Lessons from stock market wizards

Many traders buy stocks based on rumors or tips from friends, relatives or social media groups. Others just watch the ticker and buy actively traded stocks that are going up. Buying stocks using these methods is easy and exciting. However, it is also a surefire way to burn out and lose money in the stock market.

To better equip active traders to consistently generate profits, regardless of market conditions, COL Financial organized the “COL Trader Summit: Trading Beyond the Price” on Saturday, May 4, at SMX in SM Mall of Asia.

“It has always been our objective to help our clients achieve a richer life by investing intelligently regardless of their investment style, whether it is active or passive. The COL Trader Summit is meant for active investors, so that aside from knowing where the market is headed, they know how to create and execute profitable trading strategies,” said COL Financial president and CEO Dino Bate when asked about the objective of the summit.

The summit had about 800 attendees and a good lineup of speakers who are highly skilled and well experienced in trading global equity markets. Although all of the speakers are friends and colleagues whom I’ve known for many years, I still learn from them all the time.

To kick off the event, COL chief technical analyst Juanis Barredo shared his market outlook. The good news is, according to Juanis, the PSEi is well on its way to hit our 8,600 fundamental target, creating opportunities for traders to make money. He shared a list of stocks he liked. He, however, warned prices would not move up in a sharp slope but rather in a zigzag pattern or a channel. He highlighted the risk that overbought markets overseas (including the United States) could cause volatility domestically.

After Juanis, COL founder and chair Edward Lee shared lessons learned from his 46 years of investing. Among the many lessons he shared, my favorites were: “Treat trading as a business” and “You need cash flow apart from trading.” Treating trading as a business is important as traders need to have a plan when they trade stocks—when and at what price to buy and sell stocks.

However, the ability for traders to execute their plan is dependent on their ability to stay objective. If the trader needs the returns of his portfolio to fund his day-to-day needs, it will be hard for him to stay objective. He will be less willing to admit he is wrong and cut losses early.

This is not good because it is normal for a big number of trades to turn out wrong and good traders must cut their losses early to stay profitable.

Caylum Trading Institute president Edmund Lee, COL deputy head of research Charles Ang and Citisecurities head of global equity research Leonard Chua shared how traders could create realistic expectations with respect to their trades.

Knowing how a stock’s price will move—by 45 percent, 60 percent or 90 percent—is dependent on its fundamentals. Stocks of mature companies will go up more slowly (45 percent) compared to stocks of fast growing companies (60 percent) and speculative stocks (90 percent). The three also agreed traders could use fundamental analysis to improve the performance of their portfolios.

Lawrence Lee, president and CEO of Citisecurities, shared risk management strategies for traders. Often, trades that don’t turn out the way we planned become long-term investments because human nature prevents us from cutting losses that become too big to stomach. To prevent losses from ballooning out of control, traders need to enter every trade with a stop loss price which they should follow in exiting their positions assuming their trade doesn’t go their way.

Lawrence also introduced the concept of “value at risk” (VAR) or the amount that a trader is willing to risk if he is wrong. Typically, the size of VAR is 1 percent of a trader’s portfolio, which means he can have 100 wrong trades before he gets wiped out. Since a trader typically has five stocks in his portfolio, his potential loss is limited to 5 percent at a time.

By combining VAR and the stop loss price, traders could determine how much they should bet when buying a stock to control their potential loss if a trade doesn’t go their way. Using this method, traders will automatically buy a smaller amount of volatile and speculative stocks and a larger amount of less volatile and blue-chip stocks.

Lawrence shared some risk management tips such as making it a point to never allow losses to grow in size. Although you only need a stock to go up by 5.3 percent to recover a 5-percent loss, you need a stock to go up by 400 percent to recover an 80-percent loss.

He also said traders should not be afraid to cut losses. By doing so early, you can use the funds to buy a stronger stock which will allow you to recoup your losses faster compared to just holding on to your losing position.

Although I already know most of these lessons, I enjoyed attending the summit since it reminded me that traders needed to be disciplined to succeed. For those who would like to watch the presentations, some of them are available in COL Financial’s Facebook page. I hope the lessons will help you succeed in your trading journey and keep you from relying on rumors and tips to pick what stocks to buy.