Specific Lessons I need to Learn:
- Spreadbet Cash Buffer - It is vital to have a big Cash Buffer in my Spreadbet Account - maybe I have been running it a bit tight with about 10% of my Long Exposure sat on hand. This works fine in normal times but when things get hairy it is probably too tight. 15% or even 20% might be safer and less stress.
- Access to Trading Accounts - Don’t assume you can login to igIndex at any time and just put in more Cash Buffer - when things get hairy it may not be possible.
- Twitter is very much a double-edged Sword - On the Plus side it is a great Support Mechanism as you can vent your frustration and there are many other similar minded Investors feeling similar Emotions and Concerns. On the Negative side I found that my Feed got full up with People who have a Bearish mindset and who are feeding any anxieties - I think they are wrong and it does not help me to constantly have them putting this Bearish Case forward. Many of the People I follow are ‘Traders’ and more focused on Day Trading or perhaps Short Term Trading over days and weeks. This is great because they have many good tricks I can pick up but it is not so good when their Time Frame is very different to mine. Something that is in a ‘Bear Market’ on a Daily basis may not be in a ‘Bear Market’ as I understand it on a Monthly basis. There is an issue here of terminology. Twitter gave me Information like the Suspension of US Futures Trading - would I have been better off not knowing about this? Blissful ignorance is often the Long Term Investor’s best buddy. Perhaps I should have stepped away from Twitter or maybe I should not follow people who work on a different timeframe to myself - it is a difficult one that I need to ponder for a long time. Of course there is a danger in only listening to one side of the Bull / Bear argument.
- The dangers of CNBC / Bloomberg - I can actually pat myself on the back for not turning on the Telly for CNBC or Bloomberg. I have learnt from other Crises that these things just feed anxiety and fears - they run a Narrative that fits the Falling Markets and hype everything up. I have felt for a long time that the Markets move first and then the News is created to fill the explanation vacuum - Viewers must be provided with a ‘Reason’ for why the Markets are Falling. CNBC and Bloomberg must have the answers - the truth is they are clueless like EVERYBODY else on the planet. The whole News agenda is totally rigged - when the Markets are falling they wheel in the Bears, when Markets are rising they wheel in the Bulls. The people rarely appear again and by the time they have everyone has forgotten what they tipped or told us to get out of. Whatever the particular News Narrative is, they can find some ‘Talking Head’ somewhere who will give an opinion to back up that Narrative. There was a classic the other day where CNBC had a headline along the lines of “Notorious Short Seller says Markets will tank” - think about it.
- Complexity of the Macro picture - The simple fact is that Macroeconomics and the Global Economy are way way too complex for anyone to understand or to make judgements about. There are countless ‘Network Effects’ at the Micro Level which add up together (often in different ways according to a particular time) to create a large Economy - this is unpredictable - it is basically ‘Chaos Theory’. Network Effects are things like when you buy a New Car, your Neighbour thinks “ooh, that’s a nice Motor, I better change mine or I will look like a pauper” and they rush out and buy a New Car also - you cannot predict these kind of interactions and they can spread like wildfire - both in a good way in a Boom but in an awful way in a Recession. You also cannot predict if your Neighbour will buy a New BMW or a New Honda - these decisions have very different impacts on a wider Economy.
- Hedges need to be appropriately sized to work well - My Hedging via FTSE100 Short Spreadbets worked very well but it was not of a large enough size - probably by about another 50%. This is something I have made a note of and I will do larger Short Positions in future. Part of the problem is that in recent less savage Pullbacks, the size of Hedging I had worked pretty well - because there was a lot of ‘Natural Hedging’ within the Portfolio of Spreadbets where Drops on some Stocks were balanced to an extent by Rises on others. However, on Black China Monday it all went nastily wrong because all my Stocks became closely correlated and fell together.
- Stoplosses on Hedges - I need to think about and possibly experiment with Stoplosses on maybe some if not all Spreadbet FTSE100 Short Hedges. I have found that running a Short Position like this for several Months is no problem but I could have done with more firepower to the Downside when things got hairy. Maybe I could put on a Short with a fairly tight Stoploss and accept that the Price of the ‘Insurance’ it provides is the loss I would take if it hits the Stoploss. This seems logical and is not a problem if I keep the Size of any Loss to a realistic amount - maybe 0.5% of Portfolio Value as a Maximum. It seems fair to risk 0.5% if it will protect me from falls of maybe 5% or more. If I decide to go down this route, then I could start with very small Short Positions and see how it goes - this is always the best way to try out any new Approach or Tactic - try it first in small size and build up if it works.
- Take actions which help control Emotions - My Emotions on Monday were extremely heightened and it was exhausting - totally draining. Many people said the same thing on Twitter on Monday Night and it was clear that we had all been on edge and pretty freaked out. I need to get better at taking a break from it all and walking away (yeah, right, like I am walking anywhere in a hurry !!). The danger of such rampant Emotions is that I will probably do something stupid and rash - and such Actions always cost me Money. It was truly amazing how on Tuesday and Today (Wednesday when I am writing this bit) I feel totally relaxed and Markets have been ok apart from some Wild Swings in the Indexes - it illustrates exactly how Market moves can force you into making daft Snap Decisions by playing with your Emotions. This is why I have my Rule of only making Buy or Sell Decisions outside of Market Trading Hours and when the dust has settled later in the Evening - it is most definitely the best way to behave. It is vital that Decisions are made with rational, calm, thought using the Slow part of my Kahnemann Brain - not silly, emotional, irrational, panic Fast thinking leading me into dumb-ass mistakes (for details on Kahnemann Psychology, please see my bookshop on WD2 where you can find his book ‘Thinking Fast and Slow‘). Along a similar line, it raises up the importance of regular Sleep and keeping away from dangerous substances like Booze - it does not help with calm, careful, thinking.
- Stop looking at the Screen - I am in the habit of looking at my ADVFN App and seeing how my Stocks and the Indexes are doing on a regular basis during the day. This is fine in normal times but on days like Monday it just made things worse - it would be far better to make sure I have a huge Cash Buffer in my Spreadbet Account and just to not look so much. This is something I really need to get a grip of. The simple fact with regard to Technical Analysis factors is that it is only the End of Day (EOD) Prices that matter for a Long Term Investor - Candlesticks and MACD and RSI etc. are generated from the EOD Prices - so during the day it is just useless Noise. This means I need to only look closely at the Charts when the Markets are Closed and the Data is as real and as meaningful as possible.
- Discipline - I nearly made a huge Emotional Mistake of adding to my FTSE100 Short right at the Bottom of Monday’s Intraday Moves around Lunchtime - luckily I held myself back but I must not get myself into this situation. Trades must only be decided Out of Hours. Discipline (apologies for labouring this point but it is crucially important !!).
- The TV News Buy Signal - appears to have worked yet again. Mainstream Media are useless at reporting on Stockmarket Falls until they get really bad - they never announce that the Stockmarket is going to fall in the next couple of Weeks and that you ought to get out. Once they are leading with the Story, you can guarantee that it is time to buy. This also applies to the Tabloid Newspapers - once they are reporting on a Stockmarket Meltdown on their Front Pages, this is a Huge Flashing Buy Signal. These Media outlets are always too late and all they do is heighten your Fear and Emotions and make a Cold Rational Decision much harder. It is similar to the ‘Cocktail Party’ thing - when everyone you know who never normally trades in Stocks is coming to you with Share Tips, you know we are at the Top of the Market and it is time to get selling !! This has certainly been the case in China where even Cleaners and Waiters were buying Shares (with no idea about what they were buying and not even the slightest concept of what ‘Valuation’ means) - and of course I was one of these Suckers back in the Dotcom days…….
- It is important to appreciate that Short Hedging is not about making a profit - it is more about avoiding a Loss on my Long Portfolio. Thinking this way means I am less likely to take silly Risks because I am so desperate to make Big Profits on the way down. Avoid Greed because it is just another Dangerous Emotion and merely the Flipside of Fear - neither are helpful to making Money.
- Be aware of the Dangers created by the ‘Availability Heuristic’ - whereby our Primitive Caveman (or Cavewoman - do they have segregated Caves for Women? I better check with Jezza Corbes, maybe it's like his segregated Train Carriages) Brains get overly focused and emotional about recent and potentially catastrophic events. In this case the World is transfixed by a Slowdown in China (from 6% GDP Growth to 4% or something equally idiotic) and everyone is obsessed by it - urged on by the Media and self-serving Short Sellers. It is a fuss about nothing and we all need to calm down.
- “Buy when others are Fearful - Sell when others are Greedy” - I need to train my Brain to be Buying Stocks when there is Panic in the Air (like now, but I have no Cash spare !!) and to Sell Stocks when there is Euphoria and rising Markets - I think I am getting the hang of this but it really takes guts. This is being a True Contrarian but it works. One of the best aids to doing this is the FTSE100 RSI (and the Relative Strength Indexes for other Major Stockmarket Indexes). When it is Low (RSI 30 or less) I need to be Buying and when it is High (RSI around 70 - maybe 60 plus - it depends on where each Index tends to peak out) I need to be Selling.
- RoboWheelie - I must stay Calm, Rational, Logical, Robotic at all times (oh look, I repeated it again - sheesh, it must be important !!).
- Optimism pays - being a Bear is not a Good Long Term Strategy - it works for short periods of time, but overall being Long will make money. I see many people on Twitter who are permanent Pessimists - I struggle to understand how they can make money.
- Hedging is far easier and less costly than selling Stocks before a Major Market Downturn - If you sell good Stocks before such a Fall, there is a huge danger that you have dumped a really good Stock that you have learnt inside out over time and you know how it moves with regard to general Chart Patterns. The chances are that once the dust settles, you will start buying Shares again but you will not buy the one you had before - something else will have been jumping up and down and looking alluring to you. The risk here is that you will be replacing a Great Stock that you know very well with something you don’t really have experience of - it could be a costly error. In addition, it takes time and there are high Costs in selling Stocks and then buying back a few Months later. The dangers are that you will sell too late and that you will buy back in too late - thus missing out on valuable Returns that you could have had. It is far more cost effective and simpler in terms of time and effort to just put on a couple of Hedges when you think things are going to Drop and to then take them off quickly once you think the Panic and Downturn is over. You also avoid all the hassle of deciding which Stocks to buy when the time comes around to buy again. It is also worth remembering that Momentum is a great part of Stockmarket gains - if you sell a Great Stock that has Upward Momentum, you could be missing out on the ‘Free Lunch’ of the Momentum effect as the Stock keeps powering Upwards. As an example, say you had 25 Stocks in a Portfolio and you decide to Sell 8 of them to reduce Risk before a Drop or maybe going into the Summer Period (you are a believer in Seasonal Investing !!). Doing so will cost you a lot of money in Fees and Spreads etc. and then you have to buy another 8 Stocks to replace them (even if you buy the same Stocks you sold, you still have huge Buy Fees and spreads). It is far easier to put on a FTSE100 Short (via maybe a Spreadbet or CFD or by an Exchange Traded Fund like XUKS) which you can quickly take off once the Down period has passed - simple and cheap.
- Daily Working Pattern - I think it is a good idea to have a sort of Daily method of working - you can see mine in the Blog ‘Wheelie’s Daily Roll’ from 4th April 2015. Working in a sort of mechanistic, robotic, repetitive way probably can help with controlling emotions on difficult days like Monday 24th August was - what’s different to a normal day really? Why behave any differently? Markets wiggle around every day - that is what they do, it cannot be controlled. So best to ignore it and carry on as usual (assuming you have a good light behind the Sofa so you can read Investors’ Chronicle ok as you cower, quivering in Fear).
- The real 'Black Monday' - As bad as ‘The Great Fall of China’ was, it was nowhere near as bad as the real ‘Black Monday’ of October 1987 when the FTSE100 fell 23% in 2 days. It is well worth thinking about how your Portfolio would fare if the Market fell by this kind of amount - particularly if you use Leveraged Positions via Spreadbets and CFDs. In theory, such new devices as the ‘Circuit Breakers’ which pause the Market for 5 mins if it falls 5% or something might help prevent such a Collapse, but we saw on Monday 24th just how fast a Panic can work and how things just get totally out of hand. It is worth thinking about this and being prepared. Much of the Selling on Monday 24th was driven by Computer Trading Systems which don’t have the rational ability to think “hang on a minute, this is starting to look overdone”. The way they are programmed means that at the slightest whiff of trouble they automatically dump all their positions - it creates an added danger in the overall Market system (Systemic Risk).
Well, hopefully my 2 Blogs have given you a flavour of the pain I endured on the Monday of the ‘Great Fall of China’ and some of the Lessons that were thrown up by it. It certainly felt like a Historic Day and I suspect it was a classic Capitulation.
At the moment I am very inactive with regards to Trading and I cannot see myself doing much until we get to maybe late October. Until then I am closely watching my Charts for any signs of a Serious Selloff and I am prepared to whack on some FTSE100 Shorts again if I need to.
I am very much WheelieBull at the moment, but if need be I can quickly morph into WheelieBear - but I only like wearing this costume for around 6 months maybe as it gets rather warm with all that fur.
I hope everyone managed to get through this particular ‘Black Monday’ ok and that people have thought about their Strategies for the coming Months.
Good Luck all, wd.