Stock Portfolio Management: Without It Losses Are Inevitable

The Art of Stock Portfolio Management: The Foundation of Success

Updated March 29, 2024

Without a solid strategy, Loss becomes an unwelcome companion: Tactical Investor

This guide is designed to enhance your trading skills and strategies. As you evolve as a trader, you may find that some of these suggestions become less relevant. That’s perfectly okay; the key is to discover what works best for you.

A valuable strategy to consider is periodically securing some profits. Execute this strategy with composure and deliberation. Set a profit target, perhaps a third or half of your holdings. Begin with a 20% gain goal, but don’t hesitate to set your sights higher, such as 40% or even more. Sell a third of your shares when your stock achieves a 40% gain. It’s as straightforward as that.

Next, always be prepared for those unexpected mouth-watering opportunities! It’s wise to keep some money aside, just in case. For those who play it safe, make sure to have at least 25% of your investments in cash when the market is looking a bit heated. You’ll know this when the monthly charts show that technical indicators, like the MACD, stochastics, and RSI, are in overbought territory. It’s a good idea to start building up your cash until you’ve got a quarter of your holdings in cold, hard cash. That way, you’ll be ready for anything that comes your way.

Crucial Points To Remember

Divide your investments into equal parts and put the same funds into each. Always keep some money aside for unmissable prospects.
When the market is overheated, conservative investors should aim for a cash reserve accounting for 15% to 25% of their portfolio.
Decide on a profit target of at least one-third of your investment, with a preferable goal of half. Stick to this target unwaveringly.
Determine a stop loss of 20% to 30%, with an average of 25%, to set a clear limit on your losses.
Exit the position immediately when this stop loss is triggered; don’t adjust it with the hope of recovery.
If a particular investment doesn’t seem to pay off, decide whether to stay in or sell and switch to another option.
Set achievable goals and refrain from venturing into options until you have a solid grasp of the market. The exception to this rule is selling cash-secured puts and covered calls.

Portfolio Management is discussed in more detail here.

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He who understands the causes of things will do better in a future state of things than he

Integrating Fundamental and Technical Analysis

Fundamental Analysis and Its Limitations

Fundamental analysis is crucial for understanding the intrinsic value of assets. As Montaigne noted, “He who understands the causes of things will do better in a future state of things than he who merely understands the things themselves”. However, when everyone interprets information similarly, it diminishes any competitive advantage. Fundamentals become valuable when combined with mass psychology and technical analysis, using metrics like P/S ratio, short interest ratio, and insider activity when the stock trades below book value during optimistic outlooks.

The Role of Technical Analysis

Technical analysis, the art of discerning market trends through charts and data, is not foolproof as markets constantly shift. Mastering and adjusting techniques can provide a unique perspective, but it should be used with other tools like mass psychology. Many traders cling to standard settings that may not reflect current conditions. Adapting and recalibrating one’s approach is crucial, as Montaigne emphasized the importance of self-awareness and understanding one’s own biases and limitations.

Incorporating Mass Psychology

Understanding mass psychology is key. As Erasmus suggested, “In the land of the blind, the one-eyed man is king,” implying that seeing what others do not provides an advantage. Integrating mass psychology with fundamental and technical analysis helps anticipate market movements and make informed decisions.

Effective Portfolio Management

A well-structured portfolio management plan, including diversification, risk management, and continuous monitoring, is essential for long-term success. As Montaigne noted, “We only labour to stuff the memory and leave the conscience and the understanding unfurnished and void”, emphasizing the importance of wisdom and understanding over mere knowledge.

Philosophical Insights on Trading

Montaigne’s introspection and emphasis on understanding oneself resonate with the need for traders to be aware of their limitations. Erasmus’s advocacy for the minority perspective aligns with the need to think differently from the masses to gain an edge. As Montaigne stated, “If I speak diversely of myself, it is because I look diversely upon myself”, highlighting the importance of self-reflection and adaptability in trading.

By combining fundamental analysis, technical analysis, and an understanding of mass psychology, traders can develop a nuanced approach to the stock market. This allows them to see patterns and connections others might miss, leading to more informed and successful trading decisions.

Peter Spinoza has some sage words for newbies.

Paraphrasing the wise Philosopher Spinoza born in 1634, “those that try to show others the light are usually sorely in need of this light” or as Johann Wolfgang von Goethe born in 1740 who had the following to say. “I find more and more that it is well to be on the side of the minority since it is always intelligent”. Or William Stanley Jevons born in 1853 “ As a general rule, it is foolish to do just what other people are doing because there are almost sure to be too many people doing the same thing.”

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Commercial News: A Tool for Savvy Investors

The mentally challenged are forever clamouring for attention while the wise desperately seek to avoid it, for they know their efforts are best directed towards seeking more knowledge rather than wasting time basking in the light of false glory. Sol Palha

In the fast-paced world of investing, news and events can immediately impact the market, but these effects are often short-lived. While the news is frequently dismissed as inconsequential and perceived as stale when it reaches the masses, savvy investors understand that commercial news can be pretty valuable by digging deeper and interpreting the core story. It can hint at market sentiment and signal potential highs and lows, providing insights beyond the surface.

The Immediate Impact of News

News can cause immediate fluctuations in the market, but these are typically short-lived. For instance, a company’s quarterly earnings report might cause its stock price to spike or plummet. Still, this reaction often stabilizes as investors digest the information and consider the broader context. Therefore, while news can offer valuable insights, investment decisions should not rely solely on these events. Instead, they should be based on a thorough analysis of the company’s financial health, industry trends, and other pertinent data.

Assessing News Sources

It’s crucial to assess the credibility and potential biases of news sources. Many outlets have agendas that can colour the information they provide. Breaking news, in particular, can be prone to revisions and inaccuracies. Investors must exercise caution and critical thinking when responding to such news. By doing so, they can avoid making hasty decisions based on incomplete or misleading information.

The Role of Mass Psychology

What if the facts presented to you are faulty or, worse yet, fake? Then, no matter how thorough your analysis, the result will be flawed. Sol Palha

Mass psychology plays a crucial role in the stock market. Investors can make informed choices by understanding the emotions that drive the masses. A smart strategy is to observe and wait until these emotions peak and then consider reversing their position. This approach is more effective than simply taking the opposite stance of the majority, as it requires patience and a clear understanding of the emotional landscape. Embracing the power of mass psychology can guide investors towards successful investments.

Inductive Thinking and Technical Analysis

Inductive thinking involves observing patterns in the market and using these observations to make predictions about future trends. Technical analysis is a prime example of this approach, as it involves studying past market trends to forecast future movements. Even if the information is not 100% accurate, the patterns and trends observed can still provide valuable insights into the market. However, technical analysis should never be used in isolation. It must be combined with other methods, such as fundamental analysis and an understanding of mass psychology. When these methods are used together, they provide a comprehensive view of the market, improving the chances of success in trading.

Inductive Thinking is both overlooked and under-appreciated

Here you search for the facts and then use these facts that you obtained from your observations to draw a conclusion and determine a possible outcome. Sol Palha

Inductive thinking is a superior way of approaching the stock market. It involves using your intuition and observations to draw conclusions and make predictions. Unlike deductive thinking, which relies on established theories, inductive thinking allows you to see patterns and connections that others may miss. This is because it requires you to be more present at the moment and engage a higher level of your mind.

The best time to keep a trading journal is during a market crash. You will be amazed at the data you can glean from your notes months and years later. Sol Palha

However, many market participants struggle to understand and effectively use inductive thinking. They often fall into the trap of believing they must spend countless hours reading stock trading books and working hard to improve their skills. Instead, they should focus on observing market conditions and keeping a trading journal during volatile times, especially during market crashes. This will allow them to gather valuable insights and make informed decisions.

The key to successful investing is to be cautious when everyone else is confident and vice versa. Understanding mass psychology is critical to this approach, and we can help you fine-tune your understanding of this powerful. We can assist in this arena because mass psychology is integral to our analysis.

What we focus on at the Tactical Investor

“Our attention is centred on the collective behaviour patterns of the general population, known as the mass mindset. This mass mindset holds the key to unlocking the secrets of becoming a successful investor.

We believe that personal growth and success in the stock market are linked. We must learn to crawl before we can walk or run; before we can crawl, we must desire to do so. The same goes for investing. If you seek change and success, you must first have the desire for it and then understand that change requires effort. This effort involves breaking away from old and faulty beliefs and reprogramming your mind to embrace new and effective concepts.