Investment Strategies To Manage Uncertainty

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It’s a holiday here in Victoria today…and in Tassie. We’re celebrating Labour Day, to commemorate the granting of the eight-hour work day.

This all kicked off in the 1850s apparently. It was during the gold rush, when labour was in increasing demand. But at the time working hours were long and hard…usually around 12 hours a day, six days a week.

According to timeanddate.com:

Many Australians saw the need for better working conditions and in the 1850s there was a strong push for this. On April 21, 1856, stonemasons at the University of Melbourne marched to Parliament House to push for an eight-hour working day. An agreement with employers for a 48-hour week was eventually reached and Australian workers welcomed the new eight-hour day. A victory march was held on May 12 that year and each year after that. In 1856 the new work regulations were recognized in New South Wales, followed by Queensland in 1858 and South Australia in 1873.

In 1879, the Victorian government proclaimed a paid public holiday to commemorate the eight-hour work day. This was granted during the time when the great Australian land boom was just warming up.

Then, like now, the government probably thought it could afford to buy off the masses with some handouts. After all, getting rich was easy. Just buy land. Working was for shmucks.

Note the eight-hour day was for six, not five days a week. I’m not sure when that changed to the 38-hour week and I’m too lazy to look it up, because it’s a holiday and I’m done labouring.

Although I can say I’m not too familiar with the 38-hour week, nor are most of the other editors here at Port Phillip Publishing HQ. Generating useful investment ideas takes time and research, and it’s rare that you can produce good ideas between the hours of 8.30am to 5.30pm…or whatever standard office hours are these days.

Having said that, today the office is closed. I’m going to hang out with my girls, and leave you with an extremely insightful essay by my colleague Jason McIntosh.

It about knowing when to hold ‘em…and when to fold ‘em at the investment table. Sometimes all you need is a little bit of guidance and discipline to vastly improve your investment returns. Jason’s essay below will help you with that.

Jason contributes to my Sound Money. Sound Investments.  report and is also the system designer and brains behind our trading system, Quant Trader. If you’re interested in seeing what early users of Quant Trader are saying about the service, and want to secure a limited time discount on a subscription, click here.

For now, I’ll hand you over to Jason.

It’s an Eagle’s World

By Jason McIntosh

Many people hate uncertainty. It drives them crazy.

And this isn’t something new.

The saying ‘a bird in the hand is worth two in the bush’ has been around for centuries. One variation dates back to the 6th century BC.

The meaning of this age old phrase is simple. A small certain result is better than an uncertain larger one.

I think this says a lot about how humans are ‘wired’. We instinctively look to shut down risk.

And this is sensible.

Risk management is at the core of our physical, financial, and emotional survival. It’s what keeps us safe.

But can we be too safe?

I think risk avoidance can go too far. Being too quick to stamp out risks limits our potential.

People often tell me that ‘you never go broke taking a profit’. They seem to think it’s the frequency of profits that matter…not the size.

This is much the same as a bird in the hand. The two phrases are about locking in the present in case tomorrow is worse.

But what if the future is better?

I want to share some comments from a member of my Quant Trader service. This is something I think you’ll be able to relate with.

‘I read with great interest your recent email regarding trading style, your use of a wider stop, and allowing winners to run. I agree with this “style” but struggle with how to live it.

‘Let me explain:

‘In search of double and triple digit gains over a medium term it is extremely difficult to hold your nerve when a particular stock may have gained say +30% and then starts to retrace.

‘Do I hold on for the ride down or take my profit?

‘How do I live the trading style if I am always protecting my profits?’

I know exactly what he means. Every successful trader must come to terms with this.

Let me show you one of my own trades. It’s this very situation.

The trade was in a company called Alumina [ASX:AWC].

Within only a few weeks, I was up 30%. The bird was well and truly in the hand. But I let it go without hesitation. I was ready to ride this trade back to near my entry point.

But an early exit wasn’t necessary. This stock went on to rise by over 100%.

You see, trading — like life — involves risk. That’s really the only way you can stride forward.

Quant Trader is a trend following investment strategy. It works on the basis that there are plenty of birds in the bush. And the statistics say a few of them should come your way.

The key is not to let uncertainty get the better of you.

I’ve got a few suggestions if this is an area you struggle with. These are strategies I use myself.

  1. Trade smaller. You’ll probably worry less when the stakes are lower.
  2. Try not to think in money terms. It’s just numbers…take out the emotion.
  3. Don’t look at your portfolio every day. Set your exit point and walk away.

Let’s go through them.

Trading smaller is a relative thing. There’s no point taking a bigger position if it causes too much stress. You have to be able to live with it.

A 19th century Wall Street saying captures this nicely. It says ‘sell down to the sleeping point’. If your positions are keeping you up at night, then it’s time to trade smaller.

The next point is about how you think.

I remember receiving some excellent advice when I was starting out. A wise older trader told me not to think of my trading stake as everyday money.

Instead, think of trading funds as the score. A rising balance shows you’re playing well.

Lastly, don’t get hung up on the day-to-day fluctuations. Take a step back. You’ll find the bumps a lot easier to handle if you don’t feel them on a daily basis.

I’ll finish this section with a quote from Chicago Bulls coach, Tom Thibodeaux. He says, ‘You gotta learn to be comfortable being uncomfortable.’

I don’t think trading has to be an entirely uncomfortable experience. But Tom makes a good point.

Success is about pushing boundaries. It involves uncertainty and risk.

We need to use strategies to make the unknown more tolerable. I believe this is the key to uncapping our potential.

So let the pigeons go. The sky’s full of eagles!

Greg Canavan,
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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slewie the pi-rat
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and a happy 8-hour holiday to all!

let’s check out the 1-yr Bloomie Commodities:
http://quotes.ino.com/charting/index.html?s=CBOT_AW.H15.E&t=&a=&w=&v=d12

see how it “almost” cracked that 50 DMA recently?
when [and if] it does crack that thin, red line [and confirm], i think all Aussies should take TWO days off!
just tell everyone that slewie said it was ok, and to drink up, dammit!

wpDiscuz
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