What ‘drum’? Very simply summarized, the overall ‘schematic’ of profitable trading …
All you need to profitably trade the markets, is a process. It should be simple. With that process, there must be some sort of risk overlay. It will either be built into the very nature of the strategy, or the risk overlay may include things like a stop-loss order, with some sort of trade management rules. And then, you need to be willing to grind out that strategy over a period of time.
Usually we keep specific trading processes to ourselves, and clients of ‘The Sharpe Report‘.
I’m going to give you a strategy. A process. For free. In this entry.
Please note … I am an expert. I am approaching 20 years in the business. I professional manage portfolios. And over time, I have forgotten more methods than most traders ever learn.
First of all, understand what a ‘process’ actually is. It’s not whether or not you think a ‘single name’ is going to go ‘up’ or ‘down’. Single issues can go anywhere. Ford, Marathon, or Disney or Apple, or any of the rest of them; are not a ‘strategy’ or a process. They are single names. Yes, you can buy them from time to time, as part of a process. But single names aren’t a process.
Trade Management techniques (such as Dollar Cost Averaging) may be a good trade management technique. But that is not a process. It’s simply a trade management technique; which can be applicable within a process.
The process, is the consistent reason, rationale and steps you perform to select the stocks you own, to achieve profits.
So … you ready?
Here you go … here’s a simple process which may be one of the best strategies for someone who is new. There is no vested interest here. I’m simply going to point you towards a free process that you can look up for yourself. A process that has a lot of history behind it, and one that you can look up published results for yourself to see just how well it works …
DOGS OF THE DOW
That’s the name of the process. It’s a simple long-term strategy. One could almost call it a type of ‘valuation’ strategy. Pick the 10 largest companies of the DOW Index that pay a dividend that are trading at 52 week lows. Then hold them, for one year. Once you have bought those 10 stocks? Make weekly cash deposits (whatever you can afford) to your account, for the entire year. Then, at the end of the year, sell the stocks. After you sell the stocks at the end of the year, take all of the capital you have saved as well as your proceeds from selling the 10 stocks, and repeat the process.
That’s it. That’s the strategy. It has reams of published data that proves that it works.
Why does it work? Because it applies and combines independent variables to give you a consistent edge.
Does it work because the stocks are at 52 week lows? No. Does it work because there is a dividend yield? No. Does it work because it has a chosen periodicity, namely, one year? No. Does it work because they are large cap companies and have a survivability ‘moat’? No.
It works because it is a combination of those factors. The combination of independent variables, lead to the edge. It is the fact that the strategy has 10 stocks that are at 52 Week Lows in addition to the Dividend Yield in addition to the specified holding period of one year, and in addition they are large-cap companies. It’s the combination of all of those factors together.
Here’s the problem and where traders will fail, when attempting to use a strategy like ‘Dogs of the Dow’.
Retail traders do not fail, because they do not have a profitable strategy. Profitable strategies are a dime a dozen and they are all over the net (along with a lot of absolute garbage sold by supposed “Trading Educators” which for the most part should be avoided like Grim Death). Regardless, there are many, many proven, profitable processes, or methods, or strategies for trading. Dogs of the DOW is but one of them.
Traders screw up the process through a lack of discipline.
It is typical to see many new retail traders obtain such a method, that has been proven to work over time and they then try to “improve it” … and “tweek it”, because they are ‘bored’ with it. Or in a completely egotistical manner they think they can mathematically improve the edge; without understanding the mathematics that creates the edge, and despite the fact that they’ve only been trading for one year. And their lack of discipline manifests itself in a variety of actions. For example, they take their profits too soon and do not hold the stocks for a year. Then they will add a technical tool, and then someone else with some winning profits distracts them, and they tweek it again. And soon, they have destroyed the very process they were attempting to use. By ‘tweeking it’, they have removed those independent variables that worked to give a consistent edge in the first place.
I truly want to see newer retail traders make it. But I’ve seen this happen a million times with new traders over the decades …
They take a great method, and work as hard as they can … to destroy it
Why? Well, perhaps the trading strategy has a losing year. Or it produces a small amount of draw-down; relative to the overall strategy.
So what. Who cares?
Warren Buffett had a losing year last year. Down 18% if memory serves. Bill Ackman had a big down year last year. As did David Einhorn. As did Carl Icahan. Some of the best names in the business. Incidentally, we beat every one of them, including the portfolio numbers we publish and demonstrate publicly, and did so in real-time. But even we had a down year last year. But that’s beside the point.
The real point here, is that newer traders aren’t accustomed to handling and dealing with draw-down or a losing year. They are not accustomed to dealing with discomfiture. So they lose discipline. They ‘tweek’ the method. They change it in an attempt to avoid losses. Which is impossible. Regardless, they end up destroying the very edge that the strategy produced. So that soon enough … they have no independent variables that are working together. And thus, they have no edge in the market.
Everyone … even me (LOL) has a losing year from time to time. Who cares if Buffett was down 18% this year, and 0.25% this year, if he makes 35% next year? And 45% the year after that? Trading, for a career, is about …
… A process. It should be simple. With that process, there must be some sort of risk overlay. It will either be built into the very nature of the strategy, or the risk over-lay may include things like a stop-loss order, with some sort of trade management rules. And then, you need to be willing to grind out that strategy over a period of time.
I just handed you a strategy that you could use to make millions. Make weekly, regular capital contributions to your account, to compound your position sizing over time. Wala … wealth.
But wait Dan … doesn’t Sharpe Trade, LLC offer a course on valuation investing?
Yes. yes we do. You can find that valuation course here.
Then why would you tell us about this strategy for free?
There are two reasons.
One, I am ridiculously passionate about helping new retail traders.
Two … our valuation course describes a strategy that produces better risk-adjusted results than ‘Dogs of the DOW’, and at the same time, allows me to purchase stocks that do not violate my conscience. So to be honest, while ‘Dogs of the DOW’ makes money? Our course provides the tools by which a trader can make more money.
Now to be clear, some have criticized the “Dogs of the DOW” strategy. We will soon have an article that dismantles the silly notions presented within those criticisms …