Ask Colin

In Newsletter 34 you asked a potential short term trader for 15%pa return over two years. If you only trade the long side, how can you do this?

In the newsletter I was talking about someone who wanted to be a short term trader. A short term trader should be able to trade both the long and short side of the market. So, if they need a track record from trading in a longer time frame, it would be good if they had also traded the short side in a bear market.

I was not necessarily suggesting they use my trading plan, which is as an active investor, who trades a longer time frame, but only the long side. Even if they had traded a method similar to mine, I would still be looking for that return before trying the short term. There are some points I would make where I think you may be misunderstanding me:

1. When my funds are not in shares, they are in cash. I include the return from cash reserves. So, in 1995, when I was out of the market for almost 11 months, I had a 6%pa return on the cash reserve. So, if I had made a large return the year before in the bull trend, I could easily have a 15%pa return for the two years.

2. My method is to close out positions as the trend fails at the end of a bull market or the start of a bear market. However, that does not always mean I have no positions. If a stock remains in an uptrend, I might hold it. I am sorry if I have not made that clear. I said 'might' because my market exposure strategy may have caused me to close out even some uptrending positions. They would not have been the best ones though, because I sell the least successful holdings first in that situation.

3. I could be taking positions before a bear market is finished. If the Coppock has turned up and there are strong stocks to buy, I will start buying.

4. While I have a basic method, it does not mean that I stop thinking and follow it blindly, no matter what. In the long bear market we have just been through, in our market anyway, some sectors were falling and others were in uptrends. I was only lightly exposed to them last year, but my return adding the returns from those positions to the interest on cash reserves beat 15% for the period. This is unusual. More commonly, I would expect to make less than 15% in those circumstances, so if that was the second year of the two years I asked for 15%pa, it might have been difficult to do. But that is fair enough - I don't think someone should start trading short term without a track record in both bull and bear markets. If they were unlucky enough to come into trading just before several years of declining markets, that is the way things are. They will just have to be patient and await the opportunity to test their methods and gain the experience they need.