In pursuit of the long term

[David Randolph]

I agree long term positions are where the multi baggers are made and by long term I mean months to years. I am currently trying to have more longer term holds in my portfolio, but they require a more fundamental approach, they require a wider loss tolerance and probably a bigger position size as you want to focus in on a few real A+ candidates and know them inside out.
I know a trader here in Australia who trades only in 3 or 4 stocks (Australian, banks mainly) and only trades a handful of times in a month. He has made fantastic returns. Mark Crisp a UK trader with a subscription trading system advocates also only a handful of trades a year, with large position sizes to catch the big movers. He is also very succesful. Buffet as well (the long term king I guess) comes from the less is more approach, fewer trades, bigger positions. Obviously all the above practice good money management within their own systems (Livermore's weakness as David pointed out).
This is a good topic for the members board and not the GIGM board, there is a lot more I could say which I may do on a new thread there.

Here's your thread Aussietrader 

[1reilly]

David and Aussietrader
I'give you my 2 cents worth of commentary on this subject. I've known Warren Buffet since 1971. I know what he used for investment criteria then and what he uses now. Surprisingly not much has changed just the % of ownership. Now he buys the business. To invest in the long term growth of a company you must first understand the business model completely. Then you have to have a very good grasp of the business sector in which this company will compete. You have to be able to be able to project how this sector can grow and how this company will continue to increase its market penetration. Then etc. etc. Then each quarter you review the fundamentals of both the company and the sector. etc. Always watching revenue growth, margin exspansion, free cash flow etc. As you can see all of a sudden you find yourself knowing every nuance of the company. This is the complete fundamental approach. You'll notice that I haven't said one thing about Technical factors because growth and value aren't concerned about price except how it relates to certain fundamental ratios. I have used ETC a number of times because so many fundamentals tools are used I don't have the time to list them. YHowever, you get my point. Now even when you have done all this work things go astray. Warren found this out related to Smith Barney. Misjudgements were made related to both the sector and the company. He actually had to assume the position of Chairman of the board to help work the company out of its problems. So now to 3stocksonfire and this topic. David you are attracted to a stock based on its technicals. Once you look at the technicals you look for the short term fundamentals. That has in some cases led to a look at a long term fundamentals. Or you have looked at a sector first and then found a stock in that sector you felt was technically well positioned. This, I believe,is what your members expect.
When you consider holding a stock for the long term what you're really saying is as long as this stock acts according to my fundamental views I will stay the course. Buffet may know that the next two qurters will underperform and so will the stock but Those type of investors know that the 3&4 quarters will meet their long term growth pattern. They will ride the wave down and probably add to their positions.
I recommend you continue doing what are doing. The members who choose to continue holding a position for the longer term can. i.e. BRVO or VPHM etc. Actually you and the members here have identified a number of great stocks. Continue to find good situation, trade them when they violate your parameters and hold them as long as they meet your goals.
Hope this moves this subject on to a great thread,

[AussieTrader]

1Reilly makes some great points, probably the most significant being that the he is a friend of Warren Buffet 3SoF certainly has some outstanding members. Buffet style long term approach is fundamentally driven, they search and invest (heavily) in companies that are intrinsically undervalued in the knowledge that over time the market will 'correct' that valuation to the upside and that there will be fluctuations before it corrects. Buffet and Berkshire are not technical traders in their approach, most of us at 3SoF are technical traders.
So from my perspective in pursuit of the long term would be a hybridised version of technical and fundamental approach. It would differ from if you like the modern portfolio theory (10 or 15 same sized positions) and be a more focussed approach on 3 / 5  positions, greater investigation into the companies business model / market / balance sheet / growth potential /management effectiveness etc. By definition this knowledge gathering / educating woud be mostly prior to investing. It would also mean larger position sizing. There may be pyramiding and conversly position adding at lower support levels. It would also require patience because this type of approach is the antithesis of a highly active diversified portfolio approach (like the 3SoF port). As such there will be a higher degree of volatility and perhaps drawdown on this type of portfolio.
So, I think a trader can / should have this type of aproach alongside the more active higher turnover portfolio. Whether 3SoF should have it is another question and that would largely be a member driven debate. Personally one of my investing goals this year is to incorporate a longer term focus approach in my overall investment strategy, over the coming days I will construct its rules etc and share it on this thread.
Comments from members appreciated......

[shawFund]

I totally agree that the real money will be made to hold stock long term.

But one rule has to stick with: stop-loss rule. One bad investment could destroy all your previous efforts.

Never trust any company unless they can bring money to you.

For the portfolio I had during the last 4 1/2 year, I trade only 1 time per year and only 3-4 stocks in the porfolio all the time.

[AussieTrader]

Taken from the VPHM thread:

Some great discussion on this thread and all very informative, excellent.
For some time now, I have been mulling over moving to longer term holdings and trying to identify and stay with bigger winners. A thread to discuss longer termer was started here http://www.3stocksonfire.org/trading/index.php?topic=4267.0
My conclusions which are not set in stone yet are that I should:
Trade bigger positions (but maintain good money management, exactly what will depend on number of holdings and risk tolerance factors, but still cut losses quickly)
•   Have fewer holdings (5 to 10 max)
•   Make fewer trades (but be prepared to be stopped out and re-enter again later should correct conditions re-occur )
•   Trade 52 week high / all time high stocks (By definition these are strong stocks which have on-going momentum and that many traders  believe to be unable to continue upwards, in fact they become short targets which conversely helps fuel the momentum)
•   Pay heed to shares outstanding (say less than 30 million)
•   Pay heed to insider and institution hold percentages (insider holds should be strong, institutional not too high say less than 30%)
•   100K or so average daily vol (to ensure decent liquidity)
•   Quarterly earnings increasing (Shawfund is right to identify this as a key parameter to finding new stars about to launch)
•   Fledgling or hot industry (not always necessary, but good for added fuel)
•   Add to strong positions on pullbacks to support (this is not in every case needed, but why try to find new candidates when with good money management you can add on the way up). This brings in to question the diversification of portfolio debate i.e. am I at more risk with bigger positions and fewer holdings. Both sides to this debate are valid, I am beginning to believe that holding and having deeper knowledge on a smaller number of stocks is safer than a broader number where I have limited or no knowledge of the company)

Once some candidates are identified and fit the right criteria, set buy stops to enter when they breakout per identified conditions (e.g. to new 52 week/all time highs with increasing vol) Rather than buy them because they were identified the night before.

The above is not ground breaking new information, it is a known methodology that is being used right now by many traders. The aim to find a) stocks with ongoing momentum (and to buy as they continue up) and b) stocks starting to gain momentum (and to buy earlier in the move, this being a lot harder and more prone to failure than a)

I used some of the above conditions to identify and enter HANS a few days ago. http://www.3stocksonfire.org/trading/index.php?topic=4290.0 HANS was less than $5 2years ago, today its $104 and still rising on strong momentum. Not long ago I would have shied away from buying an $80 stock which had already given multiple bags, now I am seeing this is exactly what I should be buying.

I am not saying I have a magic formula or guaranteed system. I am still piecing together my approach. I am trying to move the risk reward ratio further to my advantage.