Rolling Stocks Investment Strategy, Discussion Notes



This document was produced to help the club members think about their requirements for the club's Investment Strategy





What do you want to achieve from the investment club? Is the priority to build capital, learn, have fun, or something else?


Whilst the aims can be complimentary, they may not always be so. For instance if learning is the primary objective then we may wish to trade frequently. If it were to have fun then perhaps we would want to take on high levels of risk. Both of these might result in less capital gain (or losses!) than a strategy focussed purely on making money.






Over what timeframe should investments be held?


The envisaged holding period determines the sort of market move we are looking to exploit. This can vary from market noise traded by daytraders; swing trading (days to a few weeks); intermediate moves (weeks to months); up to very long term moves that might last for one or more years (e.g. the FTSE appears to be at the end of a near 20 year bull market!).


If we assume that most decisions will be taken at the monthly meetings then this implies that we must expect our investments to be held for at least one month. But are we looking for intermediate or long term gains?




Type of Analysis


What form(s) of analysis should we use to determine how to buy and sell shares? E.g. Fundamental, technical, mechanical, a combination, or something else.


Within each of the above broad categories there are further subdivisions on which we may wish to concentrate. For example, fundamental analysis primarily breaks down into ‘value’ and ‘growth’. Value might be determined by a set of filters. Growth might make use of techniques such as discounted cash flow.




Type of Trading


What will we trade? E.g. shares, warrants, options, indices, other derivatives.


So far we have concentrated on shares with one excursion into warrants. Do we wish to consider more speculative vehicles that may also allow us to profit from a falling market?




Money Management


What percentage of capital should be invested in a single company? What percentage should be invested in a single sector? What stop losses should be used?


This is closely related to the following subject and both are aimed at minimising the risk of suffering large losses.



Risk Control


How much are we prepared to lose on a single investment? What can be done to minimise risks such as market announcements?


If we decide beforehand the maximum amount we are prepared to lose then we can use this as an unemotional trigger to avoid taking large losses if we get things wrong.


Do we wish to buy shares when we know that a major announcement (e.g. results) will be announced shortly? Likewise, do we wish to close positions before results are announced when we are unsure of how positive they may be?




Entry Strategy


What are the criteria to use for buying shares?


This will largely be based on the type of analysis we use and will largely be covered by that section. However, it would be advantageous to have a set of criteria that if matched would indicate a buy or, perhaps better, if the criteria are not met then we would only buy in exceptional circumstances.




Exit Strategy


What are the criteria to use for selling shares? Do we want a stop loss system? Do we want it to be strict or flexible?


In many ways this is the most important of the points to consider. And it’s one that we are all aware that we are not too hot on! I am convinced that it is something that we should ensure is agreed at the time we make a purchase.


Again, the criteria will depend to a large extent on the analysis method.


Any stop loss should be based on the expected holding period – the longer the period, the larger the stop loss should be. We might wish to also consider a trailing stop loss as separate to a ‘we really don’t want to lose too much on this share’ one. For example, if a share rises by more than a certain amount we could impose a reasonably tight stop loss and automatically sell a proportion of the holding if it is breached.