After Reading this blog you will never need to Agrue if Trends are Important or no. Since i have started my Retail Research Desk, I have been asked many times that if I use fundamental or Technical Analysis for Investing. My Answer has always been, i use history, i learn from history about what has worked for last 50 years around the world in the Game of Investing. As Warren Buffet says ” What i have learned from History is that people don’t learn from History, and they repeat their Mistake”.
Today i want to Share a Secret, and that Secret is about Trends. I have seen a lot of technical guys cursing the fundamental ones and vice versa. I believe the only Goal we have is to create wealth with taking calculated risk using any Fundamental, Technical or Quantitative Analysis.
The first Step in learning to pick stock market winners is for you to examine leading winners of the past to learn all the characteristics of the most successful Stocks. We did a Research of the Biggest Winners of any 3 year period from 1994-2016 and we got amazing Insights from it.
Today i am going to Write Five Things you Need to Know About Trends
1) Only Concentrate on Medium Term Trends – When Charles Dow (Father of Technical Analysis) was writing his Theory 118 years ago he had written about 3 Trends i.e.
Primary Trend (Main Trend)- 9-24 Months
Secondary Trend (Reaction)- 3 Months+
Minor Trend- Less than a Month
Charles Dow had written that Minor Trends are “RANDOM IN NATURE AND CANNOT BE PREDICTED’, but today i see 99% traders who want to get rich quick do Intraday and Intradweek trading which is absolutely useless and i can Guarantee you that they will never create wealth doing that. Atul Suri (Right Hand of Rakesh Jhunjhunwala) in his “Trading for a Living” conclave said that Intraday Trading is For fools and he only Invest in Trends for Long term
2) Trend Last Long Enough to Make Money – The Pharma Index went up 7x from 2009 and 2014 without correcting even once more than 13%. The Dow Jones Went up 4x from 2400 to 9300 between 1991 and 1998 without even correcting once for more than 9%. I can give you 1000 Examples like this but i have made my point.
3) The Difficult Part is Sitting Tight – I am a Big Fan of Jesse Livermore and he said “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”. This is the most difficult part of Investing is being patient in your winning positions and believe me i took me years to learn patience. You have to be very patient with your winners and Extremely Impatient with your Looser. Jesse livermore said “The market does not beat them. They beat themselves, because though they have brains they cannot sit tight”
4) Fundamental not supporting Trends – Paul Tudor Jones (hedge Fund) has caught every stock market crash and has compounded money faster than warren buffet said “The concept of paying one-hundred-and-something times earnings for any company for me is just anathema. Having said that, at the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?”. Paul Tudor Jones is a trend follower and buys whats rising and sells what Falling. This is where we at stallion Asset Differ, we only like companies which are rising but have improving fundamentals, i cant buy a company with deteriorating fundamentals and rising prices.
5) Trends Change – Ed Sekyota of Trading Tribe says “The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.” The Best trend Traders have absolutely no regret in losing money, they are extremely unemotional. Sanjoy Bhattacharyya who is one of the marqee investors on Dalal Street who Ramdeo Agarwal consults before buying or selling a stock said in Gurus of Chaos that “If i am loosing more than 15%, i exit my Investment”.
Conclusion – I am in a CFA, CMT and i understand both fundamental and Technical. We at Stallion asset are into long term investing, but trends are extremely important especially in the last stage. Fundamentals might be good for the first 100 or 150 percent of a move, but the last 6 months of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic. There is no training, classroom or otherwise, that can prepare for trading the last wave of a move, whether it’s the end of a bull market or the end of a bear market, you just have to ride the wave and keep a trailing stop loss. To Create Wealth we have to only catch 1-2 bubbles and believe me your life will change.