Aggressive investing may pay off, or backfire horrendously. It all depends on the market environment, and on your willingness to give your aggressive investments the extra care they require.
If you want to devote part of your portfolio to aggressive investments, you should do so only if you can accept the added risk that this involves, and if you have the time it takes to deal with this risk.
Aggressive investing is different from conservative investing in a variety of ways. Aggressive investments are most always more volatile than conservative investments, of course. So the timing of your buys and sells has a greater impact. Then too, bad choices are inevitably more expensive in aggressive than in conservative investments.
Aggressive investors need to prepare themselves for these inevitable losses. This calls for a toughness of personality or temperament. If you can’t accept losses (or the constant possibility of loss), you should avoid aggressive investments. Otherwise, when losses come or appear imminent, you may wind up panicking and selling at a low.
If you feel panicky, other aggressive investors may feel that way too. That’s why demand may dry up overnight in aggressive investments.
More than ever, you need a portfolio
If you invest aggressively, your best approach is to invest in a package of stocks in which risks are high, but are planned for rather than unexpected. This aggressive or speculative portion of your portfolio may make up a large or small part of it. But to make money as an aggressive investor, you’ll probably aim for these characteristics in your choices:
■ Buying stocks with a medium-term orientation. You’ll hold most of your stocks—particularly your most profitable positions—for one to five years. That’s about equal to the average business cycle. That’s far longer than the typical holding period of a trader, who may buy and sell every few weeks, days or hours. Traders often wind up losing money. On the other hand, some of history’s most successful speculators—Jesse Livermore, Bernard Baruch, etc.—have profited with the one-year to five-year hold.
■ You’ll seek volatility. A good rule-of-thumb is to look for stocks whose highs in the past couple of years are more than twice their lows. Mind you, you may also seek out what we’ve referred to at times as ‘undiscovered gems’— junior stocks that have gone sideways for years while their finances or outlook have improved.
■ You’ll buy mainly when prices have fallen. This is the trickiest part of aggressive investing. After a 10 per cent setback, you have to decide if the market is ready to bottom out, or if it’s headed for a slide of, say, 30 per cent more. Success here obviously calls for a high degree of judgment.
Take the recent market correction, for instance. After losing 8.4 per cent of its value from its peak on January 4 to its trough on February 8, the S&P/TSX Composite index has gained back just over two per cent from its low. Will the index keep going up from here? Or is it a dead-cat bounce? That’s when the market temporarily recovers from a sharp decline only to decline again.
You need to remind yourself, then, that economic earthquakes may make you squirm or even cost you money if you’re unprepared to face them. But eventually they should lead to new opportunities for today’s most successful companies. These are the kind you want to invest in.
A stock for aggressive investors to buy
The traditional hunting ground of aggressive investors is junior stocks—industrials as well as mines. Special situations may also present attractive opportunities for aggressive investors. These are stocks that have some unusual reason to prosper. An example of an aggressive stock is Shopify, Inc. (TSX—SHOP; NYSE—SHOP). This extremely volatile e-commerce stock was recently trading close to its 52-week high in Toronto at around $185. A year ago it traded as low as $85. An aggressive investor might want to take a position in the company should its share price drop below, say, $155.
This is an edited version of an article that was originally published for subscribers in the March 2, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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