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The Stock Market Fisherman!

A wise man once said, I don't believe in diversification when it comes to making money. I find out where the money is being made and then I put my money to work.

Ever since I became interested in the stock markets, I had always wanted to view the markets as a game or a sport. I never ever wanted trading or investing to be stressful or an emotional strain, otherwise it would defeat the purpose of becoming self employed. As with all businesses I pursue, I have a rule that states 'Enjoy the process, or get out!'

But the purpose of this page is demonstrate a different side to trading and investing that some may not be aware of, or just simply didn't think was possible. I like to call it -
'The Stock Market Fisherman'.

The idea for the name came to me one day when I was actually in hospital with my baby son, who was having scans on his brain. As I had decided to scale back my trading time, I was questioning what it was I wanted from the markets. The answer had been with me for years, but it wasn't until this particular day that it all clicked.

I have spent so much time studying other people's methods and systems that at one point I was starting to think I was psychologically damaged, and that I was like a pin ball in a pin ball machine, bouncing around trying to find the answers to life. But that is not the case. I just love to learn. I love to learn details, fundamentals, the psychology and the behaviours of markets at different times. 

Many moons ago, I heard a mentor of mine say to a crowd that he treats the markets as his source of income, if and when he needs the money. So for example, if he planned to go on a holiday (which he does every month), he would use the markets to pay for it. His ability to generate income on a regular basis comes from experience, but what makes him clever is that if he fails, he has cash reserves to make up for it. 

The beauty of this method is that he wins more often than he loses, and when he wins, it's always more than he needs. 

Without realizing it, I had taken this idea and cemented it into my sub-conscious as the goal I wanted to achieve in regards to the markets. Even though my friend was only talking of a particular market and strategy, I have no doubt he has since expanded on this to include other financial products and mediums such as commodities (futures) and currencies.

Fast forward to now, it is obvious this experience has helped pave the way.

I treat the markets as one big ocean, where at any one given time, if you are prepared to look, you will find a school of fish. Once you find the school of fish, you should have several baits at the ready. The bait is the strategy, and the school of fish will be the financial product. 

So let's use an example. 

Let's say I have a watch list of about 300 US stocks, and this list is broken down into sectors such as energy, basic materials, health and so on. The list is then broken down into categories, such as steel, non-ferrous metals and so on. When I look at which stocks have been trending well over the last six months, certain categories really stand out, such as steel (as of April 2006).

The next question I like to ask, is why is this happening? And a lot of it comes down to demand from places like China, and the fact that they are hosting the Olympics soon. Knowing this gives me an understanding of how the commodity markets work and that the steel industry needs raw materials. If I can determine the global demand and supply equation for iron ore and then steel, I can get a handle on how far mining stocks and steel producing stocks are likely to continue in an uptrend.

Of course other factors come into play for individual stocks, but to get back to the stock market fisherman theme, if a there is a fundamental reason for a bunch of stocks, or a commodity to be trending higher, then that’s where I want my fishing boat to be. As soon as I feel the trend is over, I will move my boat elsewhere.

The point I'm trying to make is that I understand through research and being selective on who I listen to out there, why certain areas of the market move at different paces. I believe that there is a bull market in commodities, and I only believe this because of who I listen to and what I read. I don't have to believe this, but I do.

Armed with my beliefs, I will look to position my money where I see fit. So, if I still feel the steel industry has a way to go, I have several options. 

Invest in mining stocks, and solid ones at that, or invest in a steel index. I can even go as far as buying real estate in mining towns, especially if the bull market is young.

My theme of course is not to find one area (such as steel) and stick to this religiously until the money dries up because quite frankly, I would get bored. However, it would be part of a small bag of areas on my radar. Just like when I go fishing, I have a menu I want to bring home that incudes more than one species of fish. 

At the moment, I have about 2 to 3 areas of the market I am interested in, and of those areas I may specialize in one or two sections. These areas may keep me interested for months, or maybe years, but the likely situation will be that the 2 to 3 areas are all moving in the desired direction, but at varying knots, and this provides opportunities usually on an ongoing basis.

Currencies add another element to my trading as they are extremely liquid, and are great place to park money for a rainy day. Once you understand how things like interest rates, inflation and so on work, you can get a good idea of the medium term trends of currencies. I also like to trade currencies when I have a bad day. Usually I'll just pick up my guitar and strum until my frustrations disappear, but at the same time, an hour or two during the London session can be quite fun.

I would like to take this opportunity to thank some of my teachers along the way.

Peter Bain for his teachings on Forex and his mentoring, Dr Stephen Cooper for his teachings on stocks and options and also his mentoring, Jim Rogers for making the global financial markets so much clearer, and Andrew Dimitri, for his wonderful (although extremely boring) strategy for making money in all directions except straight down.

Happy Trading

Dean

P.S. Visit our Stock Market Fishermans Catch page to see great trades.