Ask Colin

You wrote an article in Shares magazine on 5 and 22-day moving averages. In your portfolio you have purchased ABC Learning Centres (ABS) on 10 March 2004. However, applying the moving averages, the trend has failed. What is the reason for holding those shares?

You wrote an article in Shares magazine on 5 and 22-day moving averages. In your portfolio you have purchased ABC Learning Centres (ABS) on 10 March 2004. However, applying the moving averages, the trend has failed. What is the reason for holding those shares?

I am glad you have asked this question because it poses several important issues.

Firstly, I write about many techniques, but that does not mean that I use them myself. What I use is clearly explained in my video Building Wealth Through Shares and in the book The Aggressive Investor, which I am publishing progressively on my website. You may then ask why I write about other techniques. I do that because there are many ways to trade and to invest and each trader and investor has to find the tools that most suit their personality and needs. There is no single "right" way to trade or to invest.

Secondly, there is the very important question of time frame. You are judging my investment against 5 and 22-day moving averages which are appropriate for a trader with a far shorter time frame than mine. I am not sure what moving average time frame would be appropriate for my portfolio. In the case of ABS, 5 and 22-weeks would still have had me sell, but that combination looks a bit too short-term for my style. 5 and 22-months might be closer, but this combination looks a bit too long-term for my portfolio. So, I am not sure how I could respond in terms of moving averages, except to say that I use the 260-day (52-week or 12-month) moving average to identify trend direction and for ABS it is still up. However, I do not make my decisions based on this moving average. It is an aide only.

Thirdly, you can only appropriately judge my portfolio on the basis of whether or not I follow my investment plan. This is fairly easy to do from my video or book, except that I reserve the right over time to do two things. First, to make changes in the plan if I think I can improve the plan. I am constantly reviewing the plan, though I change it infrequently. Second, to make occasional small investments on bases other than my plan in unusual situations. I have one such investment in my portfolio as of early July 2004, but it is not ABS.

Fourthly, my portfolio is published on my website to meet legal requirements of disclosure in the context that I write about stocks in both educational articles and market comment columns. There is insufficient information on the website portfolio disclosure for you to evaluate my portfolio. I would like to make additional disclosures, but I am not permitted to by law. The FSRA allows me to state facts, but I cannot give information that might be construed as advice. For that reason I do not disclose the quantities I hold or the stop-loss or protect-profit stops on my positions.

Finally, the reason that I am still holding ABS is that it has not hit my stop-loss. As I just said, I have decided that a stop-loss level could be seen as advice, even though it could be argued that it is a fact. However, that would be difficult for me to prove, unlike what stocks I hold and the dates that I bought and sold them, which can be documented absolutely.

The best I can do is to offer to explain the decisions I made and the reasons for them, after the investment is completely sold and some further time has elapsed, so that there is no possibility that I am inadvertently giving advice in teaching my methods. If you like to ask me again at such a time, I will be happy to answer candidly. I will be including some of my actual completed investments as case studies in my book. My subscription website will be the first place to read about them, because I am publishing the book progressively there.

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