Only Five Stocks to Watch

Inspiration
Our strategy is largely inspired by the approach of John Maynard Keynes and, to some degree, of Mark Shipman.

 Strategy
We hold only a small number of shares at any time. We buy shares that ar rising, and sell when they start to fall. If we get a tip about a share that is going to sparkle, we keep watch on it, and invest when the sparkle is well established. If it is not rising, we don’t buy. This way we aim to hold a portfolio that is always performing.

Rising means on an upwards-trend. Falling means on a downwards trend.

Of course, as well as trending up or down (or not trending), a security will also swing up and down within the trend parameters. We judge where the trend paramaters are by drawing a Resistance Line joining all the peaks and a Support Line joining all the bottoms. When a security hits the Resistance Line, we often reduce our holding, and increase our holding again when it bounces off the Support Line.

When a share crashes through the Resistance Line, or, more importantly, the Support Line, the alarm bells sound. Sometimes, the event only stretches the Line, but when it is clear that the Support Line is truly breached, we sell.

Keynes

Keynes had an exceptional career as economist and Government adviser. He was the first economist to become a best-seller. However, his greatest fortune was accumulated by trading in shares and forex.

Unlike his forebears, who invested in a wide basket of shares as an insurance against the occasional failure, Keynes limited his investment to a small number of shares. These he watched and traded in and out as the price rose and fell. Early in his career, he borrowed money from parents, relatives and friends to start off an investment fund. This fund was wiped out, but he went back to his relatives and friends again to set up a second fund, which was extremely successful.

By holding only a small number of shares, it is easy to keep watch on their progress and dispose of any share that starts to fall, before too great a loss is suffered. Similarly, one can buy back in when the share starts to rise again.

In Keynes’ day, trading was done through brokers, with rather hefty fees. Dealing in small quantities of shares was not economical. Now, however, with automated exchanges and brokers, an account can be started with a few hundred dollars.

Shipman

Mark Shipman, in his book Big Money, Little Effort presents a strategy for determining when a share (or a market) is beginning to take off and when it is heading into a decline. Shipman was the first Brit to start a Hedge Fund; he was an extremely successful adviser and fund manager, until he decided to retire and spend his days on a yacht in the Mediteranean. Well, he says he could easily manage his Hedge Funds and give advise from his yacht, only that his clients would expect him to be in an office from 9 to 5.

In his yacht, he plugs in his laptop once a week, on Saturdays, and looks at the markets. It takes him an hour to do his trading, placing his orders for opening on Monday morning. He doesn’t look up prices on any other day, so as not to be influenced by the “noise” that besets the market as speculators try to make a short-term profit. He goes for a long term, or investment, strategy, rather than a trading strategy, which means he sets out to judge the general trends rather than the day-to-day fluctuations. He uses two Moving Averages (One longer and one shorter-term) to judge when a trend is starting and ending.

He strongly distrusts human judgement, and recommends that one always uses a system. The system described in the book is suitable for an Investment Approach. A trading approach would use shorter-term indicators.

As for keeping a balance, instead of selecting a basket of shares, he trusts the fund managers to do the selection for him, and investes in Exchange-Traded Funds (ETFs).