Alan Hull is a second generation share trader, fund manager, businessman, teacher, writer, mathematician, I.T. expert and popular speaker on the seminar circuit. He is the best-selling author of 'Blue Chip Investing' and 'Active Investing', both by Wrightbooks.
Alan speaks extensively throughout Australia for organisations such as the Australian Stock Exchange, Australian Investors Association, Australian Technical Analyst's Association and at the Investment Expo and Traders Expo. His books, articles and newsletters are published and widely read throughout Australia and overseas. Alan's newsletters are based on his trading strategies 'Active Fund Management' (which is explained in his book 'Blue Chip Investing') and 'Active Investing' (which is explained in his book 'Active Investing').
ACTIVE INVESTING - WHAT IS IT?
Trend trading is a powerful way to trade. This is because trends do exist in the stock market, and when you are in a trending share the market does the hard work for you.
Active Investing can help you with trend trading by identifying potential trends as they occur.
The simple dynamic that drives share prices either up or down is shown below in block diagram form. Note the use of the word 'Factors' as opposed to the word 'Facts' in the first square.
This diagram summarizes the whole process that moves share prices and is the foundation of dynamic analysis. Factors that affect opinion include fundamentals, market cycles, macro economics, global factors, etc.
Investors use fundamental analysis to find listed Companies that are financially sound, have solid management and good future prospects. But Investors must be prepared to wait for share prices to rise because the above process, although reliable, can take years to work.
Traders use technical analysis to observe price activity and buy shares that are rising in price and sell shares that are falling in price. Chartist's ignore factors that effect opinion but are prepared to work hard at observing price activity and usually monitor the stock market on a daily basis.
Active Investors combine both fundamental and technical analysis to ensure that the entire process that drives share prices upwards is working. Active Investors spend approximately 1 hour per week checking their share portfolio. Active investors use dynamic analysis.
Nobody invests in Fundamentals... we buy & sell the share price; not factors that affect opinion. Both of the shares shown below have excellent fundamentals but only one of them is going up.
Active investors use technical analysis to test and measure the results of fundamental analysis in the same way that everyone else tests and measures the results of their work. The process starts by finding companies with good fundamentals. You can use the research of others, ie. books on fundamentals such as TopStocks by Wrightbooks, Stockbroker's research, etc. We then test the annual Rate of Return of the shares in these companies with the RoR indicator.
The Rate of Return indicator is used to calculate the annual rate of return of a share given its current rate of climb or fall. It achieves this by calculating the annual return and dividing it by the current share price. The result is then multiplied by 100 to convert it to a percentage.
The Rate of Return Indicator can be seen in the following chart. Technically it is referred to as the 'Linear RoR' Indicator because it uses linear regression as opposed to moving averages.
In the above chart PPT is enjoying an annual rate of return of 44%. The horizontal bar placed at 25% is the cutoff level. Searches can be performed using the Rate of Return Indicator to sift out shares that only have an annual rate of return higher than the 25% cutoff. The linear RoR indicator switches itself 'On' when it detects the presence of a valid trend. It automatically switches itself 'Off' if the rate of return falls below 25%, the money flow drops below $10 million/3 Months, the trend reverses or price activity moves sideways for an extended period of time. It is an 'Intelligent' non-lagging indicator that gives unambiguous signals.
Ask yourself whether you know any of the companies shown in the following charts. Then ask yourself if you own shares in any of these companies. Active investing is the foundation of successful trading.
First Published: 12 March 2001 - Copyright © Alan Hull
DISCLAIMER AND COPYRIGHT
ActVest Pty Ltd is a Corporate Authorised Representative (CAR No.306718) of Avestra Capital Pty Ltd AFSL 292 464 ("Avestra"). This article has been prepared for the general information of investors and does not take into account the investment objectives, financial situation and particular needs of any particular person.
Persons intending to act on information in this document should seek professional advice to confirm that the investments or strategies mentioned are appropriate in the light of their particular investment needs, objectives and financial circumstances prior to taking any action.
While reasonable care has been exercised and the statements contained herein are based on information believed to be accurate and reliable, neither ActVest, Avestra, nor their employees or agents shall be obliged to update you if the information or its advice changes or be liable (unless otherwise required by law) for any loss or damage suffered or caused to any person or corporation resulting from or contributed to by any error or omission from such statements including any loss or damage caused by any fault or negligence on the part of ActVest or Avestra, whether direct, indirect, consequential or otherwise, whether foreseeable or not.
Direct investing in the stock market can result in financial loss. This article, and any associated files, is intended solely for its intended recipient. The contents are confidential and may be legally privileged.
|Copyright © Electronic Information Solutions Pty Ltd 1990 - . All Rights Reserved.|