TRADING PLAN
Hi there
thought some of your questions could be answered by the attached
thanks
1. Why have a Trading Plan?
1.1. A Trading Plan is an essential document for anyone endeavoring to trade on the sharemarket. It is intended to become our “Guidebook” or “Bench Level Instructions” if you like, for how we, as a club, go about the business of trading and investing. And without it our success will be haphazard, and unnecessary losses will be guaranteed.
2. Why have we set up an Investment Club?
2.1. Knowledge:
2.1.1. In order to achieve a good cross section of experience with the various aspects of trading & investing in securities it is essential that we aim to have exposure to all risk categories and investing strategies. By doing this we will gain a greater understanding of the sharemarket and be better able to make informed decisions when it comes to our own investment needs. Greater detail of how this will be achieved is covered in later topics.
2.1.2. To keep us in the learning mode one member (or an introduced Speaker) should give a short presentation (5-10 minutes) to the group on a topic they have researched at each of our meetings.
2.1.3. Each member will be exposed to the various office positions on a rotational basis to gain experience with the running of the club as well as the fundamentals of managing a trading business.
“The life is short, the craft so long to learn”.
Hippocrates.
2.2. Financial gain:
2.2.1. We’re all in it for the money! There’s no doubt about that, it’s only our motivation that will differ. There is potentially a fortune to be made (& lost) by trading in shares and it is a wise decision to learn the craft!
2.2.2. Paragraph 9 of the partnership agreement covers the financial objectives of “Investment Power”.
“It’s what you don’t know that you don’t know that will cost you the most!”
Unknown.
2.3. Self-improvement:
2.3.1. It goes without saying that one of the key ingredients to continued success of any kind is continual improvement in all that we do, and all that we are. So personal development in all its many forms is vital.
2.3.2. While our clubs’ primary aim is to expand our ‘financial’ knowledge relating to the sharemarket, it also has a role to play in developing its member’s ability to deal with the emotional aspects of trading & investing. For the individual trader or investor learning to deal with the emotions of fear & greed are essential. These 2 emotions can cost you your entire account unless you can learn to manage them.
2.3.3. There are also many personal qualities that we can help each other to develop as well, such as greater self-confidence gained through presenting our share research to the group, undertaking a position in the club or chairing a meeting. This is one of the reasons we will be rotating the official positions every 6 months.
2.3.4. Also, when it comes to reading the market, an understanding of group psychology can give us a distinct advantage in assessing imminent market trends. It is well documented that the majority of people tend to buy & sell on emotion (fear & greed). So an understanding of what drives people to buy or sell will put us in a better position to take advantage of the mood swings of the market.
2.3.5. So as a club, we must do what we can to encourage & support our members/partners in their individual pursuit of self-improvement, because in the long run, it will be a determining factor in each of our successes.
“To keep the lamp burning, we have to keep putting oil into it”.
Mother Teresa.
Social Philosophy:
2.3.6. Business-before-Pleasure? Pleasure-before-Business? Who cares really, just so long as there’s a little of each. Because “All work & no play makes Jack a dull boy!”
2.3.7. There must be balance in all things! So plan a few functions & have some fun along the way because there’s no point making a stack of money if you can’t enjoy it hey?
3. Our Trading Philosophy
3.1. Day Trading, Position Trading or Investing?
3.1.1. Day trading is a labor-intensive pastime requiring constant monitoring of the market throughout the day. Day traders rarely hold ‘open’ positions over night and work on making their money from the daily fluctuations in the share prices. For the most part, day trading is beyond the scope of this club.
3.1.2. Position traders will hold a position from 1 to 20 days on average, though their intention is to stick with each trade whilst it is still considered viable to do so. Hence we would consider ourselves to be position traders.
3.1.3. Investing – For our purposes, this is distinctly different from trading. Investing is what you do with the money you can’t afford to lose & is what your financial advisor would have you do with ‘all’ of your money. When it comes to shares, investing is a long-term buy-&-hold strategy that relies on the tendency of the market to increase in value over time. As a club, we will use this strategy in a limited capacity, however our primary focus is on the short to medium term with a more hands-on approach.
3.2. Technical Analysis or Fundamental Analysis?
3.2.1. Fundamental analysis looks at the company as a whole and assesses its performance and growth potential. Using fundamental analysis we can determine whether or not the company is over or under valued.
3.2.2. Technical analysis helps us to determine our entry & exit points by assessing the underlying sentiment in the market about our chosen share. There are many different technical indicators we could use, so it is our aim to learn what these are by presentations from those in our group that have some understanding of them.
3.2.3. Hence, both of these philosophies have a role to play in our selection of shares to trade & the way we manage our trades.
3.2.4. For the most part we will use Fundamental Analysis to select the shares we wish to trade (this is our IP Fundamental Value List of the Top 50 Companies) and, Technical Analysis to time the entry into these stocks, manage the trade & tell us when it is time to close our position (sell).
4. Business Management
4.1. The Business Structure:
4.1.1. Our business structure is a “Partnership”, and the name of our business is “Investment Power”. The details & partnership rules are set out in our Partnership Agreement.
4.1.2. “Investment Power” has been modeled on an existing club called “The Sheba Investment Network” as described in the book “The Money Club”. We have modified the Partnership Agreement slightly to better suit our needs.
4.1.3. It is recommended that all partners read the above-mentioned book as it will help you to get a feel for what makes a successful investment club and some of the roles you will be expected to play as a member/partner of the club. No doubt there will be partners only too happy to loan you a copy if you don’t already have one.
4.2. What to invest in?
4.2.1. Investment Power is not limited solely to the purchase of shares; we can in fact enter into any investment approved by the partners that we deem suitable (Paragraph 9 of the Partnership Agreement refers). Having said that, our focus will be trading/investing in shares.
4.3. Choosing Our Shares:
4.3.1. When choosing a share for nomination, each partner will need to be mindful of which risk category their nomination will fall into so they are not concentrating on ‘high risk’ shares for instance if we already have our quota of these. Refer to figure 4.1 for a breakdown of our percentage-of-capital to be allocated per risk category.
4.3.2. Each partnership is expected to research a share they feel has potential & present their findings for consideration by the partners present at the monthly meetings. These shares are voted on, if it is determined they meet our criteria and risk category allocations. The shares with the most votes will be considered first (& so-on & so-forth, etc….).
4.3.3. It is important that we are comparing ‘apples-with-apples’ when deciding on a share/s at our two monthly meetings, so it is essential that all the necessary data be presented to enable a true comparison of each share to be made. To assist with this, & to ensure all relevant details are presented a form is included at Annex B to this Trading Plan. Unfortunately, shares presented with insufficient information CANNOT be considered for purchase until the required information is made available to the group.
4.3.4. All share nominations are to be presented to the Secretary with sufficient time to be included in the Agenda, which the Secretary will distribute to all partners seven (7) days prior to each meeting (paragraph 8c of the partnership agreement refers). This is to enable all partners to consider each of the agenda points and assemble any information they consider relevant prior to the meeting. Whilst this requirement can be waived, it will not be in our best interest to do so in most instances as it unnecessarily limits the time available to each partner to consider the proposals or nominations being put to them.
4.3.5. Shares that are nominated by partners at a monthly meeting, if for whatever reason were not purchased, should continue to be monitored by the partners that nominated them for selection. After all, if a share is worthy of nomination, it deserves further consideration. By doing this we will provide ourselves with a valuable feedback mechanism to enable us to improve our decision-making process. No doubt many of these shares will surprise us and go on to be winners & we would be remiss to dismiss them just because we rejected them in the first instance. It is our poor decisions that have the potential to teach us the most.
4.4. Watch lists – IP Fundamental Value List
4.4.1. In order to reduce the shear volume of shares to a more manageable level, watch lists (the IP Fundamental Value List) are to be created that relate to the PE Ratios referred to in figure 4.1 and the Fundamental Value determinations at Annex A.
4.4.2. Using the criteria laid out below, stocks will be filtered out to leave us with a list of stocks representing the best buying opportunities in our medium & low risk categories.
4.5. Communication:
4.5.1. It was agreed at the monthly meeting on 06-Feb-2002 that the Secretary would distribute the minutes of the meeting within three (3) days of the meeting so as all partners would have timely access to a full record of the latest business decisions/discussions regardless of whether they were present at the meeting or not.
4.5.2. As referred to in paragraph 8c of the partnership agreement, the Secretary is to distribute the agenda to all partners at least seven (7) days prior to a meeting.
4.5.3. As a means of simplifying communication between partners it is desirable for all partners to have a computer with Internet access. E-mail provides the simplest and most cost effective means for Investment Power to disseminate information such as minutes, agendas, the IP Fundamental Value List & daily share price updates from the trading partner.
4.5.4. Whilst it is in everyone’s interest that all partners have a computer, at no stage should it be considered mandatory to purchase a computer. However, it must be realized that partners without computers are at distinct disadvantage to those that do. Business of all types these days relies on efficient, cost effective communication and Investment Power is no different in this regard. If you do not own a computer, a good question to ask yourself at this point would be; “Could I effectively fulfill the roles of secretary or trading partner without a computer with Internet access?” Because at some point you may be called upon to do just that.
Investment Account
This category generally consists of:
· Floats,
· Low cost ‘Penny stocks’ or small start-up companies hoping to make it big,
· Volatile companies that fluctuate wildly; &
· Companies with low trading volume.
They usually pay NO dividend and are considered growth stocks (i.e. you make your money from the growth in value of the share price).
Growth stocks typically have a Price/Earnings Ratio (PE ratio) of 30+.
Data sources used for these companies will include:
· Prospectus’,
· Technical analysis (graphs etc),
· Media,
· Magazine articles,
· Company releases to the ASX,
· Rumors; &
· Company web sites (read propaganda).
These stocks are typically high risk & should not form a significant part of the portfolio.
Stop-loss should be set quite tight,
say 2 ½%, & needs to be monitored closely.
This category generally consists of:
· Medium to Large companies that have an established track record,
· Less volatile than previous category, though they do tend to have greater volatility than the ‘Blue Chips’,
· Companies with moderate trading volume,
They may pay a dividend and can be categorized as Income/Growth stocks (i.e. you make your money from moderate growth in value of the share price &/or income from dividends).
Income/Growth stocks typically have a Price/Earnings Ratio (PE ratio) of 15 to 30.
Data sources used for these companies will include:
· Fundamental analysis (who, what, how, why & when),
· Technical analysis (graphs etc),
· Media,
· Magazine articles,
· Company releases to the ASX,
· Rumors; &
· Company web sites.
Stop-loss should not be set too tight,
say 5%.
This category generally consists of:
· ‘Blue Chip’ companies,
· Low volatility companies,
· Companies with high trading volume,
· Companies with large capitalization.
They pay a dividend and can be categorized as Income stocks (i.e. you make your money from dividends and slow steady growth in the share value).
Income stocks typically have a Price/Earnings Ratio (PE ratio) of less than 15.
Data sources used for these companies will include:
· Fundamental analysis (who, what, how, why & when),
· Technical analysis (graphs etc), though not as useful with stocks that are a long term buy & hold strategy,
· Media,
· Magazine articles,
· Company releases to the ASX,
· Rumors; &
· Company web sites.
Stop-loss strategies are of less use if your strategy is buy & hold, though a 10% trailing stop will prevent HIH style losses (hopefully).
Figure 4.1
5. Money management
5.1. Record Keeping:
5.1.1. It is anticipated that not all partners will not have access to a computer, and as such would be unfairly excluded from filling the role of treasurer, so for simplicity & fairness we have decided that financial records will be kept using a manual system.
5.2. Bank/Trading accounts:
5.2.1. At our first meeting we decided to establish a Bank Account with the ANZ Bank.
5.2.2. Our Trading Account is with E-Trade®. The treasurer when needed transfers money from the ANZ business account to the trading account. For security, two signatures are required to withdraw/transfer money.
5.3. How much to spend /how much to save?
5.3.1. For information on the requirement for monthly deposits by partners please refer to the partnership agreement, paragraphs 5(a & b) & 18.
5.3.2. The monthly meeting held on 03-Oct-2001 set the minimum share purchase at $1500.00. This figure is to be revised as the value of our trading account increases with a view to achieving a minimum purchase figure of around $5000.00. Transactions of this size are preferable as the commissions only represent around 1.5% of the total transaction cost, meaning each trade will be into profitable territory much sooner than they would with smaller parcel sizes.
5.3.3. Once the value of our portfolio exceeds $6500.00 each share parcel should be no more than 25% of the total portfolio value. This allows for the purchase of four (4) $1500.00 parcels & leaves a float of $500.00 cash to cover any expenses.
5.4. Expenses:
5.4.1. All expenditure is to be approved by a quorum of partners.
5.5. Who can spend it:
5.5.1. Those partners duly authorized, as signatories on our ANZ account are the only partners that can withdraw/transfer money for any purpose. Two signatures are required to access all funds.
5.5.2. The trading partner &/or the reserve trading partners are authorized to commit trading account funds for the purchase/sale of shares as voted on & approved by a quorum of Investment Power partners only.
5.6. Entering the trade:
5.6.1. The trading partner &/or the reserve trading partners will only enter into a trade approved by a quorum of partners. He/she will use E-Trade® to conduct the transaction in accordance with the instructions given.
5.7. Managing the trade – Profits, Losses & Stop Losses:
5.7.1. Unfortunately, losses will be an inevitable part of our trading experience, so it is essential that we consider strategies to minimize our losses whenever we decide to purchase a parcel of shares. In fact trading is more about minimizing losses than it is about making money. The wins will come, but only if we can survive long enough to achieve them. The key is to keep the losses small by getting out quickly instead of watching our portfolio go town the drain when things don’t go our way.
5.7.2. So when setting the stop loss values, the amount we are prepared to lose on each parcel of shares should represent no more than 2% of the total portfolio including all open positions.
For example, if our total portfolio value is $6000, 2% of this is $120. Therefore we are prepared to lose up to $120 on each of our $1500 parcels of shares. Our stop loss will be set at a maximum loss of 8% on the purchase price ($120 is 8% of $1500). By setting the stop loss in this way we will only lose 8% of our total portfolio (plus slippage ) if all four trades go against us, leaving about $5520 to continue trading in this example.
5.7.3. If automatic conditional trading is not used on E-Trade® , then manual stops that are actioned by the trading partner or the reserve trading partners on a daily basis. The prices used as for the stops are the daily closing prices. If a stock closes ‘at’ or ‘below' our stop loss figure we sell ASAP the following day. The only reason you would not sell would be that the price had rebounded above the stop loss figure before the sell order could be placed with E-Trade®.
5.7.4. Trailing stop losses – Once a new trade enters profit it may become desirable to initiate a Trailing Stop Loss. In this way we can let the stock run in order to maximize profits. The effectiveness of this strategy will be determined by the ability of the trading partner &/or the reserve trading partners to monitor the stock on a daily basis.
5.7.5. Time Stops – When purchasing shares you must have a profit objective in mind. You must also know how soon you want that objective to be met. There is no point keeping a stock too long if your money is tied up going nowhere, so a date must be determined for profit targets to be realized by.
5.7.6. Dollar Stops – A predetermined dollar figure is also used as a stop. Once this figure is reached the parcel is sold.
5.7.7. Partial Profits - On particularly risky shares it may be desirable to take ‘partial profits’ once the share price has risen by a predetermined amount. It is common to sell sufficient shares to recoup the initial outlay and leave the remaining shares to run as long as it is viable to do so. In this way risk of potential losses is minimized by not risking capital any longer than necessary.
5.8. Exiting the trade:
5.8.1. In each case, an exit strategy must be determined before entering into a trade. This way if the trade does not go as intended, a plan to minimize losses already exists and can be acted upon immediately by the trading partner &/or the reserve trading partners without the need for time consuming consultation.
5.8.2. The trading partner &/or the reserve trading partners will only execute a sell transaction approved by a quorum of Investment Power partners. He/she will use E-Trade® to conduct the transaction in accordance with the instructions given.
Additions to the Trading Plan (Agreed at Meeting of 1st August, 2004)
1. We shall trade between 8 – 15 stocks.
2. Our parcel size shall be $5,000, unless otherwise authorized by the majority of club members.
3. The Trading Plan shall be reviewed annually.
4. The ratio of quality stocks to speculative stocks be 1:4 (i.e. Med/Long term : Short term).
5. The reasons for buy/hold/sell stock should be recorded.
6. The Nominator of a stock should monitor it and hold documents relating to it for each meeting and particularly have details of the entry and exit points. (By flow chart if possible).
7. The target for profit shall be taken at 15%.
8. The time limit for profit shall be – medium term 75 days and long term 1 year.
9. Trailing stop loss set at 7.5% (after stock gains 7.5%)
10. The Meetings of Investment Power shall now be every 2 months.
11. The Trading Member has the power to purchase shares with the consent of two other members of the club via email or other recordable means.
12. Shares must be chosen from the 100 listed on the IP Fundamentals List, unless they are a ‘speculative’. (Note: The existing Trading Plan limits the percentage of funds put into Speculative shares).
13. All members may nominate shares as above.
14. The IP Fundamentals List is to be circulated on the 15th of each month by the Trading Member and is to be determined from the requirements of Annex A.
15. Any objections to shares nominated must be received within 24 hours of the nomination.
16. All IP members are to check their emails regularly.
Annexes:
A. IP Fundamentals List Requirements/Constraints.
B. Share Nomination Proforma.
C. Summarised Trading Plan (Version 1.1)
Annex A to
IP Trading Plan (Version 1.1)
IP Fundamentals List
Requirements/Constraints
IP Fundamentals List Generated on the following:
1. Return on Equity (above 8%) = After tax profit/shareholders equity *100% (ROE > 8%).
2. Don’t use Beta greater than 1 as this means the share has too greater volatility (Beta < 1).
3. Price of share/earnings per share (P/E) to be greater than 8 and less than 30, need to stay away from really high PE ratios (+8 < P/E < 30).
4. Price to earning growth ratio (PEG) to be between 0 and 1 as this indicates a stock with potential for growth (0 < PEG < 1).
5. Use PEG and Dividend yield as good factors for weighting.
6. Current ratio = amount of money available to pay debt (replaces interest cover) (>3 means company could pay back debt three times over).
7. Dividend yield (>2) if too high, you could lose some of the growth stocks.
8. Debt to Equity ratio (>80) means that the company has < 20% debt.
9. Market Capital > $100 M.
ASX Code
Company
Industry Group
Risk Category Low Risk 0 Moderate Risk 0 High Risk 0
Price
Shares on Issue
Market Capitalization
First Listed
Earnings Per Share (EPS)
Dividends (cents per share)
Asset Backing (cents per share)
Price to Earnings (PE Ratio)
Dividend Yield %
Ex-Dividend Date
Price to Assets - Debt to Equity
Website
Chairman
CEO
Directors
Principal Activity (sector/ sub-sector) Sector: Sub-Sector:
Comments:
Main Competition
3 reasons why we should buy shares in this company.NoteFor greater “weight of evidence” all 3 reasons should be unrelated to each other. 1.
2.
3.
Purchase Recommendations
Expectations Short Term 0 Medium Term 0 Long Term 0
Purchase Type At-Limit 0 At-Market 0
Max price to pay per share $
Parcel Size ($ & Qty) $ Qty:
Stop Loss Initial Stop Loss: ($ or %)
Dollar Stop:
Time (Date) Stop:
Trailing Stop (%):
Notes or Special Instructions
1. Why have we set up an Investment Club?
We have set up the Investment Power Club as a way of increasing our knowledge & our wealth by combining the resources & the talents of a diverse group of friends.
2. Our Philosophy & Trading Style
As traders, we would consider ourselves to be position traders. Our focus is on medium to high-risk shares.
We will predominantly use fundamental analysis techniques to select stocks with potential for capital growth and monitor these stocks using technical analysis to determine the best time to buy and sell.
Our goal is to achieve 75% (or better) profitable trades with an annual rate of return greater than 20% by undertaking the following:
a. We shall trade between 8 to 15 Stocks.
b. Our parcel size shall be $5,000, unless otherwise authorized by the majority of club members.
c. The ratio of quality stocks to speculative stocks be 1:4 (i.e. Med/Long term : Short term).
d. The reasons for buy/hold/sell stock should be recorded.
e. The Nominator of a stock should monitor it and hold documents relating to it for each meeting and particularly have details of the entry and exit points. (By flow chart if possible).
f. The target for profit shall be taken at 15%.
g. The time limit for profit shall be – medium term 75 days and long term 1 year.
h. Trailing stop loss set at 7.5% (after stock gains 7.5%)
i. The Meetings of Investment Power shall now be every 2 months.
j. The Trading Member has the power to purchase shares with the consent of two other members of the club via email or other recordable means. Any objections to shares nominated must be received within 24 hours of the nomination.
k. Shares must be chosen from the 100 listed on the IP Fundamentals List, unless they are a ‘speculative’.
l. The IP Fundamentals List is to be circulated on the 15th of each month by the Trading Member and is to be determined from the requirements of Annex A.
3. Our Structure
We are structured as a partnership comprised of 20 shares of equal value.
4. Watch Lists
For our high-risk shares we will not have any set rules for creating our watch list. These shares are to be considered wild cards & will be purchased on their individual merits.
For our medium & low-risk shares we use fundamental analysis based on the Annex A requirements/constraints:
a. ROE > 8%
b. Beta < 1
c. 8 < P/E < 30
d. 0 < PEG < 1
e. Current ratio > 3
f. Dividend yield >2
g. Debt to Equity ratio >80
h. Market Capital > $100 M
That should get the bubble going better eh!
