REACTIVE INVESTOR OR PROACTIVE INVESTOR?

I start this post with two sayings from Ray Dalio, arguably the largest hedge fund manager in the world.

“The way to look at any market… is to look at the buyers and sellers and to understand who’s buying and who’s selling and what the motivations are behind that.”

Too many investors are reactive decision makers… if something has gone up, they say ‘ah, that’s a good investment,’ they don’t say ‘that’s more expensive.’  It’s the most common mistake in investing.  You have to look ahead and say what is the transaction? What will determine the buyer or seller?”

More about Ray Dalio here:

http://www.forbes.com/pictures/eehd45kkie/ray-dalio-3

I was reading his comments yesterday and it struck a chord within me because I have been making the transition from a reactive investor to a proactive investor.

A proactive investor, regardless of the market he invests in, is one who has developed a way of anticipating what the smart money in that market is doing and how to piggyback their entries and exits.

He always seeks to answer four basic questions, using whatever approach (fundamental analysis, technical analysis or both).

1. Where is price going – uptrend, downtrend or ranging?
2. By what volume – by what minimum number of basis points in that direction?
3. How do I know when I am wrong?
4. What do I do if I am wrong?

Well, based on my quest to trade proactively and not in a reactive manner, I always seek to answer the above questions and I only take a trade when I am able to answer all four questions.

For example, based on my market timing tools, as shown below, I have maintained a buy bias for a particular stock Guaranty Trust Bank Plc since 11th March and I remember several investors/traders saying that the stock cannot go beyond N25, thereabout, but I disagreed because they all couldn’t give me a logical backing as to their bias.

Yesterday, as I had anticipated, price spiked up all the way to N27.5. As anticipated, I find it instructive that GTB opened up Q2 2013 with a spike upwards, thus confirming my bias.I now expect profit taking at N28, short to medium term and N38, in the much longer term.

Yesterday’s move left some of those investors/traders befuddled, but I was not surprised. Rather, I was surprised that they were surprised. But then again, I personally do not know many traders who use a systematic approach as the basis for their investments in the NSE. The average investor is at best discretionary and at worst, befuddled. I hope this post draws them out.

GTB 11032013

Am I always right? No.

But the trading edge is not in how often you are right or wrong. It is in how much you make when you are right and how much you lose when you are wrong. So seek to make more every time you are right than what you will lose every time you are wrong.

A systematic proactive approach to investment trading is the secret to every successful trader/investor.

For me, technical analysis of the Nigerian Stock Market is my proactive approach.

I watch order flows, observing the NSE All Share Index as well as market ebb on a rolling quarterly basis . Then I target technical momentum trades on fundamentally solid blue chip stocks.

So, I ask you, what is your proactive approach?

We learn everyday.

Olufukeji Adegbeye CWM.

DISCLAIMER: This article and all its recommendations are purely for educational purposes. Margin trading is highly risky and is not suitable for all kinds of investors. Kindly consult you financial advisors before making any decision based on the content of this post.

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6 thoughts on “REACTIVE INVESTOR OR PROACTIVE INVESTOR?

  1. Nice blog and very interesting post, Olufukeji. I tend to rely more on the financial performance of the underlying company than on technical factors. GTBank posted some impressive year-end results yesterday, which could help explain the spike (and the order flows the past few weeks). I’m curious which Nigerian blue chips you include in your universe. Also, do you have any tips on how to spot a good momentum trade?

    • Wow…Ryan Hoover commented on my blog…yay!!!yippee!!!.
      Well, viz momentum trades,being that I also trade FX, I adapted a number of my proprietary FX strategies to NSE equities and I was pleasantly surprised to find a couple of them working rather well.
      In summary, I basically combine volume indicators, starting with the NSE AllShare Index and observe its behaviour around quarterly support and resistance levels and when I see potential breakouts on increased volumes, I look for entries on leading stocks of respective sectors – Banking, FMCG, Breweries my favorites being NB, GTB,1st Bank and the pricier Nestle (I dont have this, but it is a classic example of Technical Fundamental Hybrid stock trading, so I follow it because on its own, it is an indicator for me). I choose only growth stocks such that even if my analysis is wrong, I won’t mind holding on to them for the long haul. I rarely buy stocks in the short term that I cannot hold long term. 2008-2011 showed me the danger of trying to short term trade the NSE.( For the thrill of short term intraday/week trades, I trade FX, not equities, cos FX offers better liquidity, better transparency, less ‘manipulability’etc )
      Volatility indicators like Bollinger Bands/Keltner Channels, trend indicators like Relative Strength Indicator (RSI), Commodity Channel Indicators (CCI), MoneyFlow and Moving Averages help me finetune my entries for best risk management, profit targets and loss limits. I read up on Darvas breakout stock picking system a lot. It was a real eye-opener for me viz NSE.
      As per getting the NSE in chart format, Bloomberg is great cos its realtime but it’s pricey for the individual retail investor/trader, so for now, I am always on the lookout for free sites that offer charting and technical analysis tools for NSE.
      Hope my long ‘dissertation’ reply helps:)
      Thanks for taking out time to visit my blog…most grateful!

  2. Ryan has an important point in fundamentals. My approach to market is to realize some distinctions:
    1) Trading is not Investing & Investing is not trading
    2) The fundamentals drive the price points. Technical analysis is worth less without sound fundamental indicators like: Management, Corporate governance, Capital reinvestment/Dividends strategy,Market share and strategy,product cycle,mark to market ratio amongst others
    3) Focus on high growth stocks with real intrinsic value higher than the book value that portrays mark to market ratio is important
    4) Aligning your investment portfolio around a few stocks that centerpoints your strategy is as important as the volume you bring to market

  3. Thank you Kelvin for taking out time to comment and share your approach.
    IMHO, any approach that answers the four questions I listed in my post is a proactive approach. As long as points 2, 3 & 4 are helping you in your trading, then you have a proactive approach.

    For point 1, well, isn’t investing simply trading zoomed out to the longest possible holding period/time frame/investment horizon?

    As for the Technical vs Fundamental Schools of thought, both are complementary, not substitutionary. Say you’re a huge institutional, offshore investor who uses fundamental analysis to decide what to do and as soon as you conclude and you begin to take your position, it is reflected in the market charts, simply because you are a large volume investor.

    So, I can now apply my technical analysis tools to try and piggy back the entries and exits you’ve made based on your fundamental analysis.

    My best proactive approach is a technical, fundamental hybrid.
    Thanks again for sharing your approach.

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