A couple of posts ago I mentioned that I was going to blog about a mechanical system which I use to determine when to buy and sell shares. But due to a number of posts I have received about this topic, I decided to take a step back and start from the beginning. I hope that in doing so my system will become a lot clearer and people can start to put my trades into context.

IN THE BEGINNING

Okay, first up. Before I even look at what shares to buy I always decide how much I want to risk. And I mean that in the broadest possible sense.

1. Working out how much capital I have: This involves looking at total savings and subtracting from that from any expenses I need to survive. Mortgage payments, utility bills, food, etc. All that comes out. I am then left with free capital which would jeopardise my existence if lost. This is what I call my investment capital.

2. Working out how much to ‘invest’: The general rule is to subtract your age from 100 to determine how much you should be invested in shares as opposed to anything else. For me that breaks down to about 70% I should be putting in shares (As you will see from my holdings I have nowhere near this number, but more on that later). This is what I call my ‘equity’
Then I put the rest of my money into safer areas such as currencies, high interest accounts, bonds, that kind of thing. Which brings me nicely onto…

[14/02/07: Some investors such as Benjamin Graham do not agree with this. They state that one's equity / cash ratio should depend entirely on one's personal circumstances. To give an example, an old widower with a lot of money to spare should invest more in equity than a young person with a mortgage, family and job. Also, technical traders vary this allocation based on their view of how oversold or overbought the market is. But in my view any of these will work so long as you are aware of what you are doing. They are just exercises in helping you determine what your risk appetite is after all.]

Total Investment Capital: 100% (Stock/Cash Allocation: 50%/50%)

CASH

High Interest 25%

Growth Currency 25%

EQUITY

Long Term 50%

High Risk 50%

Now if you are still working and getting an income then you’re in good shape because your Total Investment Amount will keep growing and you will have the ability to keep adding to your cash and equity accounts. This is why fundamental investing requires a very long term outlook as you are constantly adding to your positions.

Okay now that we have gotten that out of the way I can go onto talking about how to determine what blue chips or high risk stocks to buy and sell, which is the interesting part. But from all this please be aware that the posts I make probably affect only 25% of my savings capital (it’s actually a lot less than that because I don’t post up information on my non Malaysian trades, and on each trade or post I probably risk less than 1%) at the moment! I hope that this helps puts things into perspective and will allow your trading life to exist for the long term. Until Lesson 2..

Happy Trading!