Investment Strategies

Short-Term Trading

To start, I’ll cover shorter-term trading, which I consider to be any investment held for under a year. Here are some of the key things that I have learned to be important considerations when implementing an investment strategy on this time horizon. 

"In the short term, the only way to really differentiate yourself from other traders is to not let your emotions affect your trades."

It is important to have a systematic process to leave as few choices to discretion as possible. Many times, shorter-term traders use technical analysis. They will create support and resistance lines. However, these are all arbitrary levels. Therefore, I want to introduce a new way of thinking about the markets.

"View your portfolio in terms of risk in the scheme of your next 100 trades."

A written trading plan will help keep you organized. A trading log is also really important because it allows you to reflect on the risk parameters of your investment strategy. Consistently good habits will bring good results, just like with anything else in life. To effectively view trades in terms of risk, you will need to use a few tools. First, you want to have a stop loss on every trade. This level will depend on a lot of factors, but most importantly the average true range of the stock and your self-emotional control. If the price of the underlying stock increases, you want to make sure to adjust your stop loss accordingly. Once your stop loss is at your break-even point, you effectively assume no risk anymore, allowing you to expose yourself to new risk units. If the stock price keeps increasing, keep adjusting this level. Never sell the stock yourself; the stop loss will one day do this for you. 

"There is no way to predict these bullish trends, but by using risk mitigations, you will be able to profit from them." 

Never expose yourself to too many risk units. They are easy to calculate because you already know the maximum amount that you can lose: the difference between your entry price and stop loss multiplied by the number of shares you own. Further breaking up the maximum risk units that you are exposed to into sectors is recommended for diversification purposes. Inherently, investing in bearish trends will bring along more risk; therefore, I always try to place buy orders in established bull trends and short orders in established bear trends. 

Short-Term Trading Key Considerations

The Time Value of Money

I enjoy short-term swing trading for many reasons. First and foremost, I have much more discretion over my decisions because of liquidity. 

Less Research

Swing trading in general is much less fundamental than long-term investing. Week-to-week, the stock market is a voting machine; only on a longer basis will a lot of company fundamentals be appropriately priced and realized by the market.

Emotional Superiority

In fundamental long-term investing, it is often hard to form a thesis that isn’t priced into the market because of how readily available information is nowadays. However, it is easy to have the upper hand in the long term in swing trading. This can be done through emotional superiority. Retail investors often sell at low prices or buy at high ones, following a confidence bias. This is why buying into emerging trends or high probability patterns at good entry prices is a successful strategy. By properly managing risk by consistently accounting for open risk units and using stop losses, an investor can expect good returns over time. 

Long-Term Investing

For longer-term investing (any position over a year), it is much more important to understand the underlying company. Stable organic growth can be one of the best long-term investment theses. This can come from numerous factors, including better operating margins or investment synergies. By using such fundamental metrics, your future projections will be a lot less speculative and instead be based on high-probability reasoning, making any implied share prices a lot more reliable. This should be done through an average weighting of multiple financial models, including comparables, precedents, discounted cash flows, and leveraged buyouts, to ensure greater accuracy.

Purchase entry price is incredibly important as it will best help you profit from market inefficiencies. Almost always, the markets are incredibly efficient, but because people are naturally emotional, this will not always be the case in large price fluctuations. Large crashes are the perfect opportunity to begin making long-term investments in growth or value stocks. This reasoning covers just the basics, but for now, it is important to grasp a consistent and logical long-term investing framework to be successful. 

Long-Term Investing Terminology

In markets, risk is often rewarded with additional expected returns. The best example that I can think of is bonds: lower-grade bonds provide a larger yield, but also come with a higher probability of defaulting. This same principle can be applied to the equity market. Because stocks are considered riskier than most bonds, investors expect higher annual returns. This relationship between risk and return is very important and is commonly represented through the capital asset pricing model. 

The Capital Asset Pricing Model can be used as the discount rate for a company with no debt

When working with future cash flows for projections, it is important to discount them because of the principle that money loses value over time. $1,000 next year may only be worth $900 today because you could invest in another asset that generates more cash during that time. The Capital Asset Pricing Model is a simple equation:

CAPM = Risk-Free Rate + Beta (Expected Market Return - Risk-Free Rate)

The Risk-Free Rate is commonly referred to as a 10-year Government Treasury bond yield because the stability of the US economy makes this as close to no risk as possible. For those who are statistically inclined, this equation can be viewed as a proxy for the regression of expected market return minus the risk-free rate on the expected return of the stock. Beta is just a measure of volatility when compared to the market. A Beta of 1 means the underlying asset moves in unison with the broader market; a Beta of 2 means that the underlying asset moves twice as much in either direction when compared to the market, a risk that investors expect to be compensated for. Lastly, the expected market return is the projected long-term growth rate of all equities, which, for simplicity, is commonly considered 10%. For a company with no debt, the only risk that investors incur is in equity. The equation starts with the risk-free rate because this is the minimum expected return of investors, or else they will just invest in the risk-free asset. Because stocks are not risk-free, the additional expected return is the equity risk premium, or the beta * (expected market return - risk-free rate). Using this equation can lead to a clearer rationale behind investments.

Ray Dalio’s Principles Summary

Ray Dalio's Principles lays out a framework for thinking, decision-making, and creating a productive culture, emphasizing both personal growth and organizational effectiveness. At its core, the book is about identifying truths about yourself and the world and then creating systems to act on them consistently.

On a personal level, Dalio stresses the importance of developing your own principles, or a set of clear rules and guidelines to guide your decisions and actions. These principles should evolve as you gain experience and recognize new patterns, making them living rules. Central to personal growth is radical open-mindedness: staying curious, admitting you don't know everything, and being willing to change your mind. Equally important is self-awareness: knowing your strengths and weaknesses, and building teams and partnerships that complement your capabilities.

When it comes to decision-making, Dalio advocates for a structured and objective approach. Believability-weighted decision-making relies on the opinions of those with proven track records rather than the loudest voices, reducing emotional bias. Principles should be systematized into repeatable processes, allowing decisions to be consistent and less impulsive. Effective decision-making balances risk and reward, minimizes downside, and maximizes upside. Tracking outcomes and holding yourself accountable ensures that lessons are learned and strategies continually improve.

Learning from failure is a cornerstone of Dalio's philosophy. Mistakes are viewed as opportunities to reflect, identify causes, and refine principles. He emphasizes that growth often comes from difficulty and discomfort, and that setbacks are signals for reflection and progress. A clear understanding of reality is critical.

Culture is equally important. Dalio champions radical transparency and openness, encouraging honest feedback, open debate, and a commitment to uncovering the truth. This culture fosters meaningful work and relationships, where success is measured not just by achievements, but by collaboration that benefits everyone involved.

In essence, Principles is a framework for living and working thoughtfully: define your rules, embrace reality, learn from experiences, make decisions systematically, and create a culture that values truth and meaningful collaboration. By doing so, individuals and organizations can operate at their highest potential.

Competitive Strategy

Michael Porter's Competitive Strategy provides a framework for understanding how industries operate and how firms achieve sustainable advantage. The essence of Porter's approach is structural analysis: examining the forces that shape competition in any industry. Competition works to push the return on invested capital toward a "competitive floor", which is roughly the return available in a perfectly competitive market. Firms that consistently earn below this floor cannot survive long-term because investors have alternative opportunities.

Porter's Five Forces determine the state of competition: existing competitors, potential entrants, substitutes, buyers, and suppliers. These forces collectively shape profitability by influencing prices, costs, and required investment. Customers, suppliers, substitutes, and new entrants can all act as competitors to established firms, and their relative importance varies by industry.

The threat of entry is a critical factor. If barriers to entry are high and established firms are capable of strong retaliation, new entrants are less likely to succeed. Key barriers include economies of scale (where producing more reduces average costs), product differentiation (via brand loyalty, unique features, or first-mover advantage), capital requirements, switching costs for customers, access to distribution channels, improvements through specialization, regulatory hurdles, and the potential for aggressive competitive response. While pioneers gain experience, followers may benefit from observing and improving on the first mover's methods, sometimes accelerating their learning curve.

Competitive moves are interdependent: actions by one firm affect others. Price competition is particularly volatile, as aggressive pricing can erode profitability across the entire industry. Porter emphasizes that understanding these forces is essential for firms seeking strategies that allow them to outperform competitors rather than merely surviving within the structural constraints of their industry.

In short, industry structure determines long-term profitability, and a firm's success depends on recognizing these competitive forces, identifying barriers to entry, and making strategic moves that leverage or create advantages within this environment. As an investor, being able to recognize and analyze these forces will lead to more long-term investment success.