8 Trading Strategies For 2023
We are seeing value in the market. This article is designed to sharpen your knowledge and skill base to take full advantage of these opportunities. While we have increased our buying recently, our own Small Cap Portfolio remains 75% invested. First, it’s important to clear out your portfolio, which is where our Portfolio Manager, The Idle Speculator always starts.
Read more about Investing in Small Caps. Why we picked these ASX Small Cap gems and their outstanding performance.
1. BE COMFORTABLE WITH EXISTING POSITIONS
If any of your stocks cause you discomfort, because it is too large a position for your portfolio, or you don’t like something about the fundamentals, the simple answer is to sell enough to make yourself comfortable.
2. UNDERSTAND WHAT YOU OWN
The more you understand about a business, the easier it is to be comfortable holding that stock through a bad market. Thus, we sold 500 Capral (CAA), a quarter of the full position, in the middle of the year, even though it was still performing well, because we saw clouds on its horizon with a vulnerability to higher energy costs, and it was our largest position at that time by a long way.
We review the underlying businesses of our existing positions regularly.
3. DIVERSIFY, DIVERSIFY, DIVERSIFY
The key to any portfolio is being able to withstand volatility, which means owning a number of stocks, which in our view means 15 plus stocks.
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4. STICK CLOSELY TO FUNDAMENTALS: CASH FLOW AND PROFITABILITY
We cannot influence the price other people put on the stocks we own, but we can decide the price we pay for those stocks. The key for us is satisfying ourselves that the underlying businesses are soundly financed, profitable and cash flow positive (except for good reason) and have sufficient competitive advantages to be able to at least tread water in difficult conditions, while having earnings growth prospects in better times.
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5. DON’T PAY UP
Even though each market downturn is different, our experience through the downturns in 2007-2009 were that there were seven distinct sharp moves down. 2000 to 2003 had less spiky down days, but ultimately resulted in a loss of interest in the market by the public.
The point is that you do not want to be paying up in this environment. Do not lift the offer.
6. KEEP YOUR POWDER DRY
Also, keep some of your powder dry, in other words, keep some cash in hand. It is important that you do not spend your cash too early, but slowly buy stocks that are attractive, finding treasure in the market’s trash, at value adding prices.
7. BUY DIVIDEND STOCKS
Dividends are one of the core differences between pure speculation and investing. They are an important sign of financial health, although somewhat over done in Australia because of franking credits. In this environment, most companies, certainly not small caps, are NOT paying dividends to cover up for valuation concerns. The banks did this for a number of years, but arguably not today.
Dividends will help replenish your cash reserves. In any investment portfolio, the majority of stocks should pay decent dividends, or have net cash at the very least.
8. USE UNDER THE RADAR REPORT TO BE PATIENT AND GO FOR VALUE
We are now in an environment of interest rates being higher for longer.
Investors have taken out excess money from Small Caps during June and now it is harder to acquire larger amounts of stock. Even putting $10,000 to work can sometimes move the price of a stock against you. Patience is crucial.
Rather than chasing a stock, it may be helpful to put a few bids on the exchange and see what happens.
Under the Radar Report will provide you with metrics on how much the company is worth, relative to sales, earnings, and debt, at the price you are willing to pay.
Reading our latest reports and notes on each stock, will help focus your mind on whether a particular stock is actually at a bargain price or is inflated.
If you want to put cash at risk but can’t find something really cheap, wait a little while, and you may get lucky. We’ll be there to tell you when to step in, which is why reading our reports each week is crucial.
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