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Active investing: what's your approach?
28 points by cgardn20 11 months ago | hide | past | web | favorite | 35 comments
For those of you who use Robinhood/Etrade/etc to invest in stocks, what's your approach for finding stocks to buy?

While I don't have any advice for picking stock, make sure you track your overall return. You may find - as many funds do - that you underperform the market. And it might be worth it to index.

And if you discover you're better than an index, you know your time was well spent (although luck may factor into both scenarios).

Either way, quantify your effort. You're already likely putting in a lot of time to pick the stocks. An incremental bit more will help you track it.

I'm a self-taught quant, not an 'active' investor, but here's what I do. I use factors like trend and momentum to develop algorithms. Then I backtest my algorithms against decades of data. Then I buy/sell stocks based 100% on what the algorithm says to do.

If you hand pick stocks, you will lose. A simple index fund will destroy you over, say, 10 years. I'm happy to back up that claim with cash if you will make your picks public. $1,000 to the charity of your choice.

Two questions, if you're up for answering them:

* Where's the best place to get data for testing purposes?

*What kind of trades do you do? Is it mostly buying and selling actual stocks, or do you go after more complicated trades like shorts/puts/options?

>* Where's the best place to get data for testing purposes?

If you open and fund an account at tradier.com they give you access to a REST API that includes some good stuff. I also pay $50/mo for some additional data from ycharts.com. But you can also use some free libraries that pull from yahoo and they sorta work.

>*What kind of trades do you do? Is it mostly buying and selling actual stocks, or do you go after more complicated trades like shorts/puts/options?

My algorithms are long-only and I buy stocks and hold them for at least one year. If the algorithm could exceed the high cost of short-term capital gains, I would hold for a shorter period.

You could also try quantopian.com for some super short term trading. I personally think that is a poor use of time.

I REALLY wish there was some place I could enter competitions and make my trades public. I'm using motifinvesting.com for now but would enter trades at other places if I could.

I played around with instavest.com (a YC company) which was promising for a while but it stopped working and I suspect they are on life support or something.

What do you think of portfolio123.com?

I'm looking to get my feet wet in quant stuff, but the high price is scaring me off. Right now I'm running simple momentum models on macro index ETFs using Yahoo data (monthly trades).

Thanks for the info, I appreciate it

For long-term growth investments, I buy stock in companies that make products that I use and love. i.e. Coca-cola, General Motors, Apple, etc...

For income, I put a portion into high-dividend stocks, and either draw the dividend or trade them away pre-dividend for more than the dividend would have paid... re-buying later after the price drops post-dividend.

For short-term money trades, I look for depressed stocks with what I call rebound-potential... e.g. something like bad news or earnings miss can depress a stock 5-20% depending on the day/mood of the market, I buy and hold some of these I think have a potential rebound in a moderately short-term ( say a week or 2 ), for a modest profit.

The main thing is to stay diversified, and always keep some cash available to buy a potential dip, you cannot have all of your money in 2 or 3 stocks and expect to do well unless you're extremely lucky, and just like in Las Vegas, luck doesn't always go your way. The more and different stocks that you hold, the easier it is to sell a winner, and re-invest that profit in the next.

Also, you need to be able to hold through the short-term market flux, and not sell out of fear... i.e. kim jong shooting fireworks over Japan can shake the market temporarily, you need to be able to hold steady until the market recovers, and even better, buy the dip.

Active investing isn’t a great idea unless you’re committing a lot of time and resources to the effort. And even then, it’s usually still a bad idea. The vast majority of professional funds underperform the market. It really is better in the long run to just swallow the humble pill and defer to indexes.

Buy companies you're an enthusiastic customer of. To my mind this is your only chance of getting an edge over the efficient market and its heavyweight players.

My approach is basically anchored in the knowledge that a large part of what happens with the market is emotional and not based on actual numbers. I watch a stock for a while to get a sense of how it moves. By this I mean, how does certain news effect the price, what sort of deals are they making, what are people excited about with the company, what are they disappointed with in the company. I find what their customers are saying about the company, what people think of their competitors, listen to the earnings report. I'll do this along with more technical research of the company until I feel like there's a good entry point, if at all. I'll have a target price in mind and sell once I get there. In some situations if I'm feeling especially good about an opportunity, I'll invest in LEAPS instead, which is about as risky as I'm willing to go.

Doing this right is incredibly time consuming, and I don't do it with the bulk of my investments. I will usually focus on three companies max, because that's about all the work I can handle. I've been much more successful since I started taking this approach, and the percentage returns are much better than what I get from my investments in index funds, but the amount gained comes out to about the same because of how I allocate. Trading is only as risky as you make it, but a lot of people will get sucked into the allure of outsized gains. Use all the tools and financial instruments at your disposal to protect your investments, and don't get lazy about managing them.

I buy stocks from near companies. I keep contacts from people in R&D.

Some companies do partnership on research with universities. So you can easily network and hear about their public projects.

But be very careful if you intent to create a full portfolio with all companies in the same place, it's very risky (I do it because Switzerland is a small country)

I am quite a successful active investor (sorry for the lack of modesty).

What I look for is:

1. Small companies (none of the serious big guys look at small companies so you have a chance);

2. and are doing some real and valuable;

3. and are being ignored because the past management were terrible, but where the current management has nothing to do with the old management (reverse takeover, backdoor listings, etc).

On point 3 I am amazed how many investors treat companies like people. They will continue to punish a company for the sins of the past even when everyone involved is different.

How successful has this approach been? Specifically point 3

Very, but you have to be patient. It seems to take around 18 months for the market to catch up with reality. It is really hard to pick when the market will turn, so I just buy and hold until it does.

What does “very” mean? Do you mind quantifying that with a percentage? As it stands it doesn’t really answer the question: “very” is an imprecise measurement.

Very means I have made a lot of money with this approach - far, far more than I would have using a passive index-based approach.

I am sure you understand that I don’t want to get into specifics in a public forum.

How would giving an example hurt? You've given away your strategy, a specific example of one of your successes wouldn't hurt you as they'd have recovered their stock price now.

Investment strategies are like ideas - nobody steals them because everyone has their own crappy one which they like more.

An example of a company that fits my criteria (and which I have invested in) is the ASX listed ruby miner Mustang Resources [0].

0. http://www.mustangresources.com.au/

Don't bother. Index funds will beat everyone but .000001% of people. Even most of those who beat an index fund lose once you account for the amount of time wasted (what I mean by this is that if you took the time you spend and converted that into money and put it into an index fund you would not come out ahead using the active strategy).

If you insist, from what I've read algorithmic trading, small companies (not necessarily startups) and companies that have had significant changes, e.g. new management seem to be popular.

Helping to make reliable stockmarkets in developing countries like Ukraine, for instance.

index in bull market, defensive stocks in bear market. threshold on a few global parameters and back testing (mostly volatility)

idea is to preserve capital during extended downturns.

been in the index side since 2015 except for a few months during brexit.

I use unusual options activity to find stocks. From there I check the charts and will either go with, against, or pass on the trade. 2-3 trades a year in my 401k. +38% YTD, +55% YOY.

Mostly swing trading. e.g CAN SLIM. My biggest concern is whether it's worth the added stress and time commitment vs passive investing. I do enjoy it, but it does take an emotional toll.

http://coinmarketcap.com + researching the team and tech

Do you share your ICO investments anywhere? I'd love to read about your investments.

I've done the following ICOs: filecoin, saltlending, latoken.com, cobinhood.com, polychain

It is HARD to find info about actually legitimate ICO companies.

Yes, but I'm not a financial advisor. My e-mail is username @ gmail.com if you want to reach out.

Buy as much Berkshire Hathaway as you can.

Is that a good long term investment? Honest question, given he's near the end of his life now.

I think the conglomerate is durable. As its size has increased its results have trended downward, but according to him, that's natural when investing large sums. Should be the same issue for the next capital allocator. So long as he doesn't appoint a fool. His track record on managing human nature has been pretty good though.

Look for catalysts. Make a list of stocks that are undervalued, then buy them when there's good news.

This is confusing advice. Are you saying to find a bunch of stocks that are selling for less than what you think they are worth and then start buying them when the price of them starts going up?

Sorry, I'll elaborate.

Draw a line on what you think they're worth. I detailed this in the sibling comment. If they're lower than this line, they're undervalued.

But don't watch prices. Watch the news. I say don't buy them too early because stock prices can take years to correct, especially for low profile companies.

A good catalyst: Company wins a project, key board member becomes more powerful (maybe his daddy became deputy prime minister), new market opens up for them, rival dies, acquisitions and mergers.

Bad catalysts: Scandals, accidents, some prominent individual attacks their credibility on media.

I find business news to be the best source of catalysts.

There are tools used to follow and even highlight which stocks are going up. The traders will be faster than you unless you do it full time. But you can still be faster than the rest of world.

How do you identify stocks that are undervalued?

Fundamentals. This is actually quite hard because it's relative. I've seen 'experts' do analyses like "Facebook was valued at $100 per user, this company is better than Facebook, therefore this company should be valued at $300 per user."

It sometimes helps to go at it from an untrained perspective and make your own estimates. Look at assets, cash flow, cash in the bank. Opportunities, market size. Yes, this does take a lot of work, but you are literally being an investor here. It's good to be an expert in the field you're investing in.

Draw a line. Find out where the spikes in the data are coming from: are they catalysts or just hype? I've seen some odd things, like when a certain party wins the election, shares of the prime minister's relatives go up.

The line would rarely go "hockey stick" when these things happen. Often they're more of an S-Curve. If they're undervalued, it's just correcting, meaning that the real line is a lot steeper.

Don't look too closely at profits. A lot of companies reinvest in themselves, partly to minimize tax. Companies that offer high dividends are often committed to slow growth.

Read The Intelligent Investor

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