I often think of subject matter that is way too short to justify its own blog, yet at the same time far too long to just send out via a Tweet and also I would like to store such stuff in the Website Archives so it can be retrieved by anyone who wants it; and of course with Tweets they tend to be quite ephemeral and soon lost in the River Twitter. On the basis of that, I am envisaging that this blog will cover a few possibly unrelated subjects but at least they get captured in ‘black and white’ electron imagery for the future.
Stay in control of your Position Sizes This is something I see so often and I know I have fallen into this trap many times myself in the past. It’s a very simple concept where we buy into a Stock, and we quite like it, and we give it perhaps 4% of our Portfolio and then we leave it to do its stuff. Then it turns out that this one is a real beauty and it keeps steadily pushing higher and after a period of time we find that it has grown to be much larger and could even be up to 12% or our Portfolio or more. If we have a very focused Portfolio with maybe just 10 Holdings or something, then a Stock like this could easily grow to be 20% or more.
This is clearly a high-class problem but it really can catch you out big time. Just recently we had the example of Burford BUR where it had been on an incredible run but then the Shorters at Muddy Waters got hold of it and the Stock was utterly spanked – I think it was down as much as 65% or so on the day the News really struck home.
Following that horrible episode I had lots of people speaking to me who had been in (or were still in) BUR and they had really suffered badly – and in nearly every case they had let the Position run away while the times were good and they let the position grow far too big. Of course, then the kicking that BUR had taken also caused their Portfolio to explode and they had gone from a very strong performance for the year to date to a very dismal one. And it happened in a flash. It’s easy to get caught like this but in truth it probably is highly avoidable. Firstly you can make sure you do not have a Portfolio that is too highly focused, and this must mean holding more Stocks. Rather than having 8 or 10 Stocks it might be better to hold 15 or 18 and, secondly it is a good idea to have Position Size Rules that apply for various circumstances. For example, you could have a Starting Position Size Maximum of perhaps 5% and then you could impose a Maximum Size that the Position can grow to of perhaps 12% - in other words, if the Position grows over 12% then you TopChop and keep the Position in trim. This means that you avoid to an extent the dangers of a sudden problem with your Stock (and it must be realised that any Stock can [and will !!] be hit by a totally unexpected problem at any time), or at least you minimise the damage; but it also means that you bank some Profit and of course ‘a Profit is not a Profit until you bank it’. A related problem is when we get over-enthusiastic about a particular Stock. I heard an example recently of someone who perhaps normally put about 8% of their Portfolio into a new Stock but in this case he put 25% in. Of course you can see the Car-Crash happening in slow motion as I type this; and not long after they bought in, the Stock had some sort of problem and got completely smashed. In this case the Investor had totally over-estimated their ability to predict the future of a given Stock and had fallen into the Elephant Trap with the spikes at the bottom smeared with Poison Poo. My default stance when buying any new Stock, is that I can never predict in advance whether or not this Stock will be superb for me or an utter duffer (but I do hope it will do ok and I like to think I have chosen something which doesn’t carry too many problems that I can spot during Research or foresee). However, what I am fairly sure of is that the basket of Stocks that I hold will collectively do pretty well over time. This is exemplified by a simple anecdote where I nearly always find every year that the Stock I would say is my ‘Top Pick’ in early January will likely turn out to be one of my worst Stocks by the end of the year and, vice versa, one of the Stocks that I think is looking a bit ropey, will turn out to be a huge winner and by far my best !! After all, who would have thought that KCOM and PETS would have been a couple of my best gainers in 2019? I also have a Minimum Size for when I am buying a Position – I won’t buy less than 1% of my Portfolio value – this helps to avoid unnecessary Costs which can mount up if you just buy tiny chunks all the time. However, for really high risk and speculative Stocks I might buy smaller than this for a ‘Starter Position’. Personally I find focused Portfolios extremely dangerous and they are great when things are good and horrible when it all goes against you. But worse than this is when an individual Position is allowed to get out of control and becomes ridiculously big – it is just asking for trouble to not slice a bit off the top from time to time. And if we were honest, it is really our own Greed and Over-Confidence that causes these problems. Striving to become a better Investor I said the topics in this blog might be quite random and this will prove the point. Very often I come across this idea of a ‘Benchmark’ that we should compare our Portfolio Performance with and the theory is that if we do not beat the Benchmark then we might as well just buy Tracker Funds and go off and do something else. This is of course quite sensible and a great theory in many ways, but it does have the rather considerable drawback of being overly obsessed with the Outcome and totally ignoring the Process (or the Means) of reaching the end goal of making money. The big issue I have with this though is that I enjoy doing what I do and to me the Money is a secondary thing that comes along as a consequence of going through the Process. I think it is paramount and crucial that we enjoy the ‘art’ of Investing (or Trading) and if we are purely fixated on the Money then I think it will be quite a miserable and disheartening affair and it is likely to reduce our chances of success hugely because this is the kind of challenge where you need to enjoy it (or even utterly love it) or you will struggle. You need passion to be a good Investor because without this you will not put the work in and you will lack the resilience to cope when things don’t quite work out as you would like. The Benchmark idea throws up another wrinkle. What level of outperformance of the Benchmark is acceptable? For example, if your Benchmark returns 10% gain over a year, how much more does your system have to deliver in order to make it worthwhile? Would an outperformance of perhaps 5% (so you achieve 15%) justify the extra effort involved and the extra Risk you have to take on, or would you just be much better off to take the 10% that the Benchmark gives you and then to go off and have fun? Would a 10% outperformance do the trick? This would mean 20% Return (which is a big ask) and if you can achieve this then you are up with Warren Buffett and many of the truly great Investors. Is that really doable? I look at this a completely different way. For me the measurement is whether or not I am enjoying what I am doing with my ever more valuable Life (each Day we have left on the Planet becomes marginally more valuable as we tick them off towards the inevitable that comes to us all) and whether or not I am managing to avoid having to get a job. I have now had 10 years of ‘Retirement’ and so far I have managed to grow my Pot a little bit (not as much as I would like !!) but the main thing is that I am enjoying my life and that is the priority. In terms of my Performance on my Portfolio my focus is on learning and putting in my efforts to make my ‘system’ work better all the time (Continuous Improvement – Kaizen) and I am confident that as I write this I am sure I am a better Investor than I have ever been at any point in my life, and although I keep making silly and avoidable errors, the essence of a truly outstanding system is in place and I just need to work hard at making the process deliver. That is the challenge and that is what I enjoy. And I feel like I am active to the level I desire and I take on an appropriate level of Risk. Just focusing on the Return and ignoring the Activity Level and the Risk Level you undertake to make that Return is a mistake I think. Keep pushing forwards and don’t let an arbitrary Return number divert you from your focus and look towards the day when everything ‘clicks’ and comes together to mean that you achieve some excellent Results. Market Risk Varies I have long felt that most Investors (even some really superb ones) pretty much ignore Market Risk. People are great at managing Stock-Specific Risk by methods such as in-depth Research, Diversification, Portfolio Management like Topslicing and Averaging Up and Down etc.; but when it comes to Market Risk they just put their head in the sand and keep their fingers crossed behind their backs. This might not be very clever. It is fine when things are going great and the Markets keep climbing ever higher, but at some point in time we will get a huge Bear Market and there will be a of blood on the carpet. I get the sense that complacency is off the scale at the moment and after 10 years of a Bull Market (the longest in history which in itself should send alarm bells hysterical) people have totally lost sight of the reality that Bear Markets often come around. But on top of this total ignorance of Market Risk, there is another element in that people do not see Market Risk as something that is variable. This is of course the case though and at the moment Market Risk is extremely High and this is potentially very dangerous. Market Risk is lowest as we come out of a Bear Market and after a long Bull Run the Market Risk is very high. This means that in the early stages of a Bull Run we should pile in and put loads of Money into the Markets (and if we want to use Leverage then this is the time to do it) but as the Markets rise and get quite old and stale, we should be lowering our Exposure and taking Money out. I suspect very few people do this and when the poop hits the propeller there could be a lot of tears………. I have been obsessed by Hedging via Indexes in recent years to try to reduce this Market Risk and I am confident that once we get into a Bear Market, I will be well placed to minimise the damage and to be able to mentally cope with what could easily be an extremely unpleasant and worrying situation. Don’t get Shaken Out My intention is to write a much longer Blog about how to hold Stocks for the Long-Term and I have already scribbled a plan on A4 with regards to this. Anyway, I just want to mention here how important it is to be PATIENT and to have RESOLVE and COMMITMENT to stay in a good Stock and to let the idea play out. Time and again on Twitter I see people buying into a truly excellent Stock and then not long after I see they have sold it and banked 10% Profit or something; or much worse than this they have let a wiggle Stop them out and now they are not even in the truly great Stock and they also have realised a Loss on it. It is entirely up to individuals how they run their Portfolios and how they do things and there are not ‘Right’ or ‘Wrong’ ways necessarily, but if you pretend to be a Long Term Investor then it might be a flawed approach to behave like a Short Term Trader. If you put in a lot of effort to track down and then to buy a really good Stock then you must be patient with it and give it time to play out. Constant chopping in and out just runs up costs and keeps you crazily busy for no real gain. That is fine if you want to be a Trader but it only makes sense if you are making a lot of Extra Return for the increased Activity and the higher Risk you are taking on. We are back to the Benchmarking again………. Rather than spending so much time chopping In and Out, it might be a far better use of time to take a lot longer over choosing your Stocks and to be working on Portfolio Management to optimise the efficiency of your Portfolio in terms of Risk Management and Returns. Spending time on learning activities such as reading Investment Books, working on your Psychology, meeting with Company Directors, and talking to other Private Investors and suchlike would perhaps ultimately be more effective and profitable uses of your time. I guess a lot of the problem here is that people are too easily led astray by the next new Siren who appears with their alluring Song and they quickly dump their old Lover to chase after the new Desire of their life. We are such fickle animals and this might not be the best way to run our Portfolios for the Long Term. We need to be more faithful perhaps. Think monogamy. I am talking about Stocks here; if this has you thinking of our own Personal Love Life then perhaps you should not be reading this but going to see a Relate Relationship Counsellor instead !!! Cheers, WD.
2 Comments
Paul Hunt
5/12/2019 09:30:48 pm
A lot of sense. I don't follow a lot of it unfortunately!!
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Pete Howat
10/12/2019 11:28:22 am
In your first section on position sizes you missed out the use of stops to prevent the 'disaster' scenario. If you have a big winner, you can ride it and trail a stop loss, which 'locks in' a big part of profit - even if you haven't banked it.
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