After Mr. Velarde’s very informative lecture, COL’s Chairman and Founder, Mr. Edward Lee went onstage to discuss the importance of knowing what kind of trading style you are in as well as the risks involved in it.
Mr. Lee emphasized the different investing strategies present in our market today. He also stressed the importance of having a long term approach in investing and risk management and the difference between making money and gambling money.
He started by explaining how we analyze and develop ideas to trade the market. And one famous model about this is the FTSR model taken from the Caylum Trading Institue. FTSR is an acronym that stands for: Fundamentals, Technicals, Sentiment, and Risk Management.
Fundamental focuses on the financial statements of the company being evaluated which is affected by economic, social, and political forces. Technicals on the other hand, are all about price movements. Sentiment looks at one’s personal judgement or evaluation.
When it comes to sentiment, Mr. Lee emphasized that volatility is the new normal. The stock market experiences highs and lows, which will always be inevitable, so he advises to better just stay invested for the long term to minimize the risk.
Lastly, Mr. Lee emphasized that risk management is the most important element because if you don’t manage your risk, even though you make so much money, with just one big setback you can lose all of your money. You’ll be out of the game. Worse than this, when you spiral down, you will begin to lack confidence, you will begin to doubt, you will think that investing in the stock market is like gambling.
He emphasized that we have to remember that we are investing in the best companies of the world. So if we do not understand what we are doing, definitely, we will lose our money.
He also stated that investing into the stock market may be separated into two types:
- Long Term (Passive) – Buy and Hold; Position Trading*
- Short Term (Active) – Swing Trading, Day Trading (Momentum), Scalping*
He suggests 20% of your income should be invested in equities and 80% could be put elsewhere like cash, money market, balanced funds, fixed income etc.
*Terms are very technical that you need to have some background beforehand about this. But the essence of categorizing these types of investing will show to us what kind of trading style are we in. Do we buy and hold? Do we position our trade? Do we swing trade?
In a nutshell, here are the differences of the five trading styles:
Mr. Lee further explained that when it comes to momentum or day trading or even scalping, people are so excited to trade because we cannot argue that indeed a return of 60% or more is really high. However, if that person doesn’t know what he is doing and continues to speculate, he might be earning 85% from one stock but losing the same on another speculative stock. The end result, in short, is that you might just end up losing all your money.
And I remember this chart, this chart tells us that if we lose a certain percentage in our trades, it will require a little more percentage gain to recover from that loss:
If you lose 50% of your capital, you need to make back 100% to break even.
He even jested that if you are inexperienced and do speculative trading, you’ll only make COL Financial richer because of the number of trades you would be making.
He greatly emphasized this point to those present that day: If your mindset on stock investing is gambling, you will not feel contented. You must learn the reason why you are investing. Throughout his talk, Mr. Lee kept stressing that one must treat investing (in stocks) like a business and not like gambling.
He pointed out that 85% of short term or active traders lose money, and the sad part of this is that people keep on trading speculatively and actively. He advised that if we want to speculate, just allot 5% maximum of your investment to it. So that if ever you fall hard, at least it’s only 5% of your total investment plus the lesson it taught you.
He ended his inspiring talk by citing famous people and their trading styles:
Warren Buffet, one of the richest men in the world, follows the “Buy and Hold” Investing strategy for the long term. Most billionaires also do that.
On the other hand, Jesse Livermore, the best speculative trader, declared bankruptcy four times over his lifetime before committing suicide. Mr. Lee further shared that while Livermore’s life was tragic, we could read his book, if we have the time to do so, and learn from him.
Up next: The SMARTer way of investing, as told by Marvin Fausto with a special insight on where PSEi is heading 10 years from now and why.