Do You Make This Bear Market Mistake Too?

Markets are enjoying a relief rally late last week. It’s really just a ‘short-covering’ rally though.

Don’t even think about picking the bottom here…unless you realise it’s a complete punt. It will take months of ‘bottoming’ before you can get more confident about the bear market in resource stocks being over.

Bear market rallies are good at luring people in. They make you think the worst is over. They make you think stocks are cheap. And then when you do buy back in, the market turns back down again…

On the other hand, investing in a bull market is pretty easy. Pick a stock, and watch it go up. As the saying goes, an incoming tide lifts all boats.

The reality is that most people attribute strong performance in a bull market to their own stock picking nous.

It’s only when a bear market comes along that they realise the limits of their stock picking skills. They probably also receive a brutal lesson in the role that emotions can play in investment markets.

Let me tell you, emotions will lose you more money in the market than bad stock picks.

If you pick a dud stock, the obvious and unemotional thing to do is to dump it when it moves against you. But most people stick with it. They want to be proved right.

Then it falls a bit more. ‘It’s cheap’, you think. ‘I’ll buy some more and average down’.

It falls again. ‘Ok’, you say, ‘I got it wrong. I’ll just wait for a bounce, then I’ll sell’.

But the bounce doesn’t come. You get a profit warning instead. The stock plunges.

Now you’re stuck. You don’t want to take such a large loss. ‘This is probably the bottom’, you think to yourself. ‘I’ll kick myself if I sell and then it starts to take off’.

So you hang on against your better judgement. You end up with the same dud stock you bought a year ago, only it’s worth 70% less than what you paid for it.

I don’t know if you’ve had a similar experience. I know I have. My stupid emotions have cost me plenty, especially in the early years.

But this experience was a valuable one. It cost me money but I learned from it. Unfortunately, there’s really no easy way to learn this lesson. You simply have to experience the pain of it to benefit.

Having said that, I realised a few years ago that Port Phillip didn’t have a product that removed all emotion from the investing equation.

So back in early 2014 I decided to do something about it. I felt that the next few years in investment markets probably wouldn’t be as kind as the previous few. I wanted Port Phillip readers to have access to a product that would steer them through such a period, without letting their emotions dominate their decisions.

So I got in touch with an old mate of mine, Jason McIntosh. You might be familiar with his work.

Jason was a former trader who ‘retired’ at 37. I knew he was still actively involved in the markets though, so I asked him if he could design a system for our readers.

After some negotiating, we came to an arrangement. Jason spent the next six months or so building a system that incorporated everything he’d learned in his 20 year trading career.

This involved designing algorithms to generate buy and sell signals. He did extensive back testing to make sure the system was a robust one. That is, a system that could generate solid results no matter what the underlying market conditions were.

The results from back testing told us the system would work. We just had to put it into practice.

By late 2014 we were ready to go. Quant Trader was ready to start generating live signals.

Now, we’re more than 12 months into the Quant Trader service. Despite 2015 being a tough year for many investors, I’m pleased to report that Quant Trader did ever better than back testing said it would.

This is exactly the type of product I wanted to have for you in Port Phillip Publishing’s stable. Quant Trader tells you exactly when to buy and when to sell. It doesn’t think, it acts. Its judgement isn’t clouded by emotions. It’s driven purely by the share price data.

The easiest way to describe Quant Trader is that it buys into share price strength and sells into share price weakness. It lets winners run and cuts losers early.

This sounds ridiculously simple but most investors do exactly the opposite.


Our emotions screw with our rational thinking.

Take them out of the equation and see what happens…

Here’s a snapshot of how Quant Trader has performed from inception on 17 November 2014 to 31 December 2015. This was a time where the All Ordinaries lost value, and showed plenty of volatility in the process.

The average winning trade (including open and closed positions) generated a return of 34.8%, while the average losing trade (open and closed positions) lost just 10.4%.

Look at those numbers again…

Your wins average at 34.8%. Your losses average at just 10.3%.

Many people would be happy with those numbers in a bull market. But Quant Trader’s signals did that during the worst year since 2011.

That’s the Quant Trader advantage. It’s an algorithmic trading system designed to latch onto winners early and stick with the trend. When the trade doesn’t work out, it dumps the stock. No questions asked, no ego involved.

How does it find the winners?

The system’s algorithms scan around 2,000 stocks on a daily basis looking for share price movement. Specifically, the algorithms have an advanced filtering process that distinguishes everyday volatility from share price movements that hint of a major move ahead.

This filtering process enabled Quant Trader to put out buy signals on stocks like Blackmores [ASX:BKL] (up 542% at 31 December 2015) Hub24 [ASX:HUB] (up 211%) and AMA Group [ASX:AMA] (up 154%).

Chances are you’ve heard of Blackmores. It was the ASX 200 best performer of 2015. But I’d guess the other two stocks aren’t so well known.

That’s the power of Quant Trader. It finds stocks at the beginning of a major move BEFORE the rest of the market knows about it.

There’s plenty more I could tell you about the service. That’s because I’m proud to have played a small part in bringing a product like this to Port Phillip subscribers.

But I’m running out of time, and I need to wrap up this edition of Insider.

If you like the sound of what Quant Trader can do for you though, keep your eyes peeled for a special four part video series starting next week. In it, Quant Trader designer Jason McIntosh goes through the first year’s results in detail, and explains more about how the system works.

Stay tuned for that early next week. With 2016 looking like it will be another rough year for markets, the discipline of Quant Trader might be exactly what you’re after.


Greg Canavan

Ed Note: This is an edited extract, first published in Port Phillip Insider.

From the Port Phillip Publishing Library

Special Report: You probably already sense that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent no matter what happens in the next 12 months. In this special report, Sam reveals the simple principle behind that success. And you’ll also discover his top three small-cap picks for 2016, which could bring you gains as high as 338% over the next 12 months. (more)

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Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

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