Investing & Trading Philosophy

theFreedomTrader Philosophy

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The following is an investment and trading philosophy which we have learned and borrowed from our mentors Howard Marks of Oaktree Capital and have used it with great positive effect. We stand on the shoulders of giants who have come before us. We therefore would like to acknowledge Howard Marks of Oaktree Capital as one of these giants in the industry. So thank you Howard for showing us the way.

We invest and trade our investments utilising a number of different short, medium and long term mechanical and discretionary trading systems where we believe the potential for reward outweighs the risk entailed.

We also tend to stay within our 'circle of competence', where we know we have a big positive edge to continually achieve outstanding annual returns. We define our competence within the following universe;

  • Investing in undervalued great businesses and global franchises
  • Swing trading severely beaten down fundamentally strong US S&P 500 stocks, options and Exchange Traded Funds (ETFs)
  • Trend following under researched small to mid sized US stocks and ETFs
  • Writing covered options over companies currently overvalued but wouldn't mind owning at a lower price
  • Shorting certain stocks and ETFs if an opportunity arises

Although they are each different, all of our investment and trading activities operate according to the following unifying philosophy;

Risk Control is Paramount

Superior performance is not our primary goal, but rather superior performance with low risk to achieve that result. Above average gains in good times are not proof of a skill; it takes superior performance in bad times to prove that those good time gains were earned through skill, not simply the acceptance of above average risk. Therefore we place the highest priority on preventing losses rather than merely searching for prospective profits. It is our overriding belief that "if we avoid big losses, the winners will take care of themselves."

Consistency of Performance is Key

We do not like oscillating between big return years and big drawdown loss years. It is our belief that a superior record is best built on a high batting average rather than a mix of brilliant successes and dismal failures.

Taking Advantage of Market Inefficiencies

We do not agree with academia in that markets are always efficient all the time. We believe that skill and hard work can lead to a "knowledge advantage," and therefore to superior investment results. We believe inefficient markets exist because of the tendency of human nature to swing between the feelings of fear and greed and as such, our logical and rational application of skill and effort should pay off for our efforts over time. It is only in such circumstances where we know we have a statistical edge that we move forward with our investment or trade.

Benefits of Specialisation

Specialisation offers the surest path to the results we seek. Therefore we insist that each of our investment and trading systems should do just one thing — practice a single investment or trading specialty — and do it absolutely as well as it can be done. We establish and follow very specific investment and trading guidelines which are the result of extensive research and development completed, and we do not deviate. In this way, there are no surprises; our actions and performance always meet our expectations.

Forecasting and Predictions is Not Critical to Investing and Trading Success

We believe superior investment performance can only be achieved through the consistent application of our thoroughly researched investment and trading systems, not through attempts at predicting what is in store for the economy, interest rates or the stock markets. Therefore, our investment process begins with in-depth bottom-up fundamental research, followed with technical stock demand and supply criteria's, and finally overlayed with current macro economic factors. We use overall portfolio structuring and individual position sizing to ensure we are never highly concentrated on any individual investment or trade. Therefore, the outcome of any one single investment or trade never affects our overall performance. It is the combination of successful individual investments and trades that provides us consistent superior performance over time.

Market Timing and Holding Cash

We do not believe in our predictive ability to correctly time market directions consistently, therefore we run multiple investment and trading systems simultaneously all the time, and we are only ever invested if we find an advantageous edge in which we can benefit from. If not, we would rather remain in cash so our overall portfolio can and will fluctuate from being fully invested in varying securities to being fully in cash depending on circumstances. We are never afraid to hold a 100% cash position if situations warrant this action. This is actually a huge advantage in certain market conditions, allowing us to truly take advantage of human emotions in both fear and greed, a certainty in markets of panic and euphoria.