Some thoughts to kick off 2011

2011 is underway and 2010 is behind us! What’s in store for investors over the next 12 months? Well, I can’t tell you where the index will be on 31 December 2011 and I can’t tell you what trends and cycles will occur between now and then but I can tell you that there will be up, down and sideways price action, in many different timeframes. That is a dead cert!

So how does this help an investor get fired up for the investing year that lies ahead? How can one achieve a mindset that looks forward to the unknown?

Firstly, the up, down and sideways price action will guarantee that there will be opportunities abound presented to us by the market over the next 12 months.

Secondly, one has to deploy a process(es) to tap into some of the opportunities presented (cannot be in them all) and that ensures that the risks are managed and minimised such that the market is outperformed.

This is a straightforward and non-complex perspective but can be extremely difficult to achieve. Without knowing how to actually achieve such a mindset, the investing year ahead can be very daunting.

Let’s look at the year that just passed to help understand this perspective. The ALL-ORDS (XAO) was flat and the ASX200 (XJO) was down -2.6% for the calendar year. However, the Small Resources Index (XSR) was up 30% for the calendar year and is up 41.7% since 1 July 2010. Now nobody knew in advance that this would occur with sufficient degree of certainty to put “the house” on small resource companies and to switch out of large caps – all of them (BHP, our biggest resource stock, was only up 4.94% for 2010). And even if they did know, for whatever reason, will they always be able to pick in advance where and when to focus investing capital? That is, will they always be able to repeat their prediction?

I’m not at all advocating that “the house” be put into individual trades, in fact, the exact opposite. Using balanced money management techniques with an active investment approach ensures that positions that are not performing are closed out (exit signals are generated) thereby releasing capital to be invested into positions that are performing whilst not having too much exposure overall and in individual trades that can do fatal damage to a portfolio. Sure drawdowns will occur, but not fatal ones.

The beauty of having a trusted process that finds the market action where it is running and keeping you away from where it is not running is that the pressure of trying to always know in advance what may happen is removed. With such as process “you do not need to know what will happen next in order to make money (one of Mark Douglas’s 5 Fundamental Truths of trading).”

Compare these outcomes from 30 May 2008, which was smack in the middle of the GFC down trend, to current. 30 May 2008 was chosen because that was when we started the SPA3CFD public portfolio.

So, it’s New Year 2011. Are you going to do the same as you did last year…… and as you did the year before? Well then you are guaranteed to get the same outcomes. If you are happy with the investing outcomes that you have achieved over the last 3 or so years then you need not change too much. However, if you aren’t happy with your investing outcomes then commit to yourself that you will step into a process to change the way you are going about your investing. You know the old saying: “if you always do what you’ve always done, you’ll always get what you’ve always got.”