Investment Strategies

There are 2 ways you can look at investment
1. Big picture perspective: This is where you look at the macro-economic setting, the state of global capital markets and develop a micro-economic framework that reconciles with your global perspective. This is otherwise referred to as a top-down analysis.
2. Specific investment focus: This is where you reflect more on the merits of a range of particular investments, and allocate your funds accordingly. This is referred to as a bottoms-up approach to stock picking.
3. Holistic or synchronised perspective: The best approach is to consider both, or to integrate both approaches.

Prior to 2002 I really did not have the understanding of global financial markets to understand how all the elements of the market came together. I think it took me about 4 years of reading material to really develop an understanding of the macro-economics that drive markets. In recent years its become apparent to me that so many financial journalists, even economists just dont have a clue.

I would suggest that you really need to know the commercial parameters that drive corporate decision making, and well as the factors that drive markets. It might take you a while, but managing your investments by the age of 40yo is likely to become just as important as managing your career, and managing it well could make the world of difference.
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Andrew Sheldon www.sheldonthinks.com

Misconceptions - Risk vs Return

One of the misconceptions I learned in university economics courses was that there was an inverse relationship between risk and return. The assertion was made on the premise that people would demand a higher level of return to offset a higher 'perceived' risk. There is some merit in this statement, but another factor strikes me as pertinent - the quality of the perceptions assessing market value. Consider that there are mining analysts, but they only get paid to research major stocks, so they can therefore only recommend researched stocks. There is thus an information gap. The implication is that not every market participant has a good understanding of all stocks, and some small stocks might be totally off the radar of brokers. Thus not all participants perception of the market is equal. One persons 'perception of risk' is not the same as another person's because their knowledge and experience is different. There is always a story that is poorly understood, or is just outright ignored because the market was not open to the story. This has a lot to do with personal focus, though I would discourage you from having such a fixed loyalty to one sector.
A mining analyst confronts a much smaller risk than a novice investor. A disciplined analyst has a far better understanding than an analyst whom cuts corners. An investor who has a critical mind has a better likelihood of success (or less risk) than an investor who just accepts what they have read. An investor who listens to others opinions before acting on his own, an investor who researches his stocks, and similar companies has a better risk-reward profile than an investor who doesn't. An investor who is emotion or risk-averse is likely to act on distorted thinking, and will perform worse than a trader who systematises their trades, thus acting in a mechanistic fashion.
The implication is that there is a great deal that you could be doing to reduxe your risk exposure in the market apart from listening to others when they say its too risky. In fact some of the best trades are when people are telling you to stay out of the market.
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Andrew Sheldon www.sheldonthinks.com

Trading systems - Are they any good?

Several years ago I looked at trading systems. For the uninitiated, trading systems or so-called 'black box' solutions are software packages that include algorithms to analyse market trends with the intent of spitting out stock recommendations. Most such systems use daily end-of-day

trading data from the stock exchange to give you those signals. They might even give you the tools to help manage your portfolio. In fairness, these tools are no different from the tools that traders use, though I would make the following points: 1. Such indicators are typically lagging indicators - they tend to get you in & out of the security too late. 2. They drop the context - you might think that noise, but it might be pertinent info 3. These systems were developed in the previous boom. They have not really been tested over bear markets 4. Unless you are trading short term, they are likely to be unhelpful over the next 5 years, since this will be a period of flat earnings - that is a succession of falls and rallies, but flat overall.