Trading Strategy!!

Name of the game is discipline, discipline and more discipline!! Basically if you change your rules in the middle of the game you will tend to suffer. So basically formulate the rules and stick with it.

How to select stocks to follow?
Basically qualify your stocks based on your investment philosophy. Once they meet all thier criteria put them in your watch list.


When to buy?
Have artificial buy in price for each stock. Say a stock is trading at $5.25, make a rule that you accumulate the stock if it falls below $5.



How to buy?
If you have a large amount to invest, donot invest all your money on a freefalling stock. Initial buy should be 50% of your funds allocated, then as the stock falls futher average down in increments of 25%. Keep averaging down even monthly as long as stock is below the pivot point you assigned in the previous step.
Once the stock goes above the pivot point let it run, donot ever chase stocks.

Diversification?
You build diversification over time and not concurrently. As you establish positions in stocks, once they go above your pivot point you need to start investing in other stocks. Thus over a period of time you will have positions in many stocks. Recommended to have optimal diversifications of 3 stocks at a time.





When to sell?
1. Atleast give a stock a year to give you good returns. Never sell before a calendar year because it takes time to turn around something.
2. Sell if you attain or exceed fair market value, Rule 1 precedes this rule.
3. Never sell already established positions because you found something undervalued. Every position you take need to be built up from the ground up. Once a position is built it must be held for atleast 1 year.

Investment Philosophy

There are three aspects to my investment philosophy-
1. One is Qualitative analysis spearheaded Phil Fischer who wrote the book Common Stocks UnCommon Profits.
2. Second one Quantitative Analysis spearheaded by Benjamin Graham who wrote the book Security analysis.
3. Timing your buys to coincide with some unforeseen event business is gone through.

Even though a lot of people believe that WarrenBuffet follows 85% Graham and 25% Fischer, I think they got it reverse Buffet believes in Qualitative analysis lot more than Quantitative one.

Quantitavive Analysis
1. Make Enterprise Value/Revenues is selling at a discount to its peers. So if a stock trades at ev/r=0.3 then we need to have its peer trading at 1. One of the most common mistakes is to buy a ev/r=0.3 for a commodity business if gross margin is 20% . If gross margin is 50% then ev/r=1 is fair value.
2. MAke sure you understand working capital of the company. If Working capital is half of marketcap then we are close to the bottom.
3. Dodd&Grham formula Fair value = 1*cash+0.8*A.R+0.66*inventory+0.1*fixed assets - 1 * Liabilities.


Qualitative Analysis
1. First totally understand the competition. Basically competetive structure will tell you lot about the whether to invest in a business.
2. Identify whether there are any competitive advantages for this business.

3. Timing

There could be lot of great businesses but buying it at the right time makes for great investment return. So basically wait for a bad news or a earnings miss and buy into the selloff.

Do you prefer any stock with any price?
Prefer stocks which are below $5 than ones which are highly priced. Obviously this is not a hard and fast rule because share price is nothing to do with its value. But more shares you have will improve your investment return. Also lot of investors donot like stocks under $5 so these stocks can be artificially depressed.