Different strokes for different folks: A stock market perspective

We all use different approaches in the markets, the good news is that there is no wrong way, just your way. 

I use Systematic Trend Following to trade the markets. It is an approach that I learnt from Traders who mostly trade other securities besides stocks. It is a technical analysis approach that is based on moving averages. It works well across many instruments, at different time frames. It is a good approach for indices and commodities. Whilst it is applicable to forex and stocks, it has some limitations, especially with stocks, at least in a short time frame, below 1-day.

Even though I joined the markets with the intention of becoming an (a stock) investor, over the years I have evolved into a stock trader. At first I was just a kid who wanted to invest for his future self; unit trusts (I know hey) there and couple of stocks there. Eventually I caught the wind of "trading" and I wanted in. I realised that I needed a strategy, unlike buying index tracking unit trusts or the stocks I like (which was a horrible idea). I stumbled across many strategies, simple and complex (Elliot Wave Theory), eventually I settled for Systematic Trend Following. 

Like I said, it works, but there are other things that come with stocks that are not there in indices and commodities. Sure, fundamentals are everywhere but trends persists, you just have to ride the trend till it bends. The more I trade stocks the more I realised that there are other things to consider besides the charts. Let us get this out of way before we continue; you can successfully trade stocks without using fundamental analysis, just using the chart alone. 

I ignored Steinhoff's never ending Court dates; the chart was, and is still, bullish, so I jumped in only to take a -3.4R loss on the position. They had a Court date and the share price gapped down and went way below the stop level. I exited the position (and the price recovered later). If I had paid attention to the SNH trials, I would not have taken that position, I would have also missed the 100% plus return I had made earlier when it cracked above R2. I bought at R1 in Dec 2020, and before March 2021 it touched R2.70.

Steinhoff uptrend is intact, with a lot of panic attacks in between, I am now not participating in this madness. Except that Steinhoff decided to sell a bit of Pepkor at a discount, this led to a -8% share price decline, and I have a position in PPH. I decided to focus on PPH, and forget about SNH businesses that are outside South Africa; this was a minor fundamental analysis move. It has been a good run with PPH, the price is recovering from the SNH transaction, but it is possible that SNH is not done with PPH yet as they still need cash to settle some of the claims. I will add on my position once PPH share price is back above the 50EMA.

With technical analysis your focal point is price action; price and volume analysis, and you juggle your account around that. But, there are other market participants who use other approaches, the common ones being value investors. If you want to engage a value investor, as a technical analysts, you need to shutdown your brain otherwise you will engage in an endless arguments that will not take you anywhere. I believe this stem from not understanding the other persons's investing objective. I mean, try to tell an investor that you are investing by trading and see where that conversation goes. Seasoned market participants know that there is only one right side of the market, where they make money. But you still find people who value their opinions more than consistent profitability. 

Value investors do make a lot of money, Warren Buffet is the prime example. Their approach is against what I try to achieve with Trend Following, granted, a handful of them understand finance, I do not. I did not touch Sasol when it was trading at R20/share but these smart people saw that it did not make sense for Sasol to trade that low. Well, R20/share was a bit extreme, there are people who bought prior that level because, they concluded that Sasol is undervalued. Those who bought, say, at R150/share had to wait for the stock to be more discounted at R20 before the down trend ended. Now they are happy at R260/share. Were they wrong to buy at that level, and stomach a large drawdown? I doubt they were wrong, they just followed their plan.

The are many stocks that they believe are undervalued and trade at a discount; from technical analysis' perspective those stocks are on a down trend. I bought Sasol when it closed above the 200EMA at R144/share, and I have been rewarded handsomely (nothing hectic, just a 78% return) and avoided a large drawdown (before R20/share). 

What we, me and the value investors, missed are dividends. So far Sasol has not paid  dividends. Now imagine if you used dividend yield as a stock filter, no dividend means that Sasol has zero dividend yield. You would have missed the run from R144 to R260. Brent crude look poised for a move to the $85/barrel region. Perhaps Sasol can benefit from it and push further to R350; if you stick to the dividend yield narrative you will miss that move as well, if it materialise.

Really, there is no best way to navigate the markets, there is just your way. I may not want to hold a stock that is on a down trend but the other person might find value in that stock. We all come from different schools of thought, and it is our different opinions and our actions that move the market (the word on the street is that it is smart money that move the market). 

Another stock that has separated market participants to us vs them is Aveng.

Whilst I do not have a problem with anyone's approach, I am not a big fan of those who cannot back their opinions with a position. Put your money where your mouth is.

1. We are different, our approaches are different.

2. Despite the difference in our approaches, we all manage risk, however we do it: stop levels, asset allocation, diversification etc.

3. Technical analysis is a profitable approach to stock investing. Sometimes it needs a dash of fundamental analysis, which could be both beneficial & detrimental. (I sold Tsogo Sun for Sun International, the rationale was that TSG is a BEE spin-off and SUI is the main deal. TSG cracked quicker than SUI, and SUI is a bit illiquid, I ended up coming back to TSG.)

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