An overview of my trading philosophy and style

2012-03-18T17:32:00.000-07:00

Financial markets, in some form or another, have existed since at least the second millennium BC, and it is almost certain that humans have spent just as long attempting to develop strategies to profit from these exchanges. The most successful were and are often the most innovative. One popular story is that of a wealthy Japanese rice trader in the 18th century, who hired messengers and literally lined them up at predetermined distances from his home, for the sole purpose of relaying price information as quickly as possible from far away rice exchanges. Having gained this advantage of speed, he utilized candlestick charting to trade rice futures, amassing huge fortunes. 300 years later, his modern day counterparts at cutting edge hedge funds and investment banks attempt to place their computer servers as physically close to the major stock exchanges as possible, hoping to receive price information milliseconds earlier than their competitors. As long as financial markets exist, the race to find innovative new strategies will never end.

Wall Street likes to categorize things into neat little groups, and trading/investment strategies are no exception. Growth or value? Technicals or fundamentals? Top-down or bottom-up? Day trade or buy and hold? The cookie cutter classifications are endless, and are unnecessarily restrictive. Every participant in the financial markets must have his or her own unique philosophy and style, and it is often the ones who attempt to mimic a successful trader verbatim who fail. I personally follow a blend of styles, and integrate the benefits of a number of strategies to improve my chances of making successful trades and investments. I'll give a basic outline of how I generally approach the markets, and delve into each facet in later posts.

The only way a stock price moves up

In general, the view I take of financial markets boils down to the two factors that ultimately determine price in any markets -- supply and demand. This basic tenet of economics is the ONLY factor that drives prices. The fundamental traders will perhaps argue that earnings determine price, or maybe valuations. Technical traders might say that prices fluctuate based on overbought and oversold indicators. In actuality, both are wrong. Those factors might indirectly influence the supply and demand balance of a stock price, but when all those inputs are taken into consideration, if more buyers are demanding more shares of stock than sellers are supplying, the price will go up. It's as simple as that. Traders and investors often overlook this simple fact, and over complicate their strategies with factors that have nothing to do with this basic market mechanism. I cannot stress enough how important it is to never lose sight of the basic principles of supply and demand, and I ensure that every step of my trade and investment analysis considers this.

I believe that a multifaceted strategy works best, and split my portfolio into three parts. The largest portion is dedicated to swing trading. I strongly feel that the best way to maximize gains while minimizing risk in the stock market is to gauge the short term trend of the supply and demand levels of a stock, which is one of the few concepts of inefficiencies proven by academics to exist in the stock market. The next biggest part of my portfolio is investing in leading growth stocks while shorting laggards. Picked through fundamentals and entered through technicals, effective growth stock picking adds a very strong intermediate to long term edge to any portfolio, and shorting fundamentally and technically weak stocks provides an effective hedge, as well as profitability during downturns. The third and final part of my portfolio deals with plays on macroeconomic events and cycles. This could mean a short term play on an oil during unrest in the Middle East, for example, or simply rotating through sector leading stocks during the business cycle. While I may not diversify much within each portfolio category, I do diversify across strategies. However, there are few enough strategies that I can sufficiently focus on each, without "diworsifying," as Peter Lynch would say.

I can affirm that both a top-down and bottom-up approach to stock selection can coexist effectively, although I typically begin with the former. The way I see it, if you can gauge the state of the global and domestic economy, you can figure out which markets to trade. If you know which markets to trade, you can tell which sectors to avoid and which to be in. If you know which sectors to trade, you can narrow down your universe of stocks to only those with the fundamentals you desire. Once you have your fundamentally strongest (or weakest) stocks in your strongest (or weakest) sectors, you can analyze the technicals and determine whether to take a position or not. Of course, that's a gross oversimplification of how I find stocks, but it does give the basic thought process. The following flow chart effectively sums up my basic stock selection process.

Introduction and a little about myself

2012-03-16T00:12:00.001-07:00

Hey everyone, thanks for checking out this blog. I'm assuming readers are either stock market traders, or just casual financial enthusiasts interested in the analysis and strategies of stock market speculation. In either case, you've come to the right place. I want this blog to not only be just me rambling on about the aspects of stock market strategy that I find interesting, but rather what THE READER finds interesting as well. By offering comments and suggestions, I can cater these discussions to topics that everyone can enjoy and benefit from.

So a little about myself...

Me.

I'm Irfan. I'm a senior economics major and actuarial mathematics minor at the University of Maryland. My goal in life is to become a successful fund manager, and influence the world in a beneficial way through philanthropic means. Economics fascinates me in how it can use quantitative methods to analyze virtually any aspect of the world, from markets to human behavior to football to sex. To me, being able to quantify and explain virtually any phenomena with numbers is so practical and effective. I was an assistant football coach at a local high school a couple of seasons ago, and utilized economic and mathematical reasoning quite frequently, using game theory and historical data to help the head coach optimize his playcalling. With that being said, I really cannot blame anyone who at this point thinks I'm a total nerd.

My interest in the stock market is actually relatively new. I've always liked economics, but financial markets just seemed boring to me. My dad would try to get me interested in the stock market, but I never gave it a chance. During the 2008-2009 financial meltdown, I would watch CNN in my dorm room and note the ever decreasing Dow Jones Industrials Average at the bottom of the screen, but never understood what it actually meant. However, a couple of years ago, my dad gave it one last shot, and asked me to research this investment strategy for his portfolio. I delved into some research halfheartedly, but after a few days, I was absolutely hooked. For the past two years I have read every book on investing and trading that I could get my hands on, watched CNBC and Bloomberg virtually every day, and have had a borderline obsession with understanding how the market operates and how to profit from it. I began investing a bit of real money in the summer of 2010, and applied the principles and strategies I had learned. I impressed my dad enough for him to let me manage some of his money, and now becoming involved in financial markets has become my career goal.

As for what to expect from this blog, I plan on exploring trading/investment strategies, useful research tools, as well as sharing some of my own analyses of particular stocks. What you won't find on this blog are silly promotional articles about some "magical trading system that will guarantee 300% profits a week" or anything like that. I'm not trying to sell anything. I'm not trying to push my own investment beliefs on anyone. I simply want to talk stocks, throw ideas around, and hopefully unveil opportunities for readers to make some money! I'll discuss my own philosophies and strategies in my next post, as well as my take on the many methods of playing the stock market. Enjoy this bull market in the meantime!

Shrewd Speculation

An overview of my trading philosophy and style

Introduction and a little about myself