Welcome to Sponge Shares

My Strategy

You need one!

I thought it would be worth briefly outlining how I approach the stock market and in particular the ‘small cap’ AIM market.

I personally see a strategy as something that evolves over time as you learn from success and failure and importantly as you learn how the stock market works at all levels!

When I first started out I was just solely focused on capital growth with a minimal eye on risk. This was partly as I wanted to progress quicker and partly because I had a solid full-time income backing me up so if it all went wrong I could still pay the mortgage!

Despite the above, I still had a basic strategy of finding growth stocks where I would realise share price appreciation. So for example, a company that was growing revenue year on year and that could scale its business out to grow even further. This strategy worked, my analysis paid off and I started growing the portfolio.

As I started looking for larger gains, my strategy had to change, the reason being that I was now investing in small cap higher risk stocks and I was building capital. That’s not to say I don’t still invest in large cap stocks, I do, but I’ve started to segment my portfolio with a different risk approach to each area.

As you build your portfolio and lock in success you become more sensitive to risk. Risks you may have taken when you started out are not so appealing when you’ve worked hard to build your portfolio and could lose it!

Ive tried to therefore separate my portfolio into three categories as follows:

Long-term, low risk, growth stocks

These are un-surprisingly your typical FTSE stocks. Well established business’s, revenue generating with business that can scale and grow income, probably also a dividend payer.

With these stocks I’ll have likely have identified a reason behind why I think they will provide growth over and above just being a well run business. So for example, I may choose a company like Ferrexpo that I think is undervalued on a price/earnings basis, that can expand its operations and there is a positive back-drop for its product Iron-ore.

Mid-term, higher risk, high growth stocks

This is where I’ll be venturing into the small cap space but not exclusively. Remember every FTSE 100 company you see today started as a small cap. If you can find one that will make the same journey you will be in for huge returns (even if you ride just part of the journey)

This is the area you have to be very careful as there are a plethora of small cap stocks that sound enticing and there are equally a number of other investors especially in the social media space that will tell you they are too!

Basically when venturing into this space as an investor you need to do your research. You and only you are accountable for the investment decisions you make. You have a couple of options, do the research yourself or find research sources/material where someone else has done the leg-work. You should still not rely on others research though even mine!

That said, this area of investing can far exceed gains you will make from lower risk investing if you pick right. I have a basic check-list I use to help me decide if the investment is good for me but even that isn’t bullet proof.

Ive been pretty successful in this area though so have increased stakes I put in and investments I have made in this category have returned anywhere from 20-1200%

You can see why if you get this right the returns can be huge and in some cases life-changing. I will say most of these successes have been where I have bought into a company early with little or no chatter on it and been patient. Every one wants a ‘bagger’ overnight but its just not realistic, its lucky!

Short-term, quick wins

This last category some would call trading. I don’t really differentiate between trading and investing even though some get hung up on it. For me every investment is a trade and visa-versa its just about timeframe. Also its quite possible I’ll invest in a company and ‘scalp’ trade a small amount on top with news flow or technical signals. Thats a whole other subject I’ll not cover here!

But the basis of this category is it’s more likely opportunistic. It could be news flow driven, could be macro driven or could even just be momentum. In some cases particularly AIM stocks it could just be technically the stock has a good entry level where barring a major catastrophe the stock will likely see a 10-20% or even higher gain. Sometimes there is no logic for this other than sellers got exhausted!

This area is more tantamount to gambling so the stakes I put in are always materially smaller than in the other two categores but as you get a feel for how the market works you can be very successful. This brings me on to my closing point around my strategy and one all investors should take seriously RISK

You can read my blog on Managing Risk and Exposure here

As you will probably have gleaned from the above there is a sliding risk scale for each category starting at lower risk through to very high risk.

Needless to say I invest capital in accordance with the level of risk however for me personally I don’t differentiate much between the first two categories as I have become a lot more confident in my mid-term, higher risk, higher growth stock picks, but only experience and solid research has enabled this. If out of four picks one goes wrong I’m still doing dandy!

What I will say though is I’ll not put anymore than 15% max of my portfolio into a single stock and if I put that in I’m pretty bloody confident. Normally though it’ll be a fair bit lower.

So, don’t throw in all you have on a single stock no matter how confident you feel or how much others tell you this is a sure thing! Build your portfolio in a controlled manner, protect your capital by de-risking (taking capital out), respect the market and don’t get greedy!

One last thing…

If you are going to venture into the small cap and AIM market place, realise that the market is out to take your money and there are experienced people who know how the market works and are ready to take it off you.

Seriously my suggestion is start small (even just observe for a while), learn how the market works, experience a few wins and a few losses and bank small profits. You’ll be surprised just how quick you can pick things up but don’t get wiped out before you had the opportunity!

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