So, to kick off this Blog on what I need to improve on, I am going to first of all totally ignore the purpose of this Blog and bleat on about some other nonsense - by now you must be getting a feel for my rather tangential Blogging style !!
This particular Tangent is about Perceptions and Context and Realistic Expectations. I should really have put this at the end of my ‘Scores/Doors’ Blog as it would have made a nice Conclusion bit but, alas, it was not to be.
My point is that the overall Performance I achieved in 2014 of a 1% gain on my Stockmarket Activities must be set in the context of many years of Long Term Investing. Think about it this way, for any given year, there are 5 possible Outcomes:
- Markets Down a lot - greater than 20% fall.
- Markets Down a bit - I guess from 5% Down to 20% Down.
- Markets Flat - this probably encompasses Down 5% to Up 5% in a Range.
- Markets Up a bit - this must be from Up 5% to Up 20%
- Market Up a lot - greater than 20% gains.
These percentages are just indicative numbers I have guessed at, but hopefully they help make the point (for example, rather than 20% you could argue it should be 15% - whatever, talk to the hand…..) This ‘Market’ thinking can also be applied to a Portfolio of stocks. For the Mathematicians and Statisticians and Campanologists among you, this should approximate to a ‘Bell Curve’ or I think it is also known as a ‘Normal Distribution’ (well, that’s what I normally call it….)
From this list, the ‘Outliers’, Outcomes 1 and 5, are probably quite rare - let’s say that in a 10 year period each of these might happen once. In practice, it is probably a lower probability but this is to illustrate the idea.
Outcomes 2 and 4 probably happen a bit more often, maybe each one is 2 times out of 10 years.
Then, for Outcome 3, this probably happens the remaining 4 years.
Therefore, if I think about my 2014 Performance of being up 1%, this would fall within Outcome 3 and is just one of the 4 years that it might happen. In other words, my 2014 Performance is just a ‘Snapshot’ in time and I have to consider it within the framework of a 10 year period. I hope that makes some sense. I am not sure it does. I know what I mean anyway !!
I note that ‘Bearbull’ in the latest copy of Investor’s Chronicle (2 January to 8 January 2015, Front Cover ‘The Final Investment Frontier’, page 16) talks about how Investment Returns over years have a certain Random Element when discussing how his Income Portfolio disappointed in 2014 - I guess even Warren Buffett gets disappointing years (I know he does, cos he hugely underperformed in the Dotcom Bubble at the end of the 1990s).
By the way, this 5 Possible Outcomes thinking can be put to use for your 2015 Planning activities. This is an idea I have stolen from the great Ken Fisher - he uses exactly this approach when planning for each new year (he probably uses different Percentages - I have not checked). I read about this in his book ‘The only Three Questions that Count’ - sadly it seems to be out of print but it was very thought provoking. His other books might be worth reading as well - maybe I will have a quick look and shove one in Wheelie’s Bookshop.
The simple logic is you try to guesstimate which Outcome Number 2015 will fall into. If you think it will be a tough year, but we will end up higher, then maybe you will count it as an Outcome 4. If you are more negative but not overly so, you might expect and Plan for Outcome 3. This can be a very useful way of thinking about your Total Exposures and your approach to Market Capitalisation sizes - e.g. will you hold Small Caps or Big ‘Blue Chip’ FTSE100 stocks? For what it is worth (probably not much), I guess I expect an Outcome 3 year.
Improvements / Changes for 2015
OK, after that diversion, we are now back on the Subject of this Blog. The following are things where I screwed up or was sub-optimal in 2014 and I will put more focus into sorting them out:
- Reduce Holdings - The most obvious thing that I need to address is that I have far too many Stocks. I am not certain of the exact amount, but it must be around 70 - that is way too many. This includes stuff in my Income Portfolio (11 stocks) which I am not too concerned about as they are Low Maintenance and also my 5 Unit Trusts - but they are also easy to manage - I just ignore them in the main. I think I need to knock about 10 stocks off the 70 Positions I hold - that sounds about right. The problem here is that holding so many stocks means that I am effectively just running a ‘Tracker Fund’. It has an advantage that I am probably in a good position if markets take a severe fall, but in most other circumstances (i.e. When the markets are going up, which is what they mostly do) I am probably not making the most of things. Portfolio sizing in terms of number of Stocks, can be a difficult thing - too few Stocks opens you up to a lot of ‘Idiosyncratic’ Risk from problems in individual stocks - this can happen with Portfolios of 15 or less shares. However, this Idiosyncratic Risk can also benefit such small Portfolios when individual stocks do well. On balance, I favour having a lot more stocks as I want to spread my Risk and, in effect, take on ‘Market’ Risk rather than Idiosyncratic Risk - Market Risk will be lower. A quick addition here, I read carefully Bearbull’s comments on his Income Portfolio today (see the reference earlier in this Blog) and note he holds 13 stocks (unlucky?) - this clearly shows how having a small Portfolio is no guarantee of success either - I think it just means higher variation (volatility?) of Annual Returns. Because I do not work and never want to have a ‘Real Job’ again, I am very focussed on Capital Preservation and this means I need to keep Risk Low compared to someone who has their Working Capital (their ’Human’ Capital of being able to work and earn cash) to fall back on - they could take on more Risk as a result with a more concentrated Portfolio. I am happy to sacrifice stellar returns (with big yearly variation) for more safety and avoidance of having to get a job.
- Top-up Winners - I made a big error on Booker BOK which I must avoid. What I am supposed to do is buy more of a stock after an initial purchase if it starts to move up nicely right from the off. However, in the case of BOK, it started to move up and, for whatever reason, I failed to buy more. So one of my best ‘Winners’ has only helped me to a small extent. Very silly really. I keep thinking about buying Share Positions and Spreadbet Positions at exactly the same time and reducing the discretionary and finesse element. Making it Robotic and Mechanical may be a far better way of doing things. I will consider this no doubt but the main point here is that I must Add to Winners……….
- Evolve - One important point here is that I must not Panic and radically change my Approach just because I had a poor year. I know that my Approach works reasonably well in most years, as long as I don’t do stupid things. It would be utterly daft to completely abandon my methods and do something hugely different - it would definitely cost me money and create another bad Year !! I guess the key is Evolution not Revolution……..
- Back to Basics - I have had Robbie Burn’s Naked Trader4 book sat on my shelf for many weeks and not got round to reading it. The dismal performance for last year has given me a kick up the rear to get on and read it - I am sure it will help to have a refresher in the Dark Arts of the best Investor I know.
- Keep away from Resource Stocks - If you have been reading my Blogs for some time and enduring my incessant Tweetering, you will know that I have lost pretty much all faith in Resource Stocks after losing mucho Cash on them. This year I started with a few Resource stocks and I think they have all done terrible - but they probably did not impact hugely. Anyway, they contributed to the poor outcome and it puts me off them even more. I am not ruling Resource stocks out entirely, but I doubt I will invest in them much in the future and would most likely buy the Larger Capitalisation diversified miners.
- Stop Watching TV Nonsense - As per my Blogs about the nasty experience and lucky escape I had on a FTSE100 Short Hedging Trade I made in October (you should be able to find these Blogs under the Category ‘Trades‘ on my Blog page), I must be more careful when trying to Hedge my Long Term Portfolios and I need to be more Mechanical and rely on classic Chart Indicators like RSI and Bollinger Bands etc. The big mistake I made was watching that sh*te on Bloomberg and CNBC TV and it got me all panicky and terrified we were about to have a huge Market Crash - it was nonsense and they just played on my Fear Emotions. I will make sure the TV is off during bad periods for the markets in future !! I want to be more ‘mechanical’ this year and drive my Hedging and Buy and Sell decisions more by Technical ‘absolute’ numbers and Technical Indicators that are clear - cuts out the emotional side. Simple indicators like RSI and Bollinger Bands used on their own would help this immensely I think.
- Seasonal Investing - Apart from having too many stocks, probably the Biggest Mistake I made was to fail to follow the simple timing principles of ‘Seasonal Investing’ (“Sell in May and go away and don’t come back until St Ledger Day”) in a sufficiently sizeable manner. I was great at planning ahead and thinking about selling before the Summer months, but when it came to the crunch, I only did a bit of tinkering around the edges and although I did some superbly timed Topslicing, I just did not Sell Down aggressively enough. I think I should have perhaps moved about 30% of my Portfolio into Cash - in the event, I probably only shifted 10% into Cash. This year I must plan well and execute this in an appropriate size.
- General Election - This is not really something where I need to make a specific improvement for 2015 but I just want to reiterate my concerns over the impending General Election. Yes, yes, I know, yes, yes, I have written about this lots but if I keep repeating it, there is a chance I might actually act on what I am saying !! And a small possibility that you, Dear Reader, might gain some small advantage also. The General Election is on something like May 7th 2015 and this unfortunately coincides with the Seasonal Investing Springtime lull - so we could see some nasty drops as we get near. This is right at the forefront of my mind and I will be very careful buying anything over the next few months and I am more likely to be steadily selling stuff - after all, I need to reduce holdings anyway and getting the Quid Note exposure down in total probably would not hurt - particularly in my Spreadbet Account.
- Focus on Spreadbet Account - Ah, on the subject of Spreadbets, I need to sharpen up my Spreadbet approach as I mentioned a bit in my ‘Doors, Scores, Windows or whatever it was’ Blog. I think I need to be more mechanical and reduce the discretion element - for example, when I buy a new share, I should buy a small Spreadbet position at the same time - it needs to be Robotic and stop my brain screwing things up. Human Brains were not built for complex financial markets and I am sure many female Readers would argue that Male brains were only built for food, beer and telly……..I suspect that I will reduce my Spreadbet exposure over the next couple of months - to be honest, I have not decided yet but with the General Election it seems prudent. I also think I have an ‘imbalance’ problem in my Spreadbet Account where I have some positions which are hugely larger than others - this means that drops in the big positions can really hurt bad - and that pain is magnified by the Leverage.
So, the bullet points above are the things I will address in 2015 to try and sharpen things up a bit. However, I have always felt that there is a ‘Plan B’ in my pocket which I reserve for if and when I have a series of Years where I am just not making enough Money (it‘s a bit of a “Press here in Emergencies“ type button). This Plan is essentially to move closer to Robbie Burn’s strategy - for instance, at the moment I do not use Stoplosses - I am sure if I put my mind to it, I could make Stoplosses work - maybe I am so bad at them because I seem to get along fine without them most years…..
Robbie is much more of a Shorter Term momentum trader than I am. One method he discusses in his first 3 books (I don’t know if he covers it in Book 4 as I am only on page 26 !!), is that he looks at the Top Movers lists on advfn.com and picks stocks that are already showing signs of life (something is ‘happening‘) - I think there could be mileage in this approach and I could adopt it if I needed to. In addition, Robbie seems to often sell after a 10 to 20% gain - I could do more of this and trade more often - but obviously I would need to be careful not to ‘overtrade’……….I am sure I could operate more like this if I needed to. But at the moment, I like a nice, sedate, lifestyle. I have a sort of way of life thing going that I am quite happy with and I am reluctant to change the approach too much. The bottom line is that there is always this Emergency option if I need to do something radical.
Plenty there to think about then, let’s hope 2015 can be navigated effectively. Anyway, if not, then it will be sort of Fun anyway……
Happy New 2015,