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This is a continuation of last week’s subject on my philosophy towards investing.

There are billion dollar funds’ and money managers managing 100’s of million dollar funds in equity index futures, FX, commodity futures, equities etc that do not spend 1 nanosecond on fundamental analysis of company information. They purely use mechanical systems based 100% on technical analysis and / or quantitative analysis. Are they gamblers? Their results of outperforming the market indices by large margins don’t suggest so. Do they have loss years? Sure they do.

And the way that they do it is to:

    1. Limit their risk by deploying exit strategies & rules that when used in conjunction with their entry strategies & rules provide them with a positive mathematical expectation, i.e. an edge that has been researched, modelled and pre-calculated before investing capital into the market.
      1. Well defined exit strategies based on price movement also eliminate large loss positions that eventuate over long periods (such as QBE – down 67% – and JB Hifi – down 50% – from their highs. QBE must now rise by 150% to make a new high!).
    2. Employ risk management strategies and rules that reduce portfolio exposure (potentially to 0%) during falling markets (they could and do also use shorting) and increase portfolio exposure during rising market periods.
    3. Employ money management strategies & rules that determine how much capital is invested in any position based on the characteristics of the stock / instrument.
      1. For example, if the listed company has volatile price action and the company has never made a profit then rather than totally ignoring the stock as ‘gambling’, a small portion of a portfolio can be invested into the stock with a pre-defined exit rule in place. If the research shows that the investor has an edge in doing this then this is not gambling but assessing a risk / reward proposition that has been researched and modelled based purely on the characteristics of the stock’s price movement and then executing according to that edge.

My point is that there are many, many ways to approach the market. I subscribe to the fact that there is a place for fundamental analysis but there are also many, many other approaches too. I prefer to keep my mind open to other methods and approaches because that way I learn. When we shut our minds to the possible existence of another way we stop learning and reduce the potential for adapting in a changing world.

Any person investing in the market needs to solve the problem of a:

    1. Precise process for stock selection.
    2. Precise process for exiting open positions.
    3. Precise process for determining when to increase and decrease portfolio exposure (even to 0%) to the overall market that they are investing in.
    4. Precise process for determining how much capital to deploy in each position, i.e. money management.

The less precise the process the more subjective it will be and therefore the easier it will become to chop & change and be open to outside influences and noise which will lead to hesitation and indecision with stock selection and position sizing. For example, deciding whether to invest in a stock based on the interpretation of a CEO’s statement is very subjective. Having said that, technical analysis of price action can be used to objectively measure the market’s reaction to it, fundamental analysis cannot.

If all four of these problems are not solved then the investor is probably gambling as they are placing their investment return purely on hope. Picking a stock, using whatever analysis method, and watching it’s price fall by over 65% is a ‘hope’ strategy that denies the existence of other influential variables outside of those variables analysed.

I understand and believe that in order to grow as a person, and indeed as an investor, one needs to be open minded in the way that one approaches the things that they are passionate about. One must always be willing to accept input from the universe, not only push output into the universe.

Investing, like most areas of our lives, is a never ending journey of learning and growing. No single person or collective group of people will ever know everything that there is to know about investing, ……. about anything for that matter!

On this note I’ll finish with two quotes: “He who thinks he knows , doesn’t know. He who knows he doesn’t know , knows.” – Lao Tse (thank you to Tim S, a customer in Perth, for this one) and “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain.

I trust that this provides you with a good idea of my philosophy to investing and where it has come from.


  • Kym Heidenreich says:

    Thankyou Gary for these thoughts on your investment philosophy.I have had QBE and BBG and others in a long term buy and hold portfolio with no exit strategy,so can relate to your thoughts, and agree totally.Keep up the great work.Regards,

  • Peter says:

    If I buy a ticket in a raffle then I am gambling….but if I buy all the tickets then I cannot be described as gambling as I have (in the normal course) mitigated the risk of losing.

    If I walk down to the shop then I walk on the footpath and not in the middle of the road to mitigate the risk of being hit by a car. As this outcome is not guaranteed am I, by definition, gambling with my life?….although few would agree with this apart from the very risk adverse.

    Are we therefore gambling in anything we do in this world?…yes, technically we are when we have not mitigated the risk of an alternate outcome 100%.

    While in one sense the appearance of gambling can be reduced by risk mitigation strategies however, from the observer’s viewpoint if they are more risk adverse than you, they would put a gambling label to your actions whereas, someone less risk adverse would probably not see it as gambling.


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