My Investment Career!

“The markets can remain irrational longer than you can remain solvent!” 

I’ve been in this game for almost 13 years now. At the end of each year, I make an effort to assess, evaluate and improve my strategies. This year, I have enjoyed great success, and I am anticipating very few changes in the game plan. So, what better time to actually put fingers on the keys and try to summarize the journey I am on! During our working careers, mainly in the NWT, we put aside earnings in registered pension plans with a view to funding our retirement income. In the mid 90s, I felt our retirement income was assured, so, we took retirement at age 45 which allowed us to take control of our retirement funds, and that has proven crucial. We also began looking at other options for our work activity. That played out with five years work in Dauphin at Western where salaries provided for our living, but did not provide much toward our nest egg. However, our funds were in the hands of professionals at Investors Group, who assured us that all was well, and that our retirement funds would grow and provide a good income in retirement. Our yearly updates began to reveal that our “management fees” were not affording us positive management of our funds. After a bit of research, we moved our funds over to RBC Dominion, and enjoyed watching positive developments there. After a couple of years, the agent who was overseeing our account moved on to operate his own investment business. Little did we know that it was this agent, and not the strength of RBC, that was producing the gains we enjoyed so much. We should have accepted his invitation to transfer our accounts to his new firm. We did not. After spending the years 2000-04 in Zambia, we returned to discover our accounts were a mere fraction of what we had left with them in 2000. A glimpse at the market performance during those years provides a partial explanation of why things went so badly. Interviews with the agents in charge of our accounts revealed a lack of management to mitigate losses or to provide for gains.

 

We spent a year working out of Dauphin, I was teaching in Winnipegosis, and Wendy was working in town. 2006 saw us on the move again, as I was hired to manage a Ministry of Education program out of Thunder Bay. We transferred our investment accounts to the local RBC franchise, but even though the markets were rising we did not see adequate performance of our accounts. My ministry contract ended, and I took the advice of Uncle Bernard, and decided to take an investment course and see if I really could “do better than the pros!” As that played out, I have been managing our nest egg since March 9, 2009, which, if you know your markets, was a propitious day—the absolute bottom of the financial system market crash. 

There were a lot of lessons to absorb as I took that course. They preached a practice of taking your 1% gains with a view to gaining over 25% per year. The agents and agencies we’d been investing with over the years would have been aghast at the very idea of that kind of gain. They consistently assured me that 4% was the maximum gains to be expected. Only those few years with the effective manager at RBC had ever produced more, but we were challenged to think higher. And so we did! 

There are a lot of sayings in the investment community. One of the most famous comes from Warren Buffett, the “oracle of Omaha”; it holds that you “cannot beat the markets.” However, our instructors preached the heresy that we could, and that we would! As you can see in the chart the markets have enjoyed a good run from “lower left to upper right” in the years following March 9, 2009, and I have been a beneficiary of that uptrend.  

Fundamental vs Technical Investing

Buffett has generated a fortune for Berkshire Hathaway (and himself!) using a fundamental investing philosophy. His people research companies and situations exhaustively, and then they buy into the companies that meet the fundamental aspects that can be expected to produce consistent profits, and thus gains in stock value. This ties in with his investment plan to “buy and hold” these stocks over the course of many years. In fact, he is quite direct in saying that he intends to buy and keep! Fundamentalists are also strict adherents to the idea that you cannot time the market. They spout such mantras as, “It’s not timing the market, it’s time in the market.” Based on this dictum, Buffett made a famous bet against the Hedge Fund industry. He bet $1 million that a simple index fund would out perform a hedge fund manager over a period of ten years. Protégé Partners LLC took him up on the bet. The bet ended at the end of 2017, with Buffett the winner. 

Technicians, on the other hand, analyze market data which they feel reveals everything there is to know about a stock. They do not place much, if any, weight on research into a company’s worth or prospects. Technicians reason that all the knowledge needed to make the right fundamental decision cannot be achieved easily, and probably not at all, by any particular individual investor, but, they contend, all the information out there is already being reflected in the price action of the stock. This is known as the “Efficient Market Theory”. Following this theory they believe that a proper analysis of the price action will reveal an effective indication of what the stock is likely to do in the future. It is against such a theory that all folks making an investment are assured that “past success does not guarantee future performance.” 

My Initial Training

The investment strategy I was taught at Train2Invest was a blend of fundamental and technical strategies with a view to finding five stocks every two weeks that I could expect to gain 1% within two weeks. Then, I would buy it, and as soon as it gained 1%, I would sell it. Following this plan, I would buy and sell 26 times a year for a 26% profit! And that’s about how it worked out. It was quite a bit of work doing all the research, but since we were in the recovery uptrend in the markets, the biggest difficulty was making the buy. I would put in a bid, and the stock would rise immediately above my bid! Part of our training was to refuse to chase a stock, so that would be a miss! I recall one great deal I made that first year. I bought PetroCanada, and while I was waiting for it to rise 1%, Suncor took it over and it jumped 20% in 1 day! Well, that certainly made my day! 

Developing Investment Strategies

As time went on, I followed an Uncle Bernard prediction, and began refusing to sell when I had the 1% gain, as it often seemed, especially that year, that a stock that gained 1% was also primed to gain more! Of course, that pressured me to find other signals to let me know when to buy, and even more importantly, when to sell! Practically every investor I chat with has that same concern: When to sell? I subscribed to VectorVest which promises clear market signals of what to buy, when to buy and when to sell. I found it pretty useful, but with more resources for the American markets, so I gradually moved on, and ended that relationship. I now work pretty much on my own, but am fortunate to have made several friends in the game, so we commiserate regularly, and sometimes provide ideas to each other. 

My Current Practice

Among the priorities that I subscribe to are diversification, capital preservation, and timing. To provide those I engage in a few different strategies and trading plans. I have two main plans, and some other alternatives for when nothing seems to be working! All are based on technical analysis. I accept their contention that no one can know all the information about a given company or stock. I further assert the notion that we “little guys” are even more handicapped on information access. I do not accept the “efficient market theory” fully, but in general, I believe that the market price action reflects what the mass of investors are thinking. So, I have spent much time over the years trying to find a workable plan for analyzing the market action, and predicting which stocks can be expected to improve in value. This allows me to answer the three crucial questions for investment: What to buy? When to buy? When to sell? It does not take much time to operate under my current trading plans. The remaining challenge is to follow the plan! 

Doing the Charts

Kristian used to describe my work as, “Grandpa is doing his charts.” That is the life of a technical investor. Some technicians take advanced courses in Candlestick patterns,  Fibbonaci Retracements, and a plethora of other technical tools. I do look at them a bit, but my main plans involve only a consideration of moving averages. The candlesticks on this chart show the weekly action of the TSX in 2021. The coloured lines, show moving averages of the price action: the green is the 3 week moving average, the red is the 8 week moving average. The yellow is 40 weeks. My interpretation is that if the price is above the 40 week average, the market is in a long term uptrend, and if the green is above the red, we’re also in a short term uptrend.  

The choice of week-long periods is mine. The choice to use moving averages is mine. The choice to use 3, 8 and 40 period averages is mine. I have found them to work for me, so that’s what I use. One of my friends who subscribes to a very similar investing thesis uses 2 and 5 moving averages, and doesn’t bother with a long term average at all. I know of people who use 5 and 13 period averages. The sky is the limit on the possibilities. Swing traders would use a much shorter period. Day traders might use a 15-minute period. Others will use an analysis of Candlestick patterns. There are also many other indicators like MAC-D, RSI, Stochastics… I will not bother you with even an explanation of what those are, or how they work, but I have used all of them over the years, and still use some of them. 

1. TSX Stocks Play

My main stock play works on what I call the Tide Theory. The main idea is that if the tide is rising, all boats (except really leaky ones!) are likely to be rising as well, while if the tide is falling, it will be unlikely to find any boat that is rising! Using the 3 and 8 moving averages on the weekly charting allows me to declare whether the tide is rising or not! If the TSX tide is rising, I continue to work through my checklist until I find a few stocks that I can expect to be rising as well. I limit my selection to a subset of the TSX listings. There are some sectors (currently Gold, Miners, Health Care) that I have eliminated from consideration. With changing conditions, I may include some of these, and eliminate others. 

Trading Plan: Plan your trade; trade your plan!

1. TSX must be IN, i.e. that 3EMA must be above the 8EMA. In the chart above, that will be when the green is above the red. As you can see, for 2021, TSX has been IN most of the year except for a few weeks in September and now for most of December. When the TSX is OUT, I do not buy stocks. 

2. Then, I look at the various sectors within the TSX. As noted, I have eliminated some sectors from consideration, but I currently follow eight sectors. I check though the sectors to see which are IN. I pick the best three sectors. “Best” is not clearly defined, but I’m looking for sectors where the 3EMA is maintaining a solid run above the 8EMA without either narrowing the gap, nor extending it very much. 

3. I check out the stocks within the chosen sectors. To be selected, a stock must be IN. I pick up to two stocks per sector to a max of five stocks. Again, I am looking for the “best” stocks in the “best” sectors! 

4. So long as the 3EMA is over the 8EMA, the stock is eligible to be bought. 

5. I sell when the 3EMA falls beneath the 8EMA. 

6. I also use a 6% Trailing Stop as further protection against a downturn. My experience has been that the Trailing Stop triggers before the crossover most of the time, but my bias is toward the crossover as a more reliable indicator of whether a stock should be bought or sold.

 

Loblaws had a slow start to the year, but since March has shown to be a valuable asset, and I still own it. 

Exchange Traded Funds: ETF Play

My other main trading play also operates on weekly charting of the 3 and 8 EMAs. In this play, I’m looking at index ETFs for TSX, S&P500, and Nasdaq100. This allows some investments with a broad diversification in the North American economy. There are ETFs available that relate to many other sectors and many other countries, but I’ve limited myself to these three. 

Trading Plan: Plan your trade; trade your plan!

1. So long as the 3EMA is over the 8EMA, the ETF is eligible to be bought. When I’m looking to make a buy, I watch the charts during the day and place a buy near the end of the trading day.

2. I sell when the 3EMA falls beneath the 8EMA. 

3. I use a 6% Trailing Stop as further protection against a downturn. My experience has been that the Trailing Stop triggers before the crossover most of the time, but my bias is toward the crossover as a more reliable indicator of whether the ETF should be bought or sold. 

The Nasdaq 100 has had a bumpy ride this year, but has generally moved from lower left to upper right, and has therefore produced some good income. There have been a few dips where the 3EMA dropped beneath the 8EMA, so I had to sell out. 

Dividend Payers

For some small accounts the cost of buying and selling becomes a serious factor for playing the markets. I have found two ETFs which have a history of at least maintaining value while paying a good dividend that covers the payouts from those accounts. I am always on the lookout for good dividend payers. I currently own HCAL (5%) and HHL (8%). In addition to their dividends, they have also made surprising gains in value this year: HCAL (41.9%) and HHL (14.5%). 

Locked-in Funds

We also have some locked-in pension funds, and other funds that are locked into investments, so I don’t actively manage those, but they are part of our overall income generation, and every bit helps! This area includes our house, which pays very little in any given year, but which in the long term is paying off very handsomely. I maintain the position that being a homeowner is one of the best investments one can make. 

Other Plays

When the TSX is OUT, I am usually comfortable remaining on the sidelines and watching my holdings to confirm whether I should be selling any of them, But, if I’m eager for some market action, I have two short term plays that I sometimes use. 

Popper Play

The charting for this is done on a daily chart with a specialized RSI and two moving averages. 

Trading Plan: Plan your trade; trade your plan! 

Poppers are “quality stocks” that are temporarily oversold. In a daily charting of the stocks, I use the 10% level on RSI(2) for buys and 5MA for sells. Poppers must be above their 200MA, but have dropped below their 5MA. They are sold just before the close of the day they move above the 5MA (I just set a limit sell for the 5MA). One difficulty here is selecting a group of “quality stocks”; I am working with a subset of dividend-paying TSX 60 stocks.  

This chart of BNS shows two set ups for the Popper Play on Nov 19th and Nov 30th, and both would have paid off the next day. 

Bouncer Play

Bouncers is a risk/reward play off the bottom featuring beaten up stocks that often are seen to produce explosive growth when the market turns. 

Trading Plan: Plan your trade; trade your plan!

I use RSI(4) at the usual 25% level to find oversold conditions. Then, I need a green day, and a green start to make my buy. I play them with a 5% Trailing Stop.  

In mid September, Loblaws ran several days at “oversold” according to the specialized RSI I use in this set up. Then, we got the green day and a green start on Sep 30th, and I would have my buy around $85.90. The 5% Trailing Stop would still have me in this buy, which three months later is over $100.00. Nice work if you can get it! 

So, what do YOU think?
I am always looking for reactions and advice on my investment strategy. So, far, in 13 years, I have been able to supply family income from our funds while increasing the overall capital. There have been lean years, especially the last four when Trump’s erratic behaviour translated into erratic markets. This year, by way of contrast, has produced a gain to almost match the four Trump years combined—thanks, Uncle Joe!