So let’s start on the glossary which is not in any particular order.
Indices
These are used to take the temperature of stock markets so we know what is happening and whether the general trend is up or down. They are averages which may be weighted so $2 trillion plus Apple has a huge influence on what is happening or they may be capped so less influence for Apple or unweighted in which case Apple is just another share.
Bull markets
This is the name for periods when stock markets are generally trending higher. Happily this is most of the time as can be seen from the chart above.
Bear markets
These are the opposite and cover markets that are heading lower. There is an expression from the early days of stock markets that says ‘when the police raid a brothel they take all the girls. What this means is that when a bear is really underway all shares fall, good and bad. Bear markets can be short and sharp when they are called corrections or they can grind on for months, which is what we have now.
Charts
Also known as technical analysis. The idea here is that studying the past price action of any investment instrument, shares, bonds, cryptos, currencies and so on, can give us insights into the likely future trend in prices. Without subscribing to many of the more arcane aspects of charting I would accept being described as a chartist. My rule is charts for timing, fundamentals for share selection and I give a lot of weight to charts in taking investment decisions.
Fundamentals
This covers everything that is not chart-related. Analysts spend weeks studying the fundamentals of companies, project sales and profits into the distant future and also try to value the business. Good luck with all that stuff. I am grateful to them for doing it but think it is mostly a waste of time. I use fundamentals to determine whether a share is growing strongly and has an exciting story. I can do this in a few minutes helped by the incredible availability of information on the Internet.
3G
I need to look at the fundamentals because I choose shares which are 3G as in great growth, great story, great chart. If a share is not 3G I am not interested. Subscribers often mention shares to me. I take a look, if it is not 3G, I am not interested.
Benchmark stocks
Using the techniques described above I make lists of stocks which I like and from which I make recommendations. This list has become long over the years so I have pruned it back to a hard core of indices, cryptos, ETFs and shares which I called my benchmarks. I look through this at least at monthly intervals or even more frequently as a way of taking soundings on the health of the stock market. On 6 December 2021, before I had my benchmark list but something similar, I looked and was horrified to find how many shares were trending lower. I alerted subscribers and even suggested going 100 per cent liquid. I repeated this message on 6 January 2022 since when markets have been having a torrid time.
Indicators
Indicators can be almost anything. I have ones that I use that work well for me. These include moving averages (see below), trend line breaks (see below), Coppock (see below) and the balance of shares and other financial instruments in my benchmark list looking positive v those looking negative. I also have what you could call bellwether stocks. OGIG, an ETF which holds a cross-section of exciting technology shares is a bellwether stock. Another one is Polar Capital Technology, an actively managed technology-focused investment trust, which is charted below. As you can see the shares had a spectacular bull market and are now falling after a rally attempt. The Coppock indicator for PCT is falling and has just become negative.
Value investing
I mention this because it is not something I do. For me it is how long is a piece of string investing. The value of a stock depends on a whole load of things that are going to happen in the future. These include the macroeconomic environment, how fast the business grows, whether it develops or encounters exciting something news and a host of other unpredictable factors. I concentrate on what works for me and about which I can form a view. I select shares in companies which I believe are 3G and much of this will be obvious from even a brief study of the business. Once that is established I use charts to determine when to buy, when to add more and hopefully well into the future, when to sell.
Momentum investing
What I do is often described as momentum investing. I look for shares with strong positive momentum in the business and strong positive momentum in the share price. Such shares often do extremely well, especially if you can identify them at a relatively early stage. Another advantage is that when they lose momentum you sell. Typically the share price loses momentum before this is apparent in the business so I pay more attention to charts than fundamentals in deciding when to sell.
Crowd theory
This is another way of looking at momentum investing. The idea is that shares go up as more people become aware of the story and join the crowd of people investing in the business. Tesla (see chart below) has been an excellent example of this process in action. Back in 2010 electric cars were expensive, heavily reliant on subsidies to sell and charging points were few and far between. Against this background the crowd of people/ investors who believed in the company was small. Fast forward 12 years and there are electric cars including Teslas all over the place; they are much more affordable and, at least in big cities, there are loads of charging points. Next year the Tesla Model Y is expected to be the world’s best selling car. Not surprisingly the crowd of investors who follow and believe in the Tesla story has grown enormously driving a massive increase in the share price.
The three month rule
This is an idiosyncratic rule of mine. I have noticed that shares in strong trends, both up and down, tend to pause periodically to consolidate and very often these consolidations last for around three months. The latest consolidation and subsequent breakdown in the Shopify share price provides a good example. It may not always be so neat but I find it helpful.
Trading vs long term investing
I am a long term investor but I am less convinced that forever investing is going to suit most people. It works for the people who own companies and can amass vast fortunes as result but it is just too hard for many investors given the extreme volatility of the high growth shares in which I am most interested. So if you buy shares on my recommendation you can expect, hopefully after a long holding period, that you will be told to sell. The timing of the sale will depend on my indicators for the individual share in question, for the indices and for my benchmarks as a group. I may also suggest going liquid as the safest strategy if my indicators are flashing red in a serious way. There are no magic bullets in the stock market, although Coppock comes close, so what ever we do needs to be applied with common sense.
Leverage
This is the process of buying shares with borrowed money. Many people dislike even the idea of doing this in which case don’t do it. You can still be very successful. Personally I do use leverage but it does mean you have to be very alert to trends because in the same way as leverage can enable you to ramp up the value of your portfolio very quickly gains can also evaporate with terrifying speed. It is certainly not for a buy and forget type of investor. If you want to describe my way of investing as gambling I accept that description.
Growth stocks
This is mostly self-explanatory but the metrics used to measure growth have changed in the era of the Internet and cloud computing. Many businesses now sell intellectual property in the form of software and services. Instead of being paid up front they receive a stream of income stretching years into the future. This means all the costs are upfront and revenue is deferred which in turn tends to lead to companies reporting losses. Since they are making losses anyhow companies have every incentive to focus on maximising growth by spending heavily on research and development and sales and marketing. The result is higher losses and faster growth.
How stocks are valued
This has changed over the years. Way back in the day the return (yield) on shares was compared with the yield on long term government bonds. Since shares were riskier assets they were expected to offer a higher yield but that was before inflation and before people realised that many businesses were growing in the post war world. First of all we had a reverse yield gap where the dividend yield on shares became less than the yield on bonds. Then a new valuation technique was developed called a price earnings ratio. A growth share might be priced at 20 times its latest earnings per share. Now, we have fast growing companies with no earnings so they are priced as a multiple of revenue and exciting stocks can be valued at 20 times revenue or even more which has helped valuations to climb higher on favoured growth shares.
Strategy
I am preparing this glossary, which is by no means complete, for both subscribers and potential subscribers. I am sure many of you are already familiar with these terms but it never hurts to be reminded.
As I write we remain in a bear market. The current position is a mixture of failed rallies, consolidation and fresh breakdowns. There is nothing as yet to suggest that this bear market is over or has even run its full course..
