In that case, should you not be scaling your positions based on the over/undervaluation in the index ? Rather you seem to be describing scaling out of losing individual positions once they have turned.
This premise moves from an investing view point to a purly trading view point. My number one underlying consideration is always the individual company. ie what is the 'value' of the underlying company and what is its share price. This may sound pedantic, but for me its very important, its my
keystone around which everything else revolves. At the end of the day my focus will always be on the individual company, not the 'index'.
However in a secular bear market, one must give due consideration to the fact that the index is in a potential secular bear phase, therefore what are the underlying conditions that cause this. Its not just a case a 'magic', its usually because the index as a whole is not able to increase earnings consistantly.
When i talk about scaling of of losing individual positions, i am not actually scalling out of them. All other factors being equal, i am exiting them during the downwards price volatility with a view to buying them back at a lower price (so long as intrinsic value is constant). Why stand in front of a herd of elephants, this is the real lesson to be learnt over the last several years.
As a small investor be like grass, go with the wind, dont be like the oak tree.
As soon as downwards volatility ceases, buy back your positions. I have done this a number of times with stocks such as Myr, SWM, SXL, CAB. MYR is definately not a buy and hold, CAB potentially is. I love CAB. But if the market wants to push down the price then so be it, go with the flow, exit the position, buy back in. I own more CAB than before the price drop from $5.
I think your strategy works well, but I wonder whether your % profit, activity levels/costs and risk levels could be less by removing this internal contradiction. I suspect that it revolves
around lack of confidence in identifying the primary trend. You may have been brainwashed into believing that it is not possible to time markets. It is not possible to get your timing of markets right every time but can you get it right enough of the time to make an extra normal return? That depends on you.
My major lack of confidence evolves around the fact that we are in changing and volatile times. Intrinsic values are
not stable at this point in time. This creates a lot of stress for me.
Personally i dont give a hoot about the primary trend. When i say this i mean with regards to my ultimate investment strategy.
There will be a time at some point in the future when intrinsic value will change his hat. I will move from intrinsic value to 'the speculator'. I will be providing lots of notice about this. At this point in time, i will reduce significantly my overall positions. I will adopt a trading 'hat'. My discussions will be focussed on strategic trading positions with no relevance to intrinsic value. Most of my capital will be protected elsewhere. I predict that this change will not occur for many years (think dot.com like conditions)
Also I wonder about the use of margin at this point in the cycle. If this is a secular bear market, the best time to use leverage would be at the beginning of cyclical bull periods, not the end as we may be in currently. What % does leverage add to the return currently? It may be very little for a lot of risk.
Only if interest cost is less than dividend yld. Dividends are so bloody good, that my margin loan is ADDING to my position, not subtracting under current market conditions. I have
NEVER seen a situation like this in the Australian market. In fact its the only reason why i am still in the australian market. From a pure quality point of view i much prefer the US market.
I could understand your strategy if the underlying stocks were a raging bargain eg Pepsi, Coke or J&J on a PE of 10 but we are not at that stage in the cycle yet. There are not any bargains out there except in the under-researched micro cap sector. Valuations may not be rich but they are not compelling to me.
Agreed i am having a lot of trouble as well. My australian portfolio doesnt look anything like an 'australian fund managers portfolio'. However those dividends. Dividends represent cash flow (for the individual investor). Once we include dividends we can start to think of ourselves as mini insurance companies. This changes the whole equation.
My biggest regret of the last 12 months has been that I didn't follow my own convictions consistently. I liquidated my discretionary portfolio when the ASX was 4800 but left my super setting in high risk. Oh well, you live and learn.
Personally my active investment strategies are just that. My super is left on balanced mode, i never touch it, never really look at it, its my potential get out of jail card, if everything i think turns out to be complete BS
But this is another insurance play (you can see i love thinking in terms of insurance)
I have seen something else under the sun: The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all.
Great quote, if i could have multiple, i would add this.
By the way thanks for all the commentary, great chatting with you.