Showing posts with label inverse pyramid. Show all posts
Showing posts with label inverse pyramid. Show all posts

Monday 4 May 2009

Investment Pyramid





Investment Philosophy

It's Not What You Win That Counts
It's What You Don't Lose



Introduction


We suggest reading the beginner's section and the glossary of terms for starters. There is a lot of information available in these two areas – take advantage of them.


We feature three (3) model portfolios. The following overview covers the basic ideology behind the three portfolios and our investment philosophy. The portfolios are:


Conservative
Moderate
Aggressive


Conservative
The conservative portfolio emphasizes safety and risk control. It is for the investor who wants the least amount of risk exposure while still maintaining a solid rate of return. The emphasis is on the return of one’s money, as compared to the return on one’s money.


Moderate
The moderate portfolio's focus is on both the return of one's investment and the return on investment. Safety is still of prime importance. So too is the preservation of wealth. The goal is larger profit margins as compared to the conservative portfolio.


Aggressive
The aggressive portfolio is for investors who have experience in trading and who know the ropes so to speak. They understand their overall financial situation in detail. Aggressive investors have made the conscious decision to take on more risk than the average investor does – in order to gain the opportunity to make larger profits.


A well-defined plan is in place to control and manage the risks. Reassessment of the plan is essential so that the portfolio adjusts to changes in the market accordingly. Hence the aggressive portfolio is much more active than the conservative and moderate portfolios.


Money Management & Asset Allocation
Money management and asset allocation are two key building blocks of any serious portfolio – be it conservative, moderate, or aggressive. Constant reassessment and adjustment of the portfolios with market changes is key as well.


Investment Pyramid
We use an inverted pyramid to illustrate the structure and foundation of our investment philosophy. At the base of the pyramid are the safest asset classes. They are also the soundest of all available investment vehicles. Various investment categories sit on top of the foundation forming a hierarchical scale from the safest assets at the bottom – to the riskiest assets at the top.



Psychology
The market thrives on two basic emotions: Fear and Greed


However, there are many subsets to these as well. For instance, one can have the fear that he is going to miss the next rally. Is really fear - or a form of greed?

One can keep holding a stock after significant increases in price, never selling or booking profits, always hoping for additional profits. Suddenly the stock starts falling precipitously. Half of the profits that were on paper vanish. Did greed keep us from selling or was it the fear of giving up possible gains?


The market will teach us much about ourselves if we listen to it. It is hard to listen to the market as opposed to what our mind thinks about the market. This is true in all things. Listening is an art form.



Do Not Take the Big Hit
The main reason investors take a big hit is generally due to emotional and psychological reasons. We all have our own unique personality that we bring to the table.


Whatever emotional and psychological weaknesses we have, the market will quickly search them out, and bring them into play – usually quite fast.


Most often then not the market does not have to beat us – we beat ourselves. To be successful we need to know our weaknesses. We should to try to correct our weaknesses as we become aware of them. We must know our strengths – and use them to our advantage.


This is done by first recognizing them and then having a plan to keep them under control – just as we keep the other types of risk under control: market risk, timing risk, currency risk, etc.


Discipline and money management will allow us to cut our losses quickly – and to let our winners run freely. There is nothing wrong with being wrong – only in staying wrong.


Summary


The above is a general outline of our investment philosophy. The following points are most important:


Assessment of our financial situation and investment goals is key.


Assess our psychological make-up – including strengths and weaknesses.


Define the primary market trends in the market.


Choose a portfolio to meet our own specific goals.


Have a well-defined plan including asset allocation and money management.


Use a combination of the various types of analyses available.


Utilize the inverted pyramid to define safety versus risk


Do not take the big hit


Remember the slogan:


It's Not What You Win That Counts

It's What You Don't Lose


Sunday 3 May 2009

The Rule of the Pyramid

This is another simple concept one can incorporate into one's investing knowledge. For long term investors, this incorporates the other investing concept of tactical asset allocation.


The Inverted Pyramid

Playing the "Inverted Pyramid" describes the buying pattern of many players (usually "never-die-before" trader) chasing after a charging bull. An inverted pyramid is narrow at the base and gradually broadens at the top.

In a bull market, after several successful attempts, he became overwhelmed by how easy it was to make a quick buck from the market. He became more convinced and his greed manifested itself as the market trended higher and higher. His bets grew bigger and more aggressive than ever.

Building on such a foundation is senseless and perilous. Needless to say, the small winnings from the early stages are by no means sufficient to cushion even a minor correction of the market, not to mention a major deccline, when one has been exposed to huge quantities of highly-priced stock way in excess of one's risk appetite can bear. It is one of the most grievous and typical mistakes of a loser.



The Rule of the Pyramid



Assume that you are happily reaping profits from an upside rally or a huge bull run, gaining inn confidence and becoming undaunted by a possible correction or reversal in trend (the Bear).

Be always mindful of the Rule of the Pyramid. This is, as the market or stock price goes higher and higher, your bets should become smaller and smaller. In other words, the higher the market goes, the lesser you bet. Never risk more than 50% of your winnings back in the market again.

At the end of the day, after all the tiring mind games, guesswork, risk-taking and heart-stopping moments, don't you think you deserve at least something (be it small or big) as a reward for going through all that angst? Would you prefer to give it all back? Or even pay the market for what you had gone through?

This is a simple piece of common sense that not only prevents you from giving back all your winnings to the market after a rally, but also enables you to preserve your winnings.