DIY Investor Magazine
/
March 2017
26
THE SECRET OF SUCCESSFUL TREND INVESTING.
Douglas Chadwick,
Saltydoginvestor
Trend investing - also
known as ‘trend following’
or ‘momentum investing’- is
a proven method of making
money in the stock market, and goes back over one
hundred years. It is fascinating how trend investors in
very different times, and places, have come up with
uncannily similar rules for making good profits
Let`s look at five of these rules for trend investing
success.
•
The vital importance of market sector recognition
and a supply of accurate up-to-date performance
data.
•
Don`t always be invested in the market. In times of
market uncertainty, cash is a good home for your
money.
•
Test the validity of a new trend with a small
investment first.
•
Once a trend is established for a fund or sector, it is
more likely to continue in that direction than to move
against the trend. In other words, the value of the
fund gains a certain ‘momentum’.
•
After a steady rise the fund, or sector, levels off and
turns down with only occasional rallies; it is obvious
that the line of least resistance has been changed
from upwards to downwards. There is no need for
explanations, now is the time to sell.
This is perhaps the moment to take a quick flashback to
the origins of the Saltydog system of investing.
A STORY OF FOOLISHNESS AND WHAT NOT TO
DO WITH £150,000.
In 1975, I set up a flat-pack furniture manufacturing
business and ten years later, in 1985, I successfully sold
it. Using some of the proceeds from the sale I invested
£150,000 into two Investment Bonds (equivalent of
£450,000 in today’s money). I purchased these two
bonds via an Independent Financial Advisor as the
investment company concerned did not deal directly
with the public. Like so many people, I had been sold
the illusion that financial advisors actually ‘advise’,
that wealth managers actually ‘manage’, and that the
financial industry has individual investor’s interest at
heart. This was foolish of me. Stupidly, I only began to
take an active interest in the performance of the two
bonds 15 years later. I had two unpleasant surprises.
Firstly, there had been little capital growth and secondly
my money was still in the same market sectors as at
the outset! It had just been sitting there, forgotten,
throughout the fifteen years, regardless of the dramatic
changes in the investment landscape. During this period
I had built another successful furniture business, but this
particular investment had withered on the branch.
Enough is enough; it was time to take control myself,
and thus began the road that led to the Saltydog trend
investing system.
A NAIVE IDEA.
Crucially, I didn’t come to the data with a pre-existing
strategy in mind. At the time, I wasn’t a value investor, a
contrarian investor, a passive investor, a trend investor
or anything else. Essentially, all I had was an open mind
and a talent for analysing numbers and one seemingly
naive idea, and that was in order to make money you
need to be in the market when it is going up and out
when it is going down. So how to achieve that? I pored
over numbers for about 70 individual funds, and after a
number of months I started to see patterns emerging.
WISDOM FROM ONE OF THE WORLD`S BEST
TRADERS.
The first of the patterns I noticed was that some funds
would move together in the same direction, up or down,
as if in tandem. After observing this phenomenon for a
while, researching, and making enquiries, I worked out
that these funds were in the same sector. Stated like
this, it hardly seems like a revelation. In fact it seems
blatantly obvious, but I was starting with individual fund
data and nothing else. So to me it was a real discovery.
If you are thinking, ‘So what?’, Just consider this piece
of wisdom from one of the richest men in the U.S.A.
in 1929 - the renowned trader and investor, Jesse
Livermore:
‘The most intelligent way to get one’s mind attuned to
market conditions and to be successful is to make a
deep study of Industry Groups in order to distinguish the
good from the bad.
