My Investing and Trading Strategy

Disclaimer: This is not financial advice. This post is for educational and entertainment purposes only, documenting my personal approach to the markets.

Long-Term Investing

Just buy and hold the S&P 500 and you will be fine.

Investing is focused on wealth creation through compounding.

The goal is to buy and hold high-quality assets with a multi-year to multi-decade time horizon.

Find the right market to invest in. Currently, the U.S. stock market is still the best place to be.

What to buy: Primarily low-cost, diversified index funds (e.g., VOO, QQQM).
How to buy: Dollar-Cost Average (DCA) and consider adding more when the market is down significantly (e.g., >10%).

Note: Stop here if you want to keep it simple. This is probably the best strategy for most people.

Now, let's talk about active investing, which requires significantly more effort, research, and risk tolerance.

Why even bother if you can't beat the market?

Well, I believe you can beat the market if you invest within your circle of competence and study the greats.

Investing Strategies

1. ETFs Stronger Than the Broader Market (SPY)

Just DCA into these ETFs and hold for the long term.

2. Individual Stocks

Warren Buffett's Rule:
- Buy good companies when they are trading around their 200-week Simple Moving Average (SMA).
- Examples: AAPL, MSFT, GOOGL, AMZN, BRK.B, NVDA, etc.
It's even better when they are undervalued. (Can also consider selling puts to acquire shares at a price you are willing to buy.)
- This adds a Margin of safety
DCA and average down, provided the fundamentals remain intact.
Sell if the fundamentals deteriorate, the valuation becomes too rich, or your original thesis is simply no longer valid.
Dare to bet heavily when the odds are in your favor.

Trading Strategies

1. Selling Cash-Secured Puts

This is a neutral to bullish strategy. It's a great way to generate income or accumulate shares of a stock you want to own at a lower price.

Basics:
- Risk: Moderate, could lose the stock price minus the premium received if assigned.
- Reward: Limited to the premium received.
- Time Horizon: 1 month to 2 years.
Exit Strategy: Buy to close if more than 50% or 70% gain is achieved.
Market Outlook: Best in a neutral to moderately bullish market.
Strike Price: Choose a strike price where you are comfortable owning the stock if assigned.
Note:
- For 30-45 day: This is often part of a "wheeling" strategy.
  - The main goal is to collect premiums over time from theta decay.
  - If assigned, you can then sell covered calls against the shares you now own.
- For 1-2 year: This can function as a stock replacement strategy, allowing you to potentially acquire shares at a discount while collecting premiums.

2. LEAPS (Long-Term Equity Anticipation Securities)

If you are very bullish on a stock for the long term (1-2 years).

Basics:
- Risk: Very High, could lose 100% of the option's cost
- Reward: Very High, potentially unlimited
- Time Horizon: 1 - 2 years
Exit Strategy: Sell to close based on your target return or take loss when the stock drops below a key technical level (e.g., below SMA200).
Market Outlook: Best in a long-term bullish market.
Note: It's often better to buy after a dip, and a recovery has started.
- Bouncing off SMA200 or SMA50 crossing above SMA200 on heavy volume is a good sign.
Strike Price: Depends on your risk tolerance.
- ITM (In The Money) options are more expensive but have a higher chance of expiring profitably.
- OTM (Out of The Money) options are cheaper but riskier, but could yield higher returns.
Objective:
- Collect the option’s cost within ~6 months using a Poor Man's Covered Call (PMCC).
- Once the cost is recouped, subsequent gains are essentially “free.”

3. Selling OTM Bullish Put Spreads

This is a short term strategy that involves selling a put option and buying a lower strike put option to limit risk.

Basics:
- Win Rate: This is the most important metric for this strategy. A high win rate (e.g., >80%) is key to ensuring consistent profits over time.
- Risk & Reward: Since we aim for 1 for 4 (25%) returns, the risk is 4 times the reward.
- Time Horizon: 3–4 weeks.
Market Conditions:
- An overall bullish market.
- Use the daily chart for confirmation:
  - No earnings announcements for the next 3–4 weeks.
  - The price is above the 50, 100, and 200-day SMAs.
  - Heikin-Ashi (HA) continuation candles are present.
Trade Setup:
- Strike: Set below at least two major support levels (e.g., a major SMA, a previous price support level).
- Expiry: 3–4 weeks out.

A Note on Options

Options are complex derivatives that require a deep understanding of their mechanics and risks. They are contracts that give the buyer the right, but not the obligation, to buy (a "call") or sell (a "put") an underlying asset at a specific price on or before a certain date.

If you don't fully understand options, don't trade them. They can and will blow up your account if misused.

Risk Management for Trading

Position Sizing: No single trade should ever be large enough to wipe out a significant portion of the trading portfolio.
Win/Loss Ratio & R:R: Track the ratio of winning trades to losing trades and the average risk-to-reward ratio to ensure long-term profitability.
Trading Journal: Document every trade—the thesis, entry, exit, and lessons learned. This is crucial for improvement.
Diversification: Avoid putting all your eggs in one basket. Spread risk across different trades and strategies.

Lessons Learned the Hard Way

Experience is the best, albeit the most expensive, teacher. Here are some principles I've learned through losses and mistakes.

First, know whether you are trading or investing. They require different mindsets and strategies.
Don't fight the market.
- On a short-term basis: If the market is up, don't short. If the market is down, don't go long.
Trading is about technical analysis, not fundamentals.
- As the saying goes, "The market is a voting machine in the short term and a weighing machine in the long term."
- e.g., If BRK-B bounces off the 200-day SMA on heavy volume, that's a technical signal to go long.
Trade what you see, not what you think.
Trade the chart, not your P&L.
- This is very important to avoid emotional decision-making based on profits or losses.
- If the chart shows the stock is strong, then there is no reason to sell just because you are up 20%. Let your winners run. Try to hide the P&L column in your trading platform if necessary.
Have a plan and stick to it. Know your entry, exit, and stop-loss levels before entering a trade.
Recognize Hindsight Bias.
- A good decision can lead to a bad outcome (due to randomness), and a bad decision can still make money (due to luck).
Avoid overtrading. Sometimes, the best trade is not to trade.

Lifecycle Investing

The Theory: Because a young person's future income is stable and bond-like, they can afford to take on more risk early in life. This means using a modest amount of leverage (e.g., 2:1) on a diversified portfolio in their 20s and 30s.
The Goal: To achieve a more consistent level of risk exposure over one's entire life. Instead of being 90% stocks when you have little capital and 40% stocks when you are wealthy, you maintain a more stable risk profile through time.
The Deleveraging: As you age and your investment portfolio grows, you gradually deleverage, eventually moving towards a more traditional, conservative allocation in retirement.
Disclaimer: This is a high-risk strategy that is not suitable for everyone. It requires discipline, a stable income, and a deep understanding of the risks of leverage.

Investing Principles

Be fearful when others are greedy and greedy when others are fearful.
Time in the market > timing the market: The primary goal is to allow capital to compound over long periods.
Know what you own, and why you own it: Every position must have a clear thesis.
Risk management is paramount: Protecting capital is more important than chasing high returns. Never risk more than you are willing to lose.
Stay humble: The market can and will surprise you. Be prepared to admit when you are wrong and cut your losses.
Patience is a virtue: Wait patiently for opportunities, and when they come, have the courage to bet heavily.
Keep it simple: Complexity is often the enemy of good returns.

Inspiration from the Greats

Warren Buffett & Charlie Munger

Circle of Competence: Only invest in businesses you can understand. You don't have to be an expert on everything.
The Moat: Look for companies with a durable competitive advantage that protects them from competition, allowing for long-term profitability.
Mental Models: Munger, in particular, emphasizes the need to have a "latticework" of mental models from various disciplines (psychology, history, physics) to make better decisions.
Temperament is Key: "The most important quality for an investor is temperament, not intellect." Avoid emotional decision-making.
Inversion: "All I want to know is where I'm going to die, so I'll never go there." Often, the best way to solve a problem is to consider it in reverse. Avoiding stupidity is easier than seeking brilliance.

Peter Lynch

The legendary manager of the Magellan Fund at Fidelity, who achieved a 29.2% average annual return from 1977 to 1990.

Invest in What You Know: Your personal or professional life can give you an edge in identifying great companies before Wall Street does.
"Ten-Baggers": Lynch popularized the idea of searching for stocks that have the potential to increase tenfold.
GARP (Growth at a Reasonable Price): Don't overpay for growth. A great company can be a terrible investment if you buy it at the wrong price.
Categorize Your Stocks: Lynch put stocks into categories like "slow growers," "stalwarts," "fast growers," "cyclicals," "turnarounds," and "asset plays" to better understand their potential and risks.

Howard Marks

Co-founder of Oaktree Capital Management, known for his memos on market cycles and risk management.

Prioritize Risk Control Above All: The primary goal is not maximizing gains but maximizing risk-adjusted returns. Your first job is to control the "risk of permanent capital loss". This is captured in the Oaktree motto: "...if we avoid the losers, the winners will take care of themselves".
The Greatest Risk is Paying Too Much: Risk is not determined by the quality of an asset but by the price you pay for it. As Marks states, "It is price, not quality that determines value: high-quality assets can be risky, and low-quality assets can be safe".
Practice Second-Level Thinking: To achieve superior results, you must think differently than the consensus. "First-level thinking is simplistic and superficial... Second-level thinking is deep, complex and convoluted".
Understand the Pendulum: Markets are driven by human psychology, which swings like a pendulum between "greed" to "fear," "optimism" to "pessimism". The key is to get a "sense for where we stand" in this cycle and act as a contrarian.
Embrace "I Don't Know": Acknowledge that the future is "inherently unknowable". This humility stops you from making dangerous macro-forecasts and forces you to focus on what you can know: the relationship between price and value today. As his memo title states, "Truly nobody knows".
Be a Patient Opportunist: Superior investors wait for bargains to come to them rather than chasing investments. Marks uses a baseball analogy: "All day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it". There are "no penalties for patience".
Focus on Process, Not Outcomes: Due to the role of luck, a good outcome can come from a bad decision, and vice versa. "Good times teach only bad lessons" by rewarding risky behavior. Therefore, you must judge your performance on the quality of your decision-making, not the short-term result: "The quality of a decision is not determined by the outcome".
"Being too far ahead of your time is indistinguishable from being wrong."