Everyone is different in our circumstances, risk appetites, temperaments, emotions, preferences, needs, priorities, goals, levels of understanding and experience in finance, investment, and money management. Everyone invests and trades differently. Even within the same approaches, there are differences. Investors use discounted cash flows but they have different assumptions and projections, resulting in widely different results. Others use different signals and indicators for their charts and have different interpretations. What works for someone may not be preferred by another. Hence, we can see many buyers and sellers at different prices for the same stock on every trading day. We are all different.
Every great investor/trader is different too. They can have very different strategies and principles with different views and approaches. There are mistakes (definitely). In the long term, they get through and become successful. There are far too many nuances in the field. Hence, there are many ways to succeed in investing/trading, unlike most other professions.
We need to learn from these great investors and develop our reasonably simple and consistent investment strategies. These should work well over time. We need to adhere to them through good times and bad. Over time, as we learn more, we will adjust and pivot our strategy.
I have no control over my returns I have full control over my investing process If I focus on my investing process, I’m confident that good returns will follow.
Brian Feroldi
Know what you own, and know why you own it.
Peter Lynch
A trading/investing strategy is all about answering these six questions:
- What to buy?
- What price to buy?
- How much to buy?
- What to sell?
- What price to sell?
- How much to sell?
Everyone has different answers to the above six questions so will be great investors. If we are unsure of our plan or follow others blindly, we will be confused, lost and stressed when the market situation takes unexpected downturns.
Everybody has a plan until they get punched in the mouth.
Mike Tyson
Hence, we have our different approaches. The litmus test is: Are we able to consistently make money with our approaches?
Strategy is personal.
Personal finance is more personal than it is finance.
Tim Maurer
Knowing yourself is the beginning of all wisdom.
Aristotle
Our investing/trading strategy does not mean that it has to be the best, most profitable or the holy grail. Rather, it is one that suits us personally.
Academic finance, explained by Morgan Housel, is devoted to finding mathematically optimal investment strategies. There are rational financial approaches to making money through formula and spreadsheet computations. Academic finance may assume that we have no feel for a roller coaster ride (i.e. volatility) that may result in temporary unrealized losses, especially in a longer time frame. We have feelings and may not be able to act rationally like robots that the calculations and approaches require us to be. We may simplify and adapt to our personal preferences so long as it works comfortably and is reasonable for us to achieve our financial objectives.
As retail investors, we may start investing/trading with limited education, experience and knowledge compared to the professionals. We need to find our circle of competence and develop our edge.
- We have different definitions of cheap and good. Some define using Price to Earnings and Price to Book. Some look at how early is the adoption, revenue growth, cash flow and cash position; hoping to identify the next Amazon.
- We have different personal preferences. Some may like Apple and be confident of their sustaining growth; some may not. The same applies to many consumer brands.
- There are many ways to make money. Some look at chart indicators and buy when the market is oversold. Some may buy based on financial ratios.
The litmus test of our strategy: When the market is crashing, are we able to sleep well and feel okay? It should be an investing strategy that (a) we are comfortable with, (b) is aligned with our lives and (c) able to generate returns we are okay with over the long term. We also need to be comfortable with what we have missed – stocks we did not buy or sell too early that they rallied. We cannot win all the time, our strategy is unable to catch all the opportunities correctly. Hence, we should not be greedy and regretful. Develop the confidence and stay focused.
It is difficult to follow/tailgate others (especially during volatile market conditions). Instead, it is more of learning from others and seeking to incorporate them into our strategy and lifestyle than following others in blind faith.
The exhibit below is a simplified approach to classify our approach(es): what type of stocks and preferred holding period. Other factors to consider would be the countries and industries to focus on. Each coordinate has a different mindset, preference, strategies and skills to succeed. It is good to focus and develop the necessary skills.
Be aware of the differences
Below are the general differences between traders and investors. Being aware of the differences helps to understand the contexts of others’ viewpoints as both groups look at the market in their different approaches to making money.
| Traders | Investors | |
| What do they buy and sell | News, sentiment and price charts with technical analysis | Growth companies Undervalued stocks Income stocks |
| What do they read? How do they evaluate? | Study the companies based on qualitative and quantitative criteria to determine their valuation Depending on whether they are value, growth, macro and/or income investors. | Asset categories |
| Holding period | Shorter time frame Within a day, days and weeks | Longer time frame Months and years |
| Instruments | Stocks, futures, options, Contracts for Difference (CFD) | Stocks, ETFs, REITs |
| What do stocks mean to them? | Commodities, forex, indices and equities | Equities |
| Types of trades | Long and short | Long |
| Use of leverage | Futures, options, margins, Contract for Difference (CFD) | No leverage |
| Short-term, opportunistic, sentiment/news-driven based on charts their base | Ticker symbols Traders know little about what businesses these stocks involved in | Akin to owning part of the business; investors can have deep knowledge of the business and industry/value chain depending on their portfolio allocation and experience |
| What do they think? | More than 20% to multi-baggers, dividends depending on the types of investors (value, growth or dividends) | Long-term; follow quarterly/annual reporting Use pullbacks and corrections to add |
| When to buy? | Chart signals based on their technical analysis (such as oversold, hit support, break resistance, hit a certain moving average) | Undervalued with good margins of safety |
| When to sell? | Chart signals based on their technical analysis and stop-loss (an important aspect of trading) | Overvalued or investing thesis proven wrong, not valid/weaken |
| Expected returns | A few percentages | More than 20% to multibaggers, dividends depending on the types of investors (value, growth or dividends) |
Everyone can be different and make money.
Focused, keep learning and improving; be ourselves
Where focus goes, the energy goes.
Tony Robbins
An investing/trading strategy allows us to focus, especially during corrections and bear markets. We also need to hone our skillset and keep improving — compound our skills, compound our returns.
There are mainstream news, commentaries and views. There are views from social media (YouTube / TikTok videos, Twitter, blogs and forums) and friends on the daily market actions and market-affecting events. We can lose our focus and confidence if we are affected by their views and comments. We have to evaluate whether these views are wrong or valid perspectives that we overlook which we should learn.
It is impossible to produce superior performance unless you do something different from the majority.
Sir John Templeton
In investing/trading, there are many uncontrollable. What we can do is control what we can: focus on our strategy and behaviours. We need to stay disciplined by sticking to our strategies through the different market conditions. We wait and bid our time to buy and sell as we follow our investing/trading strategy.
Michael Lipper, the president of an investment firm called Lipper Advisory Services, once remarked that Templeton, George Soros, and Warren Buffett shared one invaluable characteristic: “the willingness to be lonely, the willingness to take a position that others don’t think is too bright”. They have an inner conviction that a lot of people do not have.”
The book by William Green, Richer, Wiser, Happier
This is important when the market fills with fear and greed and disagrees with us. It means periods of waiting patiently and holding tight uneasily.
We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.
Warren Buffett
Have conviction and be independent.
Keep it simple; stay humble and do not be a hubris
The simplicity that lies on the other side of complexity
Complexity can be a particularly seductive trap for clever people. Intelligent people are easily seduced by complexity while underestimating the importance of simple ideas that carry tremendous weight. (Richer, Wiser, Happier by William Green)
Buffett himself is a grandmaster of simplification. Writing to his shareholders in 1977, he laid out his four criteria for selecting any stock: “We want the business to be (1) one that we can understand, (2) with favourable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.” These may not strike you as earth-shattering secrets. But it’s hard to beat this distillation of eternal truths about what makes a stock desirable. More than forty years have passed, yet Buffett’s four filters remain as relevant and useful as ever. (Richer, Wiser, Happier by William Green)
In our education and work, complexity tends to show our knowledge, experience and expertise. Many retail investors/traders would look for holy grails and try to “synergise” the strategies of various gurus. The result is a strategy that we get confused about and are not confident of during highly volatile periods.
Focus and simplicity…. once you get there, you can move mountains.
Steve Jobs
Strong opinions, weakly (or loosely) held
It is an expression describing a framework developed by technology forecaster and Stanford University professor Paul Saffo. He described the process as:
“Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the ‘strong opinion’ part. Then –and this is the ‘weakly held’ part– prove yourself wrong. Engage in creative doubt. Look for information that doesn’t fit or indicators that point in an entirely different direction. Eventually, your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.”
It is a useful default perspective to adopt in the face of any issue fraught with high levels of uncertainty, whether one is venturing into a forecast or not. It is about the ability to embrace the power of definiteness and the power of openness concurrently. And when you act, you cannot be of two minds. You have to commit and proceed boldly. But to understand the world, you have to constantly learn, adapt, and grow, which implies shifting direction.
The illiterate of the 21st century will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.
Alvin Toffler
Marc Andreessen, the co-founder of Netscape and venture capital firm, Andreessen Horowitz, is often associated with the term. Being a venture capitalist, he is always looking for start-ups with great business ideas that oppose conventional wisdom. These can be very hard to execute and entrepreneurs must have strong convictions because of the very big bet of time or money or both. However, as the world changes, how will they react? There are always companies with innovative products and business models trying to create a new S curve and disrupt the incumbents.
Do have your side mirrors.
Do talk to other investors and traders. We can post and chat with others on social media.
They help to validate the possible biases and echo chambers that we may have with what we invest and what we do not invest.
Be open-minded and humble. Have conviction with flexibility. Be prepared to change and pivot.
Master inner game; steadying our emotions
Financial success requires two things: Mastering our mindset and perfecting our skills. An important tenet of a well-defined strategy is to stay focused and keep emotions at bay.
Mastering the mindset has two key aspects: (1) what we have invested and (2) what we did not invest. We will not be able to invest in ALL the right stocks and the stocks we invested in will only go up. It is too easy to have emotional swings and commit many cognitive biases that affect our trades and performance. Especially during (huge) rallies and plunges, it is too easy to have our emotions sabotage us and make us act on impulse. A strategy aims to steady our emotions.
Keep validating our strategy and improving it: Compound our skills, compound our returns
How do we know we have the right investing/trading strategy? Have an investing journal if we are serious about investing and trading.
We can know how good our strategy is and how consistent we are applying the strategy as we track our transactions and performance. It allows us to experiment and examine our strategies through the quality of every decision made in different market conditions.
Start small to get it right. It is more important to validate the strategy than to start big with the intent to profit. Start small, fail small (and not get wrecked), iterate to get it right and slowly scale up.
Starting the investing journal has been my game-changer. You can read in detail in my article: One thing I do that transforms my investment/trading journey.
Always work in progress and compound our skills
It takes time to develop the strategy, validate it across different and evolving market conditions and keep improving it. Our investing/trading strategy is always work-in-progress.
As we develop and improve our strategy, we realise we need to know how to manage our emotions, hone our focus and discipline and learn and act to think independently. We must also learn what not to do and what not to repeat (especially stupid) mistakes.
Great things are done by a series of small things brought together.
Vincent Van Gogh
As we want to compound returns with our strategy, we need to develop and compound by strengthening our convictions and beliefs, managing our emotions and habits and reducing our silly mistakes. Slowly and steadily, as we improve our convictions, beliefs and habits and adjust our strategy, success will follow.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
Charlie Munger
It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements.
Sir David Brailsford who coins the concept of Aggregation of Marginal Gains
It takes effort to keep learning and improving.
