Ask Colin

I have been told that your investment plan involves pyramiding. Could you please explain this aspect of your plan?  

My approach is to enter a position ideally in three stages. When I buy into a breakout, it means one third on the breakout, one third on the subsequent correction and one third on a new high for the now evident trend. When I buy into an existing trend, it means one third on a new high for the trend, one third on the subsequent correction and one third on a new high for the now confirmed trend. This is a three-stage entry to a trend, it is not pyramiding. Let me explain the difference.

Pyramiding is defined as using unrealised profits … as security to borrow funds to buy … additional positions. (Edna Carew The Language of Money)

Pyramiding is most common in the property and futures markets. Using a margin, a position is purchased. If the contract rises in price substantially, the balance in the margin account grows to the extent of the paper gains. If the margin account grows sufficiently, there will be enough there to enable the speculator to buy another contract. This continues so long as the price of the contract continues to rise, with more contracts being purchased using the paper gains as margin for the new positions.

To the extent that my position size calculations reflect any growth in the size of the portfolio when I buy the second and third parcels, there is a very small element of reinvestment of paper profits. However, it is nothing like the enormous leverage being used in true pyramiding.

Pyramiding is the explicit use of leverage and I do not use any leverage in my investment plan by choice. I do not choose to do so because there is quite aggressive assumption of risk in other areas of the plan as explained in my book.