SET PLAYS have become an important component of our great game and an effective tool in gaining an edge. The aim of any set play is for a team to have an automatic response to any scenario on the football field.
Although the concept of implementing set plays in the sharemarket might seem like a strange idea, the aim is to ensure you have an automatic response for what certain stocks or the S&P/ASX 200 (your oppositions as an active investor) might throw at you. It ensures that logic and predetermined strategies dictate your investment decisions and not your emotions.
Below are 3 set plays you can implement for your share portfolio:
SET PLAY 1 - FLOODING
Current Gold Coast Suns coach, Rodney Eade, is credited with inventing the AFL version of 'flooding'.
Flooding involves midfielders getting back and blocking up space in their defensive 50 when the opposition has the ball. The aim is to ensure there is limited space for the opposition forwards to be effective. Coaches tend to implement the flooding technique when the opposition have kicked 3 or 4 consecutive goals in succession. Survival mode kicks in and they don't want the game to get away from them whilst they sort out what has gone wrong in the coaches box.
An investor can implement a similar flooding technique when the market is falling and causing some serious damage to the performance of their portfolio, and mindset for that matter. This can be done by flooding their portfolio with defensive stocks or even cash. If the market index falls 10% from its recent high, there is a very good chance that certain stocks in your portfolio, in particular those that are considered cyclical, growth or speculative shares, will also be hit. When that occurs, you might look to replace them with defensive shares and flood your portfolio with a defensive presence to stop the bleeding - although it's worth pointing out that no company is sacred when it comes to a severe downturn. A specific flooding set play might look like this:
- If the All Ords falls 10% from its recent high - increase defensive exposure to 40% from current amount.
- If the All Ords falls another 5%, totaling 15% from its recent high - increase defensive exposure to 50%
- If the All Ords falls another 5%, totaling 20% from its recent high (RUN! - Just kidding!) - increase defensive exposure to 60% from 50%.
SET PLAY 2 - ALL OUT ATTACK
If a player is HOT, just give him the ball and move out of the way.
As a football fan, we all know there are certain games that no what a player does on the field, it turns to gold. It just happens to be their day! Think back to the 1997 Grand FInal between St. Kilda and the Adelaide Crows. (Apologies to Saints fans in advance) Darren Jarman, playing as a forward for Adelaide, kicked 5 goals in the last quarter. No matter what St Kilda threw at him, Jarman managed to kick the ball through the big sticks. Sensing he was hot, Adelaide midfielders went on the attack and kicked it to him at every opportunity. Malcolm Blight, being the great coach that he was, sensed the moment and isolated him in the forward 50 against his opponent.
Implementing an 'All Out Attack' set play in investing refers to increasing your exposure continuously to a successful position in the portfolio that continues to increase in value, also known as momentum investing or for more extreme scenarios, 'Doubling Up'. If you bought XYZ Ltd at $5 a share and it continues to increase to $6, all out attack would result in you increasing your position further in the company at $6 a share. Allocating more capital to a successful investment. If the share price continues to rise, you will increase your exposure to it even more. For example, buying 1,000 units at $5 a share, buying another 1,000 units at $6 a share and adding another 1,000 units at $7 before selling it (hopefully at $8 a share). Note: This type of investing is considered "aggressive" and not for the faint-hearted.
SET PLAY 3 - AVERAGING DOWN
If you were the coach of your favourite team and one of your top 5 players was experiencing a form slump, do you drop him or continue playing him and invest more time & effort into him? Value investors face this dilemma on an ongoing basis.
This 'Average Down', or 'Doubling Down' set play is designed specifically for value orientated investors and works in the opposite way to the 'All Out Attack' set play. Instead of rewarding good performance with more exposure, the 'Average Down' set play recommends allocating more money to value stocks in your portfolio that are in a form slump and performing badly, but have really good core fundamentals.
For example, you buy 1,000 units in XYZ Ltd at $5 a share. The share price subsequently falls to $4 a share. If you were to average down, you would buy additional units at $4 a share and reduce your average cost price. You strongly believe in the company's ability to turn thing around and will subsequently profit more from it when (if) it does occur.
Note: You are unlikely to see AFL coaches implement this type of set play. You are unlikely to see a coach isolate a player one-on-one in their forward 50 if their confidence is shot and they have the jitters in front of goal. It is also unlikely that you will see a coach persist with a player who is underperforming for 10 weeks straight.