Stock Squawk

By Parrot 🦜

Stock Squawk 🦜 - Developing Your Process

#25・ Oct 25, 2021

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Stock Squawk 🦜 - Developing Your Process

By Parrot 🦜 • Issue #25 • View online

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We all want validation. We see social media personalities post big gains on an option play, or a 10-bagger on a mega-Cap they bought 5 years ago, or a 200% swing trade; and we wonder what we’re doing wrong.

So we gravitate to people with similar interests and styles, then look for confirmation that we’re making the best investment decisions.

The problem is that there are as many variables to making investment decisions as there are people investing. That’s why it’s important that you develop your own process and be comfortable with it to weather market volatility.

There is no wrong way

Let’s start with there is no “wrong” or “right” way to invest. People will scream that there way is the ONLY way, the BEST way, or that your way is WRONG or STUPID.

I guarantee you, that every strategy loses money at times, and every strategy makes money at times. The key is finding the strategy that makes sense to you, that you are comfortable with, and that you truly understand the risk and rewards.

Developing and refining your process will allow you to be comfortable in your own investing skin. Everyone believes their way is the right way, but let’s be honest, there are a range of successful investing styles, you just have to find the one you’re most comfortable and successful with.

Getting Started

The absolute hardest part of investing is getting started. Taking the time to find a broker, open an account, and make your first deposit.

That first time you put in an order to buy a stock is exhilarating and terrifying at the same time. You’re taking a leap of faith.

Once you’ve made that commitment, you’ve crossed your biggest hurdle.

Trial & Error

You can read & study until you’re blue in the face. Drowsy used to aim to read a new investment book a month, we both still read a couple new investing books a year. But after a while you realize reading & studying will prepare you perfectly for the theoretical, unrealistic investing world. After developing a good foundation, there is no substitute for real world experience. So the best (and only) way to really perfect your own process is through trial and error.

If you have an idea, try it out and see if it works. Take copious notes, in particular on why you made the move, then review how it went (both good & bad). Make sure and document what you were thinking about & seeing in the stock BEFORE you make the investment/trade. Document your due diligence (DD) so that you can feel confident about making the move. Then you can use that information for future DD to adjust and improve over time.

Position Sizing

Whether you are a beginner or seasoned investor/trader, in our opinion, position sizing (risk management) is the most important aspect of investing. Always make sure you have money to fight another day. There is no glory in blowing up an account.

Your position size should also match the level of due diligence you put in, and your level of conviction. Work on developing your own rules around position sizing. Build your positions over time, Drowsy and I rarely buy a full position all at once, and usually buy the same stock over and over as the company continues to excel (Drowsy has bought $MELI 12 different times!).

You can find some examples of getting into positions in last weeks article on “Catching a Rocket”.

Fundamentals & Technicals

There are a hundred different fundamental & technical indicators. Some work better for certain sectors & trading styles, while others don’t work as well. Find the one’s the jump out as obvious to you, and then hone your skills at recognizing them.

Understand which indicators (moving average, sequences, patterns, etc.) you should use if you are trading, and which metrics matter most if you’re investing for the long term. For instance, DBNRR (Dollar Based Net Retention Rate) for SaaS companies like $SNOW or $CRWD is a key metric, while that same metric for pretty much any other type of company is much less important.

Make sure you know what matters most for your trading and investing style!

Different styles for different Goals

Your style should reflect your goals. Are you investing for retirement, a major purchase, or a steady income? These should affect how you approach your process.

If I was a few years from retirement, I wouldn’t be focusing the bulk of my investments on short term options. However, if you’re decades from retirement, some riskier choices like options & high growth stocks may make sense.

Just remember to constantly evaluate what your goals are. If they change, make sure your investing style and risk appetite change with it.

Different styles for different Markets

Your style should also adjust based on the current market conditions. In a general market that’s trading sideways, as we have from March to September of this year, selling puts & calls was a good strategy. In the more volatile market we had in 2020, buying puts & calls may have been a better strategy. All strategies don’t work in every market.

In “risk on” markets, LEAPs and other long term options on high growth stocks may be an excellent way to enhance your returns; however, that same strategy in a sideways or bear market may be quite detrimental.

Validation is okay

Full circle to the first sentence of this article: We all want validation.

Seeking validation is okay when you’re looking for holes in your process and ideas. Just be careful not to get caught in an echo chamber.

Taking the time to listen and understand opinions, especially when they differ from your own, is a key component of seeing and understanding the big picture, understanding risks, and improving your own individual process.

Summary

Your style can (and likely will) evolve over time. Half the world went from value investor to growth investor in the span of a couple months in 2020.

The key to long term success is to find what works for you, then be openminded & flexible enough to adjust your process as times (and the market) change.

This weeks article was meant to spark thought about your own process, not tell you what your processes should be; otherwise it wouldn’t be “your process”.

I hope we’ve sparked thought. 🙏

Weekly Portfolio Update

Weekly summary

A great week overshadowed by $SNAP earnings. Not only did it ruin my small call option, but my Ad Tech heavy portfolio sold off on Friday. In general, I expected it to be a short term blip, but it’s going to make earnings that much more interesting this week.

Trades

$SNAP; didn’t work out so well. 95% loss on call options
$NVAX; played options for a rebound thesis that didn’t materialize, sold for 2% loss
$PUBM; Jan21 $30c, swing from Friday to Monday for +30%

Additions

$EGLX; more Feb18 $5c options, hoping to see a move soon.
$FDX; Mar18 $220c options, holiday play that I plan to sell before earnings report in December.
$HOOD; Jan21 $40c options, looking for a surprise at earnings
$MGNI; Mar18 $30c options, will trim on rebound from Friday sell off.
$ATY: Mar18 $5c options, will trim on rebound from Friday sell off.

Sold

$OKE; profit taking on swing trade +90%
$RRC; profit taking on swing trade +60%

This Week

Friday’s sell off was a bit of a surprise, and I used all my cash to buy the dip. All eye’s are on earnings, and I’ll be looking to reduce my short term trade positions.

Next Up!

EXCITED for the next one! My first interview on Stock Squawk! You do NOT want to miss my interview with the founder & CEO of 7investing, Simon Erickson!

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Thank You!

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Have a great week! 😊

Until next time! 🦜