Idle ramblings of a wandering mind...

How does a stock market return of 61% in 8 months sound!! That's my current rate of return, calculated on time weighted average capital employed. I had some free cash in April 2006 - so I started putting some money in my Scottrade brokerage account. I have been consistently adding to my capital and have been following my time tested investment strategy (detailed here) with some modifications. And here I am now!! Even my debt portfolio (at Prosper.com) is doing well. Its a small experimental portfolio with average interest rate of ~20% with zero defaults as yet.

So what am I doing so well that I am getting such unbelievable returns??

• Have faith in emerging markets: When stocks in developing markets crashed a few months back - I loaded up on them. Since I knew India's economic scene very well - I picked up two winners that I have recommended before as well: Tata Motors (TTM) and ICICI Bank (IBN). Both have given me phenomenal returns since then. I also loaded up on TurkCell (TKC) when bad news brought the stock down. TKC is the marker leader and all the management news did nothing to the fundamentals - so buy away.
  
• Patience, Patience, Patience: I bought Seagate (STX) for the first time in April at 26.05. I was convinced that market is beating it too much for Maxtor acquisition - which will in fact be beneficial in medium to long run. However, the stock kept dropping - and I kept picking up additional stakes after each 5-6% drop. My last buy was at 19.95. After that the stock has now climbed up to 25.34, giving me a pretty decent return. A couple of years back I would have panicked and sold off - but not this time. I am taking my losses, sticking with my stock picks and picking additional stakes after each decline.
  
• Discipline is the key: The trading strategy I follow is simple. Here are the steps:
1. Select a stock. Look here for what constitutes a good stock. This is the most crucial step.
2. Buy the stock (say 200 shares). The price at which you buy (say x) is your anchor point.
3. If stock price reaches 6% higher than the anchor (i.e 1.06x), sell 100 (not the whole 200) shares. Change your anchor to this new trade price.
4. If stock prices reaches 6% lower than the anchor (i.r 0.94x), buy 100 shares. Change your anchor to this new trade price.
5. Unless something fundamental has changed (which is a rare event), go back to step 3. Continue till either you have no cash to buy or no holdings to sell.
• Simplicity pays: The above strategy is simple, almost too simple, but it works as long as you do not put your emotions on line. The 6% limit is written in stone - do not change it. When price drops - buy against all your fears and when price increases, sell against all your greed. This has worked for me - I have put this to many stock price data as simulation and almost always the results are phenomenal. Although everything depends upon selecting the right stock in Step 1 - so you gotta know the industry and know the business - do your research!
• Tradings beats long term investing: I know I am going against conventional wisdom here. Everyone says - buy and hold, hold for long long long - but as someone said - in the long run all of us are dead. The long run holding scheme has two big problems - one, it does not take advantage of stock volatility and second, second, it does not book profits - your gains continue to be in paper form which can get wiped out by one fall. My trading strategy works *really well* with volatile stocks and actually more volatile, better it is, as long as long term trend is positive. And you periodically book profits - thereby reducing your incremental risk. You end up paying more tax on your gains - but hey - if you are a graduate student like I am and hence fit into the low-low-tax-rate category - capital gains tax does not hurt that much. Further, low commissions at Scottrade help too!
  

I am going to continue following my strategy and post updates on how my portfolio is doing.

Labels: Investing, Prosper