Hi GJ,
Been super busy of late and scaling the SM stuff right back but took half an hour this arvo to sketch (roughly) how I do things and how I plan to evolve the strategy this year. Just a guide and have probably missed a few setups I use but hopefully an ok overview.
Super: In my 30s and who knows if I'll even be around when the future preservation age arrives. Not banking on it. So quite lazy with this but it's a condensed portfolio of investment grade stocks, like CCP, which you'll recall I put 25% of the portfolio in to at $9.30. Still holding. Looking to add some larger gold stocks with strong RR (RSG RMS, are at the top of my list, so far). The whole idea with Super for me is minimising time spent managing it, so I want stocks where I can largely just read through the two half yearly reports and any material updates. Set and forget. I'm not averse to ETFs here.
Small/Midcaps: These are mainly investment grade stocks (occasional thematic/momo) that again require less management. The chief time burden is finding them but once in the portfolio, they tend to be much more sticky than microcaps. I'll rarely post on these (and tbh there are some much more dedicated and skilled professionals who do a good job already in this space) but I'll throw out codes when I see them (last few years, stocks like FID HUB KKT APX ZNT NCK WLL etc). Pretty selective here, so the hit rate is much higher than with specs. I like to get in early and anticipate that a percentage of my buys will be the next smallcap that the fundies are talking up, a year or so down the track. Being just one investor and nimble means I can get set (and out if I need to) more easily than a small FM. That's one of the prime advantages we have as private investors. Nail 2-3 of these every 1-2 years and you'll be doing very well. Slim picking in a frothy market.
One of the things I think is crucial with investing is identifying where you might have an edge and exploiting it. With the more investment grade style stocks, I identified early on that I'm just not the sort of person who thrives on poring through Annual Reports and building extremely detailed financial models. I don't dislike it and have done it but I don't spring out of bed for it. This puts me at a disadvantage to the myriad smallcap fund managers that now exist and do have an edge in this space, due to skill and actually having a real passion for it. For that reason, my strategy with the investment grade small/mids is to keep things very simple and try to only take the so-called, no-brainers. If we say the very good small FMs are a 9/10 skillset and I'm a 6 or 7 at best, it means I don't want to be getting cute and going for the more exotic, difficult to understand businesses, that will zap my time and energy (and potentially, bite! ). So I'm usually only investing in businesses that are easy to understand, ideally, lots of fcf and no identifiable red herrings or complex financial arrangements, reporting anomalies etc. It means I'll sometimes miss opportunities the more dedicated analysts will capture but I'm comfortable with that tradeoff. A handful of relatively easy to understand businesses that usually have increasing profitability, decent mgmt and you know should be ok in the long run if markets tank. That said, I'm definitely not averse to flicking these stocks if I feel valuations are well stretched.
Micros: This is what I love and thrive in and where I feel I have an edge. For starters, over the years, I've no doubt made every possible investment folly under the Sun in spec land and remained solvent. Knowing what not to do and protecting capital is head and shoulders above any other attributes when it comes to microcaps. Anyone can get on hot stocks in a Bull market but retaining your profits will determine longevity in the market.
For whatever reason, I have a temperament that seems to work ok trading specs. Was never really one to get flustered at work or take it home with me. Tend not to get too emotional when my stocks fall. Can't remember ever falling in love with a "story", even when I was a Muppett in the early days. So very logical by nature but also have this very aggressive trader mentality, where I'm happy to put decent sums into stocks I think have very strong RR; even if 80% of market participants would think they're absolute garbage.
Right temperament or not, the goal should be putting yourself in scenarios that reduce the chance of cracks appearing. So, even if emotion is a strength, getting set low in stocks means I'm rarely worrying because my stock is down 20-30% and whether I should stop out. This is why, if I can't get set at the bottom, fairly close to directors and brokers, it's simply a case of "next bus, thanks" - no matter how good the story is. The exception to this would be stocks that have put in solid basing patterns, churned through supply and are showing signs of breaking out (e.g. volume spike/increase, change in biz direction etc). If I look at my spec portfolio and see more than a few positions in the red, I know that I've made poor/lazy investments. If I see stocks down more than 25-30% (happens a few times a year) then I'll know I've been undisciplined and need to review the mistake.
So once you're in at the right price, you need to work out how to exit. I trade a range of setups:
Buy Early, Sell Before (BESB): an old acronym from the American oil boom days (actually, BESBS - buy early, sell before spud). Strictly speaking, could be Buy Early, Sell Partials, depending on risk tolerance. With these setups, you're not trading an information edge that you've uncovered and most don't know about. You're trading opportunity cost for getting set cheaply, when the market is off somewhere else. BESB does not mean, holding stocks endlessly because you like the story and think it will go up, eventually. That's called being a true believer and doesn't make money, consistently. You want stocks with clearly defined timelines and milestones/events that will get the market excited, leading in. Bios easily have the best return profile but usually the largest opportunity cost. You make 1-5 bags, without having to hold into trial results but your wait is 6-18 months. Sometimes you get ones like DXB last year, where it gave a bag in around a month. Not so common, as they usually run well before trial results are expected. OPT IIL PBT LCT IMU have all been great examples over the last few years and 1AD, PTX and a few others could be the next batch. Notice how it didn't matter (trading wise) that IIL, LCT and PBT had disastrous trial result, as we are out before then. A big change for me this year will be a transition over to US markets, where I hope to eventually make the BESB bios strategy 50-100% of my total trading. Given the BESB investment timeframe, this would allow for minimal screen time. Really appealing for someone like me, who thinks there's better things to do with your life than spend eight hours or more infront of a computer, five days a week. I hear many talk about screen time being key and maybe true for traders. Personally, I think it's a ticket to bad health and pretty boring.
The other BESB setup I use consistently is leading into mining assays. Buy early, wait for drilling to commence and sell as hype is in full force; usually once core has been sent to the lab. Much less waiting time than bios but usually only 50-100% return. Sometimes less if there's been a poorly managed placement done to fund the drilling. I'll hold into assay release for some higher confidence plays or perhaps for infill drilling or Chairman's specials.
I also buy techs and most other sectors, with the key being entry price, marketability and giving winners every chance to run and cutting losers quickly. Like many - I'm sure - I've never had a problem finding winners, even in the early days. The key to trading profitably is not losing money. Therefore, I leave plenty on the table at times but again, happy with the tradeoff.
I'm never banking on finding the next ALU in the <$20m mc zone; not because it isn't possible but because I don't think the probabilities stack-up for you to focus your limited time in this space. I think the last couple I got on were KKT and CMP in the 10-12c range a few years back; but for every KKT and CMP, there's plenty of false starts, like WRR and RFT. If you want to find the next ALU or APX, the sweet spot in my view seems to be around the $40-80m mc zone. At this point, a genuine would-be star of the future should have sufficient revenue, client profile and mgmt track record to give you an idea. I strictly avoid chasing hyped-up stocks that are commanding $50-150m mc (SYT, BRN, UPD, RFN, GSW - the list goes on) with little or no revenue, as history tells us, comprehensively, where these names end up. This doesn't mean I won't apply for IPO stock in overpriced IPOs, if I think the story is marketable.
I'll finish off with shells, as they've been a really profitable earner for me over the last few years and one of the most enjoyable investments to research. I've had all sorts of self-appointed experts argue that it's gambling, to which you can only laugh. There's a few of us who have gone over the rules of the game for shells, plenty of times and I think there's been a huge number of traders jump onboard the shell train in the last 12-18 months. This makes sense in a raging Bull market. In short, you're looking at aptly priced nanocap vessels that have some combination of: quality mgmt/dealmakers, either as directors or shareholders in the T20, favourable wording in the recent Qtr update, a renowned broker who is either buying on-market, or more likely, has just done a placement. This covers about 80% of the research. The finer elements that can set you apart are things like the memorybank of trading names you gradually acquire and who they belong to, the $9 paid ASIC searches, the linking of names on a register to other names, any director or major holders' private companies and what they do, mgmt track record in dealing with ASIC and how Ch1&2 might apply, GICS code etc. It also takes time, scouring through quarterly after quarterly, Google searches and the like, trying to search for clues. Very much a forensic process. Opportunity cost is again a factor to consider, with most shells taking 1-6 months to acquire a new project. The rewards are often large and sudden, considering the tiny mc most shells are starting from. Some winners I've had in the last 12 months have been: CDT QNL DMI EYM BMG S3R SPI EFE. With experience and time in the market comes account size and if you can get reasonably well up the T20 on some of these shells and they do 3-5 bags for you, you're talking some decent earns that genuinely impact your portfolio return. This is strictly an endeavour for secular bull market conditions, as liquidity is non-existent for many shells in bearish conditions. The same could be said for specs, in general.
Looking forward, I think a lot of the easy money has been made on equities and think there could be harder times ahead over the next year or two (haven't said that in nine years of Bull market). The recent bond-driven volatility is the first crack in the dome in my view. I think what worked well over the last few years may not keep working quite as well and i'm positioning, accordingly. I'm also acknowledging that there's no point being totally out of risk assets while the trend is intact and there's probably another last hurrah or two to go.
I'll be looking, more and more, to supplement my trading profits with options, some agri trading and shorting extended setups over "hot air" stocks, like techs with no revenue and some miners with long lead times. This, plus delving into US biotechs should keep me busy. Working on a few other things that are taking up a bit of time as well.
Hope that's of some use.
Cheers
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