had a data feed (this was 20 years ago) which was downloaded once a week. It was an expensive business at the time. The system was this:-

1. Look for large cap shares that had halved in value over a 6 month period.

2. Wait for them to retrace 25% of the loss within a further 6 month period.

3. Buy provided they were not kicked out of the FTSE 100 (suvivorship bias was a problem).

It picked a few winners but also left us with some dogs such as M&S, Rentokil, etc. It really needs a subjective analysis as a final filter. Is it a dead cat's bounce or are the fundamentals of the business in tact and has the market simply over-reacted to news?
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Dian on 13/06/2018(UTC)
S_M
Posted: 13 June 2018 10:01:22(UTC)
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King Lodos;63795 wrote:
My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns


Playing devils advocate here, why not. If like me you only allocate around 20-25% of your portfolio to stocks you need to be looking for disruptive companies like PRSM. In my portfolio over the last 20 years it is one of 3 stocks that has given me a 500% plus return. The other two being ARM holdings and Reliance Industries which to date is my only ten bagger although PRSM isn’t that far off now.

Yeah there is a bit of luck, but for me if you aren’t looking or capable of outperforming the indices you might as well give your money to a decent fund manager or just go for a vanguard fund.

Going by your logic KL, Amazon, EBay etc would be overlooked 15 years ago.
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john_r on 13/06/2018(UTC)
Dian
Posted: 13 June 2018 10:05:10(UTC)
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After IPO, Facebook’s stock began crashing and it hit rock bottom at a price of $17.73. What a price to buy when it was so bearish? Those who did some homework grabbed face book stocks from their both hands. I saved some of the following links for my study purpose.

http://blogs.marketwatch...-internet-stocks-slump/

https://venturebeat.com/...es-to-an-all-time-high/

https://www.bloomberg.co...lly-betting-on-facebook

S_M
Posted: 13 June 2018 10:06:39(UTC)
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Dian;63801 wrote:
After IPO, Facebook’s stock began crashing and it hit rock bottom at a price of $17.73. What a price to buy when it was so bearish? Those who did some homework grabbed face book stocks from their both hands. I saved some of the following links for my study purpose.

http://blogs.marketwatch...-internet-stocks-slump/

https://venturebeat.com/...es-to-an-all-time-high/

https://www.bloomberg.co...lly-betting-on-facebook



Arguably the same thing has happened with twitter this year ?
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Dian on 15/06/2018(UTC)
Dian
Posted: 13 June 2018 10:18:18(UTC)
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S_M;63802 wrote:
Dian;63801 wrote:
After IPO, Facebook’s stock began crashing and it hit rock bottom at a price of $17.73. What a price to buy when it was so bearish? Those who did some homework grabbed face book stocks from their both hands. I saved some of the following links for my study purpose.

http://blogs.marketwatch...-internet-stocks-slump/

https://venturebeat.com/...es-to-an-all-time-high/

https://www.bloomberg.co...lly-betting-on-facebook



Arguably the same thing has happened with twitter this year ?

Yes. At some point there could be pullback for tech stocks as well. In other words tech sector is due for correction.
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Peter59 on 13/06/2018(UTC)
Tom Bards
Posted: 13 June 2018 10:26:35(UTC)
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S_M;63800 wrote:
King Lodos;63795 wrote:
My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns


Playing devils advocate here, why not. If like me you only allocate around 20-25% of your portfolio to stocks you need to be looking for disruptive companies like PRSM. In my portfolio over the last 20 years it is one of 3 stocks that has given me a 500% plus return. The other two being ARM holdings and Reliance Industries which to date is my only ten bagger although PRSM isn’t that far off now.

Yeah there is a bit of luck, but for me if you aren’t looking or capable of outperforming the indices you might as well give your money to a decent fund manager or just go for a vanguard fund.

Going by your logic KL, Amazon, EBay etc would be overlooked 15 years ago.


The point is that buying good companies with consistent high ROE, increasing EPS etc over long periods does best the market without taking on extra risk. This is backed up by plenty of evidence. By trying to buy potential ten baggers all you are doing is increasing the probability that you will lose money long term. It's that simple. For Amazon, there are 100 companies which looked just as good but failed or lost money over time
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Captain Slugwash on 14/06/2018(UTC), Dian on 15/06/2018(UTC)
S_M
Posted: 13 June 2018 11:08:32(UTC)
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Tom Bards;63804 wrote:
S_M;63800 wrote:
King Lodos;63795 wrote:
My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns


Playing devils advocate here, why not. If like me you only allocate around 20-25% of your portfolio to stocks you need to be looking for disruptive companies like PRSM. In my portfolio over the last 20 years it is one of 3 stocks that has given me a 500% plus return. The other two being ARM holdings and Reliance Industries which to date is my only ten bagger although PRSM isn’t that far off now.

Yeah there is a bit of luck, but for me if you aren’t looking or capable of outperforming the indices you might as well give your money to a decent fund manager or just go for a vanguard fund.

Going by your logic KL, Amazon, EBay etc would be overlooked 15 years ago.


The point is that buying good companies with consistent high ROE, increasing EPS etc over long periods does best the market without taking on extra risk. This is backed up by plenty of evidence. By trying to buy potential ten baggers all you are doing is increasing the probability that you will lose money long term. It's that simple. For Amazon, there are 100 companies which looked just as good but failed or lost money over time


I am not sure I could quote 100 companies that do similar things to Amazon. They have been market leaders for the best part of two decades. I do get where you are coming from, but the key is understanding when you have bought a dud stock and getting out with minimal losses.

Hitting a ten bagger does involve taking on more risk, but you would have to make an awful lot of bad investment decisions for it not to pay off in the long run. Each and every one of us has the ability to find these gems if we look hard enough.

As I said previously, I am heavily weighted towards funds, REITs and ITs at the moment. Stocks are almost a fun side to the portfolio overall. I must be doing something right as since 2011, I am sitting on nearly a 400% return with my stock concentrated portfolio. And that includes holding large amounts in cash at various times, especially before the EU referendum. How much of that is luck over judgement, well that is debateable.
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Dian on 15/06/2018(UTC)
King Lodos
Posted: 13 June 2018 11:50:28(UTC)
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Yeah, if you want really high returns, like Zhang Lei – who's averaged 52% annually – you do need to find 10 and 100-baggers, and you need to bet really big on them .. (in his case, he also has to be in China to find those companies)

From backtests, Quality investing with hindsight and diversification, returns peak at about 20% annually (through full market cycles) .. And if the market return is 7%, then 20% is about what this winners' quarter should be making.


Buffett himself says if he were managing a small portfolio, and could bet big on tiny companies, he'd still be making 50% annually.

They're two different games .. In a sense, what you do with a mini-portfolio is academic, because you're not really taking on full risk .. You've got a huge safety net with only 25% in stocks .. I've been doing the same with my momentum portfolio, which has done 50% annually since I started measuring – but a quarter of 50% annually isn't that much in a bull market.

The question is: could you have 25% of your net worth in PRSM? .. Zhang Lei can do it, but he's not just managing his own money .. Likewise Buffett .. They get paid either way; plus they're already wealthy .. I think when it's your own money, and £10,000 might represent a year of hard saving, I'd worry about the state of mind of someone who'd be willing to put 20-25% of their net worth in an AIM stock
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Keith Cobby on 13/06/2018(UTC), Tim D on 13/06/2018(UTC), Peter59 on 13/06/2018(UTC), Dian on 15/06/2018(UTC)
john_r
Posted: 13 June 2018 12:10:00(UTC)
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..........but don't lose sight of what the indices tell us ....

Over the last 5 years ......
FTSE 100 has risen around 33%
FTSE 250 Mid Caps has risen around 80%
S&P 500 by around 120%
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Dian on 15/06/2018(UTC)
Dan L
Posted: 13 June 2018 12:24:39(UTC)
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Dian;63803 wrote:

Yes. At some point there could be pullback for tech stocks as well. In other words tech sector is due for correction.


It will be interesting to see how this years sector changes affect things. When Alphabet and Facebook leave, the tech sector will be dominated by Apple and Microsoft, with Intel, TSM and Cisco some way behind. I wouldn't say any of those are especially highly priced based on their strong foothold in the industry.

Communication services is the new tech
Tom Bards
Posted: 13 June 2018 12:27:44(UTC)
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S_M;63807 wrote:
Tom Bards;63804 wrote:
S_M;63800 wrote:
King Lodos;63795 wrote:
My take on Quality is you're definitely not trying to find PRSMs .. They may be out there, but I think there tends to be a lot of luck, momentum and following other people into those trades – and that doesn't always work out.

But if you consider 75% of stocks in the S&P500 are going to lose you money eventually, and how hard that benchmark is to beat .. What you're doing in Quality investing is mostly avoiding that 75% of stocks.

Because the 25% that don't fail are producing well over 100% of the market return (considering the losers they cover) .. And I think it's the high proportion of companies that fail that make dividend investing look good on paper (take dividends out the picture, and 75% of your investment won't pay you a penny) .. So if you can do Quality investing well, you really don't need to trade much – just avoid anything excessively expensive .. And if your average stock's going 15-20% a year, it beats trying to find those 200% a year stocks to cover a few 0 or negative returns


Playing devils advocate here, why not. If like me you only allocate around 20-25% of your portfolio to stocks you need to be looking for disruptive companies like PRSM. In my portfolio over the last 20 years it is one of 3 stocks that has given me a 500% plus return. The other two being ARM holdings and Reliance Industries which to date is my only ten bagger although PRSM isn’t that far off now.

Yeah there is a bit of luck, but for me if you aren’t looking or capable of outperforming the indices you might as well give your money to a decent fund manager or just go for a vanguard fund.

Going by your logic KL, Amazon, EBay etc would be overlooked 15 years ago.


The point is that buying good companies with consistent high ROE, increasing EPS etc over long periods does best the market without taking on extra risk. This is backed up by plenty of evidence. By trying to buy potential ten baggers all you are doing is increasing the probability that you will lose money long term. It's that simple. For Amazon, there are 100 companies which looked just as good but failed or lost money over time


I am not sure I could quote 100 companies that do similar things to Amazon. They have been market leaders for the best part of two decades. I do get where you are coming from, but the key is understanding when you have bought a dud stock and getting out with minimal losses.

Hitting a ten bagger does involve taking on more risk, but you would have to make an awful lot of bad investment decisions for it not to pay off in the long run. Each and every one of us has the ability to find these gems if we look hard enough.

As I said previously, I am heavily weighted towards funds, REITs and ITs at the moment. Stocks are almost a fun side to the portfolio overall. I must be doing something right as since 2011, I am sitting on nearly a 400% return with my stock concentrated portfolio. And that includes holding large amounts in cash at various times, especially before the EU referendum. How much of that is luck over judgement, well that is debateable.


What I meant was if you go back 15-20 years, there would have been hundreds of companies with similar growth potential, not necessarily in the same sectors. Obviously we know now that Amazon was a success but there is absolutely no way that 15-20 years ago it would have been a logical decision to put a lot of money into Amazon and if you had it would have been purely lucky.

Congrats to you but the fact that you have done well is fairly meaningless, for every person who has managed to find multi-baggers, there are 1000 that lose money trying to do the same thing. Go on LSE, almost every single small cap has people thinking its going to be the next big multi-bagger, unfortunately the probability is firmly against them.

Yes, by buying quality companies with increasing profits and a long track record you may miss out on the potential 1000%+ stocks but you are also shielding yourself from the probability of losing money while at the same increasing the probability that you will beat the market and without taking on excessive risk. I'm not saying don't take punts now and then, all I'm saying is that you are more likely to lose capital if you try and fill a portfolio with potential multi-baggers.
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Keith Cobby on 13/06/2018(UTC), Jeff Liddiard on 13/06/2018(UTC), Peter59 on 13/06/2018(UTC)
Keith Cobby
Posted: 13 June 2018 12:47:39(UTC)
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Always interesting to read about what other investors are doing. I haven't bothered with individual shares for many years as it absorbs too much time. Better to select IT managers, particularly now that much of the action is off market or in private equity.

My best decision has been to move from value to growth and put a significant proportion of funds with Baillie Gifford.
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Jon Snow on 14/06/2018(UTC), antigricer on 15/06/2018(UTC)
S_M
Posted: 13 June 2018 13:18:08(UTC)
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King Lodos;63808 wrote:
Yeah, if you want really high returns, like Zhang Lei – who's averaged 52% annually – you do need to find 10 and 100-baggers, and you need to bet really big on them .. (in his case, he also has to be in China to find those companies)

From backtests, Quality investing with hindsight and diversification, returns peak at about 20% annually (through full market cycles) .. And if the market return is 7%, then 20% is about what this winners' quarter should be making.


Buffett himself says if he were managing a small portfolio, and could bet big on tiny companies, he'd still be making 50% annually.

They're two different games .. In a sense, what you do with a mini-portfolio is academic, because you're not really taking on full risk .. You've got a huge safety net with only 25% in stocks .. I've been doing the same with my momentum portfolio, which has done 50% annually since I started measuring – but a quarter of 50% annually isn't that much in a bull market.

The question is: could you have 25% of your net worth in PRSM? .. Zhang Lei can do it, but he's not just managing his own money .. Likewise Buffett .. They get paid either way; plus they're already wealthy .. I think when it's your own money, and £10,000 might represent a year of hard saving, I'd worry about the state of mind of someone who'd be willing to put 20-25% of their net worth in an AIM stock


Yes but you are assuming every else stands still which it hasn't.
King Lodos
Posted: 13 June 2018 14:14:58(UTC)
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S_M;63815 wrote:
Yes but you are assuming every else stands still which it hasn't.


No of course not. But it doesn't take much at all to water down those returns – especially how much they compound at – which is the same point I'm making for how much you could actually tolerate in a risky stock.

I've had a third of my portfolio doing 50% annual returns for half of this bull market, but I've not had it compounding at anything like 50%, because otherwise it would've outgrown my portfolio many times over .. So my overall returns have been much more pedestrian (to the point I've had to rethink things this year).

Position size can be 95% of investing .. What's the most you could tolerate in PRSM? Because if it's up 500%, that's a 5% position turning into 30% of your portfolio .. I could invest like that for someone else, or on a demo account, but with my own money: different story.
2 users thanked King Lodos for this post.
john_r on 13/06/2018(UTC), Dian on 15/06/2018(UTC)
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