March 2024 Newsletter

Investing Strategy

There are many different ways to invest, and there are an infinite amount of strategies that can be used. Many people have tried to convince me that there is only one “correct” way to invest: looking at a company’s intrinsic valuation by analyzing its cash flows and making projections. While this is a very viable approach, it is certainly not the only one, and it has its own limitations. An investing strategy is really any set of rules that can be written out to make money overtime. 

Short-Term Trading

To start, I’ll cover shorter-term trading, which I consider to be any investment held for under a year. Here are some of the key things that I have learned to be important considerations when implementing an investment strategy on this time horizon. 

"In the short term, the only way to really differentiate yourself from other traders is to not let your emotions affect your trades."

It is important to have a systematic process to leave as few choices to discretion as possible. Many times, shorter-term traders use technical analysis. They will create support and resistance lines. However, these are all arbitrary levels. Therefore, I want to introduce a new way of thinking about the markets.

"View your portfolio in terms of risk in the scheme of your next 100 trades."

A written trading plan will help keep you organized. A trading log is also really important because it allows you to reflect on the risk parameters of your investment strategy. Consistently good habits will bring good results, just like with anything else in life. To effectively view trades in terms of risk, you will need to use a few tools. First, you want to have a stop loss on every trade. This level will depend on a lot of factors, but most importantly the average true range of the stock and your self-emotional control. If the price of the underlying stock increases, you want to make sure to adjust your stop loss accordingly. Once your stop loss is at your break-even point, you effectively assume no risk anymore, allowing you to expose yourself to new risk units. If the stock price keeps increasing, keep adjusting this level. Never sell the stock yourself; the stop loss will one day do this for you. 

"There is no way to predict these bullish trends, but by using risk mitigations, you will be able to profit from them." 

Never expose yourself to too many risk units. They are easy to calculate because you already know the maximum amount that you can lose: the difference between your entry price and stop loss multiplied by the number of shares you own. Further breaking up the maximum risk units that you are exposed to into sectors is recommended for diversification purposes. Inherently, investing in bearish trends will bring along more risk; therefore, I always try to place buy orders in established bull trends and short orders in established bear trends. More detailed explanations of risk mitigation will be released in future newsletters.

Long-Term Investing

For longer-term investing (any position over a year) it is much more important to understand the underlying company. However, when analyzing a company, it is important to target organic growth in your investment thesis. This can come from numerous factors, including better operating margins or investment synergies. By using such metrics, your future projections will be a lot less speculative but instead based on high-probability reasoning, making your implied share price a lot more reliable. This should be done through an average weighting of multiple financial models, including comparables, precedents, discounted cash flows, and leveraged buyouts, to ensure greater accuracy.

Purchase entry price is incredibly important as it will best help you profit off of market inefficiencies. Almost always, the markets are incredibly efficient, but because people are naturally emotional, this will not always be the case in large price fluctuations. Large crashes are the perfect opportunity to begin making long-term investments in growth or value stocks. This reasoning covers just the basics, but for now, it is important to grasp a consistent and logical long-term investing framework to be successful. 

Macroeconomic Considerations

The market is incredibly bullish right now, with major indices increasing more than 10% year-to-date. However, it is important to pose the question "Why have markets been going up so much these past few months?" It is because of the three expected rate cuts later this year. Throughout my time investing, this is one of the most publicized rate cuts that I have witnessed. Therefore, because everyone is so aware, the market is baking them into current prices. 

What happens if the FED does not end up cutting rates? Even though I definitely think this isn't too likely, it is still a possibility for several reasons. For one, the election is this year, so the FED may not want to intervene with the results. Additionally, the personal consumption expenditures inflation report that came out recently was worse than expected. Lastly, certain indicators such as credit card delinquencies and the Empire State Manufacturing Index are showing concerning signs. 

Therefore, if macroeconomic concerns cause the FED to not deliver on their promised rate cuts, not only will the market react negatively, but also a lot of the new AI companies will not be able to refinance their debts at lower rates than expected. Because of the large impact that AI has had on the markets, this could very well trigger at least a mild crash. Therefore, macroeconomic conditions will be incredibly important to watch moving forward. While I do think the market will continue to be bullish until the election, a few bad macroeconomic signals could cause considerable negative price fluctuations.

Disclaimer: This newsletter is for informational purposes only and not financial advice.