The "Stock Trading Riches" Investment System

[PraveenP]

Hi Aim Hier,

That's great that you have your own system with an edge. That is the most important thing - a system that you feel comfortable using.

A lot of it is learning about yourself too. If someone gives you a system, but it trades at a frequency you aren't comfortable with, or it has a drawdown pattern you don't like, then you won't end up using it.

With my trading model, it is focused on the fact that stocks fluctuate. That's the only assumption - not that I can find the next Microsoft or Google. That is why I don't automatically increase CV, and I want diversification - the more stocks, the better.

With a buy/hold portfolio, or if you spend a lot of time analyzing stocks, then I agree that too much diversification is a bad thing. In the first situation, the individual movements cancel out and, in the second, you can't do an in-depth analysis on each stock.

In my model, I would be happy having hundreds of stocks (if my portfolio was large enough ) because each one is rebalanced separately. By using a pure CV (without automatically increasing it), I'm looking to maximize trading fluctuations - not growing the individual position. I want to sell every last dollar that the position is over the constant value, and buy every dollar that the position is under constant value.

I consider my trading model a form of market-making (at a large, macro level). I'm making a market and getting rewarded for adding liquidity - soaking up excess supply when the stock is weak, and feeding excess demand when the stock is strong.

So, I want to make a market in many stocks. In my model, it's a numbers game. Some stocks might stay range-bound for 3 years (I think you mentioned this example in an earlier post) - so if stocks like this would make up a big chunk of my portfolio, my account wouldn't do anything. But, eventually it will fluctuate, or get taken over. In the meantime, I have other stocks moving.

This doesn't mean I eventually want hundreds of $2,000 positions. At some point, I would increase the CV - maybe to $4,000 or $5,000. Then, I would stop adding new positions and rebalance the existing positions to the new CV - with maybe a combination of new money and selling positions that are duds. Then, I would be adding new positions slower because of the larger CV. This part is more subjective, and more a judgment, based on practicality.

So, to summarize - my system can be thought of as investing in stocks like real estate. Hopefully, getting some price appreciation, but looking for "rent". Dividends also give you this (and I do collect on dividends from my positions), but the tidal motions of the stocks pump out the rent.

Maybe a better analogy is that I'm buying property and pumping oil or erecting a windmill, so I can sell the energy and use the cash return to pay off the land. In this case, the "land" is the stock, and CV rebalancing is the "pump" or "windmill".