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Analysis & Learning

The search for perfect 10s

January 9, 2023

I have a problem with the Quentinvest website. If you look you will see all sorts of amazing performance figures that have been obliterated by the bear market. So what to do? I am changing the figures in a way which may seem misleading but is the best I can do in the circumstances. Instead of quoting share price gains to latest prices I am quoting them to all-time highs. This will be made clear next to the figures.

Part of the justification is that if I just updated to the present day this would not reflect my bearish stance on the stock market since 6 December 2021 (Time to Circle the Wagons), stated then and repeated frequently thereafter.

Since then I have been writing about shares without recommending them. I used not to do this but now I do. So how am I going to calculate performance tables in the future. I have had an idea, a lightbulb moment. Remember Bo Derek, what male from my generation could forget her, who was a perfect ten.

I have set criteria for shares so they too could be perfect tens. Let me explain how this works. I have three key technical indicators – rising moving averages after a golden cross, a broken downtrend line and a rising Coppock line. I also look for pattern breakouts, especially on 3m candlestick charts and double bottoms using Eustace Storey volume figures but for the moment I am going to focus on the first three indicators.

Scoring indices, ETFs and individual shares to make nine

An individual share can score 9/9 if my three indicators are bullish for a major index including the shares, an ETF including the shares (to capture the sector performance) and for the share itself. So 9/9, which no US shares are scoring presently when many score 0/9, means all the technical indicators are as positive as they could be so how do we get to a perfect ten.

We get to 10 by adding in fundamentals. Remember that I don’t even look at shares unless they are 3G (great story, great chart, great growth) so if I am writing about a share at all 3G is a given. Note that a score below 10 doesn’t mean a share is not 3G, it just means we may not want to buy or even hold the share at the moment.

So how do we use fundamentals to take a share which is already 3G and scoring 9/9 on the technical indicators to ten.

Something new, something magic, a huge earnings beat – something fundamental – turns nine into ten

We need something special, something new like Netflix creating its own programmes or Amazon announcing that its cloud business, Amazon Web Services, was both hugely profitable and growing very fast.

An investment strategy based on perfect tens

Here is my simple idea. We only buy shares that score 10 and when they stop scoring ten we watch carefully for sell signals. This way we make huge profits and we lock in huge profits; at least that’s the theory. So how does this relate to my performance tables for Quentinvest. Very simple. In the share tables we score the performance for perfect 10s, all of them and that’s it.

ETFs are different because their maximum score is 6/6 so that is how I will chart their performance. As always this idea is going into beta testing. We will have to see how it works but it forces us to be disciplined and patient and those are great attributes for successful investors.

One implication is that while the indices are falling or low scoring, as now, we can’t buy anything; that would have saved me some money in 2022. If we go to the extreme and only hold shares that score 10 we stopped holding any shares back in 2021 and how cool would that have been. I would have banked a fortune.

Focus on charts

It also puts the fundamentals in their place because they score 1/10. This is not quite true because only 3G shares make it to the short list so my perfect tens are the cream of the creme de la creme, very special indeed. In effect what I am saying is that if a share has amazing fundamentals, something exciting happening and an amazing chart in a world of amazing charts I will buy them. Don’t need many of those to make serious money.

Any strategy put together with the benefit of 20:20 hindsight always makes investing look easier than it is in real time. Particularly tricky is getting the selling right. The Rothschild answer was to sell too early, the Warren Buffett answer to never sell at all. My answer is to use all my indicators and a good dose of common sense to figure out when to be in stocks and when to be out. They all have advantages and disadvantages. As a spread better I have realised that never sell is not an option for me so I have to try to figure out when to sell and for me that is a chart issue.

What I do believe is that if I get the buying right that will give me plenty of leeway to fudge the selling and still make handsome profits.

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