“Why is somebody selling their shares to me, if they are such a screaming bargain?”
I also suspect that virtually no one reading this Blog will ever have read anything similar before - it is funny to me how so many vital topics of successful Investing just get ignored by the usual Financial Press - the only people likely to address such a topic are maybe Chris Dillow in the Chronic Investor and Richard Beddard on iii.co.uk. It is probably because too much of this stuff is Theoretical and not Real. At least with WheelieDealer you are getting the benefit of my Real Life Investment sufferings !!!
What I am really saying is that for anyone to be consistently successful in the Stockmarket over time, they need to have an ‘Edge’. This is some trait or skill that gives the person an Advantage whenever they trade in the markets - i.e. when they are a Buyer, they have an advantage over the Seller and when they are a Seller, they have an advantage over the Buyer.
What kind of Attributes can constitute an edge?
This really is not an easy topic to address, but I will try my best. Maybe in the cold light of day, in those rare minutes of the day when you get a chance to actually think, you may recognise some other facets in yourself that you believe give you an Edge. It doesn’t matter, if I have just made you think about this then it was well worth me scribbling it and if it helps your Investing, then brill.
These things could give you an Edge:
- Ability to remain calm while the market overall is full of panic.
- Recognising when the market is toppy and taking advantage and selling into the up move.
- Considerable skill in analysing Company Accounts - maybe from Accountancy Training.
- Experience gained in a particular industry which can be put to use with regard to related Stocks (although familiarity can breed contempt).
- Deep understanding of Stockmarket and money issues in general, built up over many years.
- Healthy scepticism of any information related to stocks you come across - most information has an ‘angle’ - often someone trying to sell you something.
- Sufficient cash resources in reserve to ensure you are never a ‘Forced Seller’ having to offload shares at a bad time because you are desperate for cash.
- Ability to think deeply, calmly, carefully in detail about a company.
- Contacts in certain companies which you can use for further insights - be careful of Insider Trading Regulations though !!!
- A big pile of Capital - best way to make a small fortune is to start with a big one !!!
- Experience of business built up over many years working in different fields in many industries.
- Time - this is a tremendous Edge to my mind. People who are retired and can concentrate on the Stockmarket are hugely advantaged.
- Good understanding of Technical Analysis - not for use in isolation, but in order to help timing of Entries and Exits.
- Comprehensive understanding of Stockmarket Strategies - things like Stoplosses, Pushing Positions by stake building, Seasonal Investing, Power of Dividends, top slicing etc.
- Appreciation of Psychological, Behavioural Finance aspects of investing.
- Interest, commitment and Passion for the subject. If your heart isn’t in it, you will not succeed.
- Flexible approach to various set backs and challenges - Investing is as much Art as Science.
- Open minded and willing to learn - actively seek to gain more knowledge - it is a field that requires constant learning and improvement. The Stockmarket evolves over time and strategies that work one year may not work in future - you must adapt.
- A circle of good trading friends who can help with various aspects of your analysis - no one individually need necessarily be Warren Buffett, but collectively you can cover a lot of bases.
- Over time you can build up a list of ‘gurus’ who you like to follow in the press or on the Interweb or whatever - very useful.
- Thorough understanding of Fundamental Factors and ability to apply them - P/E ratios, PEG ratio, Divvy Yields, Price to Book, etc.
- Systematic approach to analysing companies.
- Ability to recognise and control your emotions - recognising Fear and Greed in yourself and ability to capitalise.
- Recognising what you are - i.e. an Investor or a Trader and understanding the differences and dangers of mixing the two (don’t panic, I will blog on this more soon !!).
- Having a Tried and Trusted Approach and sticking to it even for sustained periods where it goes against you - although you must always carefully evaluate your system.
- Tools you know how to use that support your decisions - e.g. I use ShareScope software as my ‘Workbench’ - I would be even more useless without it.
- Understanding that Leverage can Kill and keeping it carefully controlled - people who lack such an edge get their Capital destroyed fast.
- Mindset which let’s you avoid the herd. I am not sure that Contrarian is necessarily a good stance, but when everyone else is rushing into Miners for example, it might be best to sit it out. Remember, the Sheep get Shorn (Oh my god, now he is bleating on about Shaun the Sheep - is there any limit to his Cultural references you may well ask?)
- Thorough appreciation of Risk and approaches to mitigate.
Ok, that’s more than enough. You get the point. This is not an exhaustive list but probably covers most stuff.
I guess the more of these you possess, the better.
“What are your Edges Mr Clever Dick WheelieDealer?”
Oh sh*te, you rumbled me. I was hoping you wouldn’t ask.
A fair few of the above I reckon. Mainly I would say Experience in career, education and life, Knowledge of Financial Markets in general, good understanding of Charts, ability to not panic too much in bad markets - seen it all before and the markets always bounce back. The fact that I do not work gives me time to think things over carefully and I have time to do in depth analysis. Patience is a vital skill that I have learnt and I have created working methods that aim to reduce my stupid emotional behaviour.
Upon reflection after an earlier draft of this Blog, I think my key Edge really is experience of many years messing about in the Stockmarket - I know what tends to work and I fully accept that I will get things wrong - but it is a game of Probabilities and you must enter Trades that have the highest likelihood of being successful. Also, if you enter poor Trades, you manage Portfolio Risk in a way that minimises the impact of such screw ups.
This is a key point for New Investors - you will have some difficult times especially in your formative years - but stick with it, and it will payoff big. If you have 30 Investing Years ahead of you, so what if you struggle to get the returns you dream of in the first few years - think of it as an Investment in your Future - all of a sudden things will click and you will get to learn what works.
Another Key Edge I have is that I turn my mind to thinking about such issues as “what is my Edge? Why do I think I can Win at this game?”. Ironic, is it not?
I cannot stress enough how important I think this Concept of an Edge is - this is not Flower Arranging in the local village hall. It is war out there and you have to Think like a Winner - if not, you will be a Loser. If you don't have an Edge you can guarantee the person on the other side of your trade will have an Edge and beat you up with it.
Don’t get Shorn - you will need your Woolley Coat for winter……
That’s all folks……(Daffy Duck - more culture for you - don’t say you never learn anything from my blogs.)