If only....

I try to play the market for maximum profits. That cannot be achieved by a buy and hold strategy.

Most of my trading over the past 15 years has been on the FTSE so let’s have a look at the FTSE starting at the beginning of 2012. If you had bought a FTSE tracking portfolio you would now be sitting on an eleven per cent profit. However you would have had some heart stopping moments. After the first three months you would be patting yourself on the back having made almost 5%. But then in the next three months you would have lost all that profit and then some as your portfolio fell by 13%.

From that point on life would be sweet.25% profit in nine months. It would have been even better if you had held onto your money and waited to invest instead of making the rash decision to go in at the beginning of the year instead of losing 8% of it in your first six months.

Even with this terrific run there were some uncomfortable pull backs. For example there were a couple of weeks in November when you would have lost 5%. When things like that happen you need to ask yourself: “Is this a glitch? Or will it go on?” The stomach churning will be exacerbated by the fact that after that horrible fall at the beginning of your investment campaign you are now 2% down. Don’t imagine that these things don’t hurt and sap confidence.

Another 5% fall occurred starting in March of this year. This time it was not the size of the fall but the length of time that the market looked bleak. It was in the doldrums for over a month before making a spectacular 10% rise in 4 weeks. This was promptly reversed.

My point is that this was a very bumpy ride and there were lots of opportunities to turn an 11% profit into 56% by hopping in and out just four times at the right moments. And that is why I am working so hard to find a system which helps me get in and out of the market at the right moments without the benefit of hindsight.

I have not done too badly. I started trading in September 1998 and since then I have realised over 200% profit (this is not a compounded figure, it is based on the return I achieved on the capital I had to invest at the beginning of each year.) Over the same period the market has risen just 20% That’s 1.3% per year. I could have done much better. If I had just got the big waves right I would have made 250% Add in a few of the minor waves … You see where I am going with this.

And none of this takes into account the massive benefit contributed by share picking. I’ve cracked the share picking side of the equation but for all of the period I’ve been trading my timing has been based on guesswork. I hope I have now found the answer to getting timing right.

(I’ve used the FTSE in this exposition because for most of my trading period I have worked in the UK market. It also will help my UK readers who have to spend much of their time watching my analysis of gyrations in the US market.)