Beliefs and Practices
John F. Duffy
Thank you for taking the time to investigate and evaluate Stock Trend Spotter™ as a potential addition to your overall investment strategy.
We built Stock Trend Spotter™ for our personal use but, with the encouragement of friends and others who came to learn how it works and what it offers to investors, we elected to offer it to a larger audience.
This White Paper is intended to give you a better understanding of the investment philosophy we bring to Stock Trend Spotter™ and the analytics we apply daily to put that philosophy into practice.
Deciding to adopt a new investment approach, even for a trial, is a significant step and we want to be sure you have a good understanding of how it operates and the underlying Beliefs behind it.
Our investment philosophy is based on five Beliefs we have developed over our years of investing.
Belief # 1: No One Really Knows:
Everyone has an opinion, it may be an educated opinion but nonetheless, it’s an opinion. Every day you will hear pundits on TV or radio recommending a Buy and at the same time, you’ll hear another, equally qualified, pundit recommending a Sell. They have an Opinion – but they don’t really Know. NO ONE DOES!
No one has a crystal ball. There are people who are very well informed in certain niches but they still take educated guesses. If you believe, as we do, that no one really knows, why build an investment strategy based on “having to know”? There is a better way.
Belief # 2: A company and its stock are not the same:
A company may have great fundamentals but if that doesn’t translate to a rising stock price then those fundamentals aren’t really helping you as an investor.
The Table below provides an example. It shows the stock price of well known companies at the end of 1999 followed by their price in January, 2016. If you had invested equal amounts in all of those stocks, it would be a Buy and Hold Portfolio to envy in 1999. However, fast forward 17 years to 2016 and the results are not too appealing. Little or no appreciation.
Stock Trend Spotter™ is focused on stock price appreciation. That’s how we help investors make their money. Our goal is to maximize profits while maintaining as low a risk as possible.
Our focus is on stocks whose price is increasing, i.e. trending. When a stock’s price is trending, we want to take advantage of the positive price movement. We have no emotional ties. We like the stock so long as the price continues to trend upward. When price begins to fall we sell the stock and look for the next trend to reinvest the GAINS.
When you’re focused strictly on fundamentals you will miss out on emerging stocks. The Facebooks, Amazons etc., of the world are stocks that have made people a lot of money over the years but not based on their fundamentals.
Belief # 3: To win in the Market you need a strategy:
Capitalizing on identifiable trends in stock price movement provides a great opportunity to make money and increase wealth on a consistent basis.
Remember, every strategy needs a trend in order to make you money.
People who use the stock market to grow their assets really have two basic choices. They can either be investors who adhere to a strategy based on Fundamental Analysis or based on Technical Analysis. And those without a strategy we call “gamblers”.
Fundamental Analysis Investors generally follow a Buy and Hold strategy and tend to be in the Market for “the long haul”. The reason is that when you are analyzing fundamentals you are looking at financial statements which are only provided quarterly.
In addition you may also want to consider the market it serves, competition, supply chain and much more. It can take numerous quarters for an analyst to determine the intrinsic value of a company, especially in changing market conditions. It takes a lot of time and effort to do this analysis. They’re attempting to project that company’s opportunity for growth in the future. For that reason they usually follow a longer term Buy and Hold strategy.
After finding the companies that meet their criteria, the investor still has to make the following decisions:
When is it a good time to Buy?
How much should I Buy?
How long should I Hold? (How long is the ‘long term’, really?)
When should I Sell?
After you Sell you have to repeat the process all over again.
For many investors and analysts alike, there is also an emotional aspect of these decisions. Investing should not involve emotions! But it can unless a solid process and considerable self-discipline are employed. Especially when the markets are turbulent. Our goal with Stock Trend Spotter is help manage that emotion.
“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human they keep waiting and hoping until their losses get much bigger and cost them dearly.” (William O’Neill)
Those who follow a Technical Analysis Strategy, like Trend Following, are not concerned with the company’s financial statements, etc. They are concerned with its price movement over time. Is this stock trending? As we have seen great company’s stock price can languish and not so great companies can have an amazing run up. Think tech stocks with no revenue but with a huge market cap!
Trend Following investors have to make the same kinds of decisions, what, how much, when to buy, etc. but with a different focus. The ‘long haul’ time horizon for a trend follower might be a short as a week or as long as a year or more. It all depends on the Trend.
With a Trend Following strategy like Stock Trend Spotter, you would not have suffered the opportunity cost of the multiple downturns in recent years. You would have moved
to cash pretty quickly and stayed there until you located stocks whose trends indicated it made sense to invest. You would not have ridden a stock down and then held it until it rose again.
Value in $ Years 1/2000 - 3/2016
An Investment made in Jan 2000 took almost 14 years to get back to even.
Remember, trend following investors make money by following the trend for whatever time period that may be.
Knowing when to Buy is Important, Knowing when to Sell is Critical!
Stock Trend Spotter utilizes technical, trend following analysis and the Stock Trend Spotter approach makes the when and how much to buy, when to sell, etc. decisions much less stressful. It takes the emotion out of the equation.
Belief # 4: Preserve capital:
Making money is wonderful. However, we all want to avoid losing money! All investors realize that small losses are part of the game, but BIG LOSSES will take you OUT of the game. Riding one or two stocks down can really hurt your entire portfolio. And it can put you in a position where, a) it will take you a long time to get back to profitability or b) cause you to engage in greater risk in an effort to recoup losses.
In order to preserve your capital you have to maintain some degree of control over just where your money goes, how it is invested and managed. Our philosophy is geared to keep you in control.
We believe an investment strategy should have a built in propensity to be conservative in terms of how much you invest, what you invest in, how long you hold, when you get out etc. etc. and you’ll see that when you look at how we apply these principles. Some of the best known and most successful investors are proponents of and focus on protecting their capital. You have to keep your money so you can take advantage of the opportunities when they present themselves. Some examples include:
“My basic advice is don’t lose money.” (Jim Rogers)
“I’m more concerned about controlling the downside. Learning to take the losses. The most important thing in making money is not letting your losses get out of hand.” (Marty Schwartz)
“I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have.” (Paul Tudor Jones)
“One Investor’s two rules of investing: Never lose money. Never forget Rule #1.” (Warren Buffett)
In other words - You must protect your Capital!!
Belief #5: “The Trend is Your Friend”:
We believe that the technical, trend following Strategy that is Stock Trend Spotter can help you build wealth while managing risk and preserving Capital.
Now that you have a better understanding of the Beliefs behind our investment philosophy. Those principles are applied every day through the algorithms that are built into the system and the practices that we follow and recommend on a daily basis.
We issue Signals (Buy, Buy Again, Reset Stop, and Sell) for two investment Models, Large Cap (S&P 500) and Broad Market. The Signals are generated based on the rules build into the system. The S&P 500 Model focus almost exclusively on the S&P 500 stocks, while the Broad Market analyzes all of the stocks in the NYSE and NASDAQ exchanges.
Our goal is to outperform the Market on the way up and to go to cash when the Market recedes.
These are our daily Practices:
1. Analyze the overall market to determine if it's a good day to be issuing new Buy Signals.
2. Analyze every stock in the NYSE and NASDAQ to determine those that have met our trending criteria.
3. Grade each trending stock to determine the top three for the day.
4. Analyze all of the currently signaled stocks to determine if they have met on of the following conditions: Buy Again, Sell or Reset Stop.
5. Issue Buy Signals for the top 3 graded stocks if the market is deemed favorable.
6. Calculate a new Stop Loss Adjustment for each new Buy, Buy Again, and Reset Stop Signals based on the stock's recent performance.
7. Calculate a conservative number of shares per $10,000 of Portfolio for each Buy and Buy Again Signal using Stop Loss Adjustments and risk limits per trade to help manage risk.
Note: Buy signals are limited to 3 per stock to prevent over weighting in a single stock. Reset Stops are issued after the 3rd Buy to lock in gains.
8. Follow every signaled stock to determine when Buy Again, Reset Stop and eventually Sell conditions are met and generate the appropriate signal and supporting information.
Stock Trend Spotter Analyzes - Signals - Follows
Every Stock - Every Day
Only Buy when the Market is Favorable
Only Buy Performing/Trending Stocks
Ride Your Winners
Cut Your Losses
Always Use Stops
Follow the Strategy
Let the Trend be Your Friend