Yesterday I wrote to you about how to ‘not lose’.

Today I am going to talk to you about how to ‘not win’, and by the end of this email, you should have some idea of some mistakes you might have been making and how to fix them.

See, ‘not winning’ is not the same as losing.

This might sound weird but hang in there.

The guy below wasn’t a losing trader.

But he was constantly ‘not winning’.

Not winning looks like this.

It’s very common.

In fact, not winning can simply look like making 10% in a year…

But you’ve put so much effort into making said 10% that you may as well have stuck with the SP500…

And really, you have a few investments where you know you should have gotten out sooner, or you know you should have had more in the trade but you just don’t know when or how to action the right structure at the right time.

Let’s dive into a few things we mention in the Fink Academy to give you an idea of how to do this.

The first place people go wrong is misunderstanding the regime we are in.

A pretty simple way of identifying whether we’re in a good regime or not is volume and price.

Is volume at or above average and is price going up on the broader index (SPX or NASDAQ)?

This should give you a wide barometer as to whether it’s wise to action anything at all.

See, the one mistake people tend to make is trying to figure out macro regime, when the right answer is to focus on FACTOR regime, and you have four factors.

Size, quality, momentum and value.

They can overlap, but at any one point, one of these factors will be providing better returns than the others, and sometimes of course, they can coincide.

We tend to stick with momentum as the primary factor we’re looking at.

Why?

Because size can end up being a momentum trade, as can quality and value, but some of the others are unable to cross into a multi factor regime.

We just want to provide ourselves with the highest probability of obtaining the best factor exposure.

So rather than focus on macro regime (what inflation is doing, what GDP growth is doing etc), focus primarily on factors.

The macro can come second.

Many think you’re just buying stock fundamentals.

No, you tend to be buying flows.

Let me give you a great example of a stock that should have performed better than it has but hasn’t because it’s missing a key characteristic.

RNW (Renew Energy) was a firm listed in the US that primary expands India’s renewable energy infrastructure.

Absolutely fantastic fundamentals and a story where it was the only listed stock that was providing exposure to India’s renewable energy build out.

16% increase in YoY profit, EPS beats, and expansion.

The problem is, hardly any institutions covered the stock!

Therefore there was no flow.

If you had missed this fact, you’d have been stuck in an opportunity cost problem - sitting in a stock that was going no where because there was no demand.

It’s now been taken private.

And this opportunity cost problem arises from not having the correct model of what a good stock looks like at any one time.

Again, super common and an issue we help fix.

But remember, it doesn’t mean you’re going to lose, it just means you’re going to ‘not win’.

Let’s think of risk and volatility in a very basic way.

We’ll talk about risk first then bring in volatility.

If I spend £1 on a lottery ticket with an expectation to make £10m if it wins, that’s an OK risk for me to take (it’s a subjective risk since I would never really buy a lottery ticket because of the expected value but besides the point).

However, if I take out a loan of £10k to buy 10,000 lottery tickets while my annual income is £50k, that’s a really stupid risk to take.

Translate this over to your portfolio and we can bring volatility into the mix because the payoff with stocks is undefined.

If I am a cautious investor, I am probably quite happy with having 40% of my portfolio in utilities that tend to trade (see, characteristic understanding coming in) at a lower beta (effectively volatility) than I would be having 40% in growth stocks that trade at a 2 beta (if the SP500 moves 1%, the stock is likely to move 2% in either direction).

Therefore, I am going to apportion more of my portfolio into lower beta stocks while being sized less in stocks that might go up more, but equally open me up to more downside risk.

But here’s the interesting thing.

Your risk there is not defined by the volatility of the stock, but by your position size because of that volatility.

A volatile stock is not inherently risky.

Your size which translates to your own personal risk is how risk is then defined…

But this comes from understanding…

The characteristic of the stock!

Did that help?

Let me know, and then watch this brief message from me if you have a sec.

Back tomorrow with ‘how to research like a pro’.