A String of Tweets from 5th June on my Approach/Execution/Optimization

Tweet

As per the heading, back on Friday 5th June 2020 I went a bit nuts and was lying in bed at some crazy time like 5am in the morning, and my head was utterly buzzing with thoughts about my Approach (my System), how I was Executing it, and how I needed to Optimize what I was doing. I have taken the original Tweets and shoved them into this Blog and they are in italic text. I have then added underneath in many places some further comments to try to make it clearer to Readers. I hope you like it.
 
WD

‘It’s a useful mindset to be able to position in one Direction and then to be able to quickly do a 180 handbrake turn and to position the opposite way. Yes, it would have been sweeter if I was 155% Long but at 120% Long I’ve done ok. Going risk off Sunday night was wise.’
 
(That is in the context of me removing some Index Long Spreadbet Positions when the US Protests/Riots kicked off and I was concerned the Markets would have a wobble – so I reduced the exposure on leverage a lot. Once things were calmer, I added some Longs again.)
 
‘In recent years many Followers/Readers must have thought I was utterly bonkers with my obsession and battles with Hedging. It will soon become clear why I was doing this and how my Theory is actually very valid in Practice now I have the Execution sorted.’
 
(People who have been following what I have been getting up to for many years will know all about my screw ups with Hedging and how I basically made the same, rather stupid, mistake twice. It cost me a huge amount of money but the good news is that it has taught me a vital lesson and I am certain this will pay off massively in the future. I first played with Hedging in the 2008/9 Credit Crunch crisis and this was what made me realise that it could be an extremely useful and effective technique. Since that time I have refined how I do it and the importance of it to my way of Investing and I have put it to the test in the Covid19 Sell-off Panic and have been really pleased with the results. The only thing I must do better in the future is to go larger with my Short Positions earlier.)
 
‘All my Trades are clearly shown on the Trades page of my Website and since January 1st I have not sold a single Stock and my Portfolio is pretty much identical to 1st Jan. I think the only Stock Trade I have done is a long Spreadbet on VOD.’
 
(This is a key element of my Approach. I want a very peaceful and inactive life and the last thing I want to be doing is sitting in front of a Screen all day as the remaining years of my life ebb away !!! To this end I have tweaked my Approach to enable decent Returns and minimal Downside Risk, with very low levels of activity.)
 
‘I have no psychological angst about when to invest a Cash pile and I have barely done any ‘work’ (if the pub had been open I would have been sat in it). I have avoided considerable Costs of Trading and am 120% Long so more than Fully Invested.’
 
(This gets to a key beauty of Hedging that I hadn’t really appreciated until just recently. As soon as I was pretty sure the Markets were turning up again, I was able to ‘flick the switch’ and turn my Hedging off almost instantly, which avoids the angst and effort that people who had Cash piles will have been feeling. It is far more Capital Efficient and less psychological impact.)
 
‘My Portfolio is intact and has picked up a few Dividends. I now have a mix of Stocks and hold many Shares that are geared to Recovery and I expect quick rises from them. I can very quickly do a 180 and Hedge again if the Charts tell me to.’
 
(Again, another benefit of Hedging that I had not realised before the recent Panic. Had I been sat on Cash soon after the Markets turned, I would no doubt have felt very risk averse and if I had bought Stocks, they are likely to have been things I thought were low risk. However, by using Hedging and simply turning if off, I have kept exposure to loads of high Risk Stocks that will rebound fast – and that is what happened.)
 
‘My aim was to get to a situation where I could make good Money in good years and to at least minimize damage in bad years. I am very pleased that this is happening in practice and now I will refocus on optimizing everything I do to tweak out extra ‘hassle and effort free’ Returns.’
 
(By the way, that Tweet got loads of ‘Hearts’. This is probably where I first started talking about the concept of ‘Optimization’)
 
‘To make big, outsized, Returns you need Beta – big moves. Most people do this through High Volatility Stocks and focused Portfolios but it’s a very high risk and difficult Approach.’
 
‘My Approach is to use Low Risk and Low Volatility and then to Leverage it up using Spreadbets and to reduce/avoid Market Downside Risk using Leveraged Index Shorts (Hedges). It enables bigger Positions and low stress/effort yet decent Returns.’
 
(This is really important. Lots of people invest in very high Risk Shares with High Betas [this means they move faster than the Market – e.g. If a Stock has a Beta of 2 it means it moves twice as much as the Market – up and down] and this brings a lot of risk and angst, especially in bad times for the markets. Achieving a similar effect by using limited and controlled leverage on lower volatility Stocks is probably much less stressful.)
 
‘Using Hedges also means I can be 100% Invested in my Share Account all the time. If I decide to sell something I can deploy the Cash on a new Stock quite quickly if I want to. It’s much more Capital Efficient and means higher Returns. Having Cash doing nothing is costly.’
 
‘To add perspective, if you can consistently do 10% a year on a normal Share Portfolio (with very little trading), then with a bit of controlled leverage and Hedging you should be able to boost that to 15% CAGR.’
 
I see these kinds of Numbers as very doable. No doubt I will have fun in coming years trying to demonstrate this !!
 
‘The vast majority of people totally misunderstand the Costs of Trading too often. They think “oh it’s just a Dealing Fee and a bit of spread” but they are incorrect. The true Costs are far bigger and come from Timing Inefficiencies when Buying and Selling. Those costs compound.’
 
‘In the same way that Good Returns compound over the years, the Costs of Overtrading compound nastily against you.’
 
(This is such an important concept – read this Blog Series and you might start to understand why – there are links at the bottom to the earlier parts):
 
https://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-6-of-6
 
‘To add a little more colour, the Return I reported of 3.3% for this week was based on the Exposure. The actual Return on Capital is 4.1%. That 0.8% difference is down to the Leverage both on Share Spreadbets and Index Longs. When Portfolio is down it hurts more !!’
 
(That sort of is the essence of my 10%/15% Returns numbers I mentioned earlier. Due to Leverage it should not be all that difficult to turn 10% into 15% - the challenge is achieving the 10% CAGR on my Normal Share Portfolio in the first place, and then my Spreadbet Portfolio is just a ‘mirror’).
 
‘But of course I’m not fussed about Day to Day moves and it’s the Portfolio Return for the year that matters.’
 
(So important. It’s psychologically far too easy to obsess about the immediate Short Term when in reality, our focus needs to be on Executing and Optimizing our System well and it is the yearly Returns that matter.)
 
‘My Rule of Thumb is that if you do 10% a year on Share Portfolio, then on a copied ‘Mirror’ Portfolio of Spreadbets you will do 7% (due to interest charges). But, that is on EXPOSURE – on Capital Invested that will be perhaps 40% (depends on Portfolio mix).’
 
(The 40% Return figure refers to my Spreadbet Account. Obviously if I was to add a 10% Return for my Normal Shares to a 40% Return on my Spreadbet Account [but in smaller size in terms of exposure], this would bring the ROCE up to 15% or more).
 
‘So with my Normal Shares and the Mirror Spreadbet Portfolio the Returns should be nice and then add a few Index Spreadbets on top and the Returns should be very nice (and I’ll be in the pub).’
 
‘On a big move the Returns from Index Spreadbet Trades can be massive. For example, my Index Shorts (the Hedges) banked 7/8% on their own. That Profit added to my Yearly Result this year is a big boost. And it’s just a few Trades for a few weeks. All on the ‘Trades’ page.’
 
(Remember that is 7/8% on the Exposure. On actual Capital used to support the Spreadbets [the Margin required] the Return was insane – from memory it was 400% or something – it is on the ‘Trades’ page I think.)
 
‘My Spreadbet Mirror Share Portfolio is about 30% of my Total Exposure. That feels about right to me but I might increase it slightly as I ‘optimize’ but it is dangerous to Leverage too much. I will gain extra Exposure on both the Long and Short side using Index Spreadbets.’
 
(I then carried on with these Tweets early on Saturday morning – clearly the WheelieBrain was buzzing !!)
 
‘I now have a ‘System’ (the ‘Processing Plant’ like on Gold Rush) totally nailed down and my attention must focus on every little detail of the Execution to Optimize Returns. Too much Gold has been slipping out of the Box !!’
 
(My recent Blog on Optimization originated from the ideas I had in that Tweet – amazing how these Blog ideas come to me !! You can read it here and it also includes a Blog link at the bottom about my Approach or System.)
 
https://wheeliedealer.weebly.com/educational-blogs/optimising-the-wheelie-wash-plant
 
‘In theory I see no reason why my System can’t achieve 25% Return per year – and without horrendous Drawdowns and with low risk and low effort. That’s about 2% per month.’
 
‘Simplistically I need 12% a year from my Normal Share Portfolio and 12% from my Long/Short Index Trades. With Leverage and variations around this (in some years 15% Shares, 10% Indexes etc.) this must be realistically possible. All about optimized Execution of my System.’
 
(Just to add on this one that if I was to make 10% a Year consistently then I would be happy enough, but it would not be stretching what I think I can achieve. As a sensible yet challenging Target, I think 25% a year (2% a month) is where I should be aiming. It won’t be easy but even if I was to make 17% I really could not complain.)
 
‘A mistake Newbies always make (and loads of ‘Not so Newbies’) is to chase the ££££s. They take High Risk, work hard (not smart) and flip flop after the next MultiBagger. It’s painful for the vast majority and has no Downside Protection.’
 
‘A Newbie who is a bit Smarter will think differently. The focus should always be on Percentages and you must think in % not £. The focus should be in the System and the Execution and getting consistent decent % Returns each year on the Portfolio.’
 
‘If your System and £ Returns it generates works on £10,000 then it will scale up wonderfully and work on £500k and £1m etc. That is how the enduring and successful Investors/Traders operate. Get the System sorted and Optimize the Execution.’
 
‘There are 2 obvious ways that People fail to achieve the Returns they dream of. First their System is flawed. Second their Execution is flawed. You need to tweak your System to get it capable of consistent low Risk Returns and then to be laser like on the detailed Execution.’
 
‘The concepts of a System and Execution are very much from the pantheon of Trading philosophies. If you have read anything about ‘The Turtle Traders’ you will know what I mean. It’s another way I’ve taken Trader stuff and applying it to my Long Term Investor outlook.’
 
‘In a way, Long term Investing is just a slower and less active variation on being a Trader. And being in the Pub not glued to a Screen all day long (a big no no !!).’
 
‘I was thinking about how many Trades a Long term Investor should be doing in a Week. Needs analysis but I would guess that if you do more than 2/3 Trades a week, then you are Over Trading. That’s on 40 Stocks in Portfolio so less on only 25 Stocks etc.’
 
‘I hold 52 Stocks and have done 1 Trade all of 2020 so far on my Shares Portfolio (done quite a few Index Trades – guess about 12 ish). That’s it. All on my Trades page on website. I Under Trade LOL.’
 
‘In essence it is what Naked Trader does but I have Codified and Systemised it. He buys normal Shares and Spreadbets and does Index Trades. He achieves 25%+ a year but he is a naturally talented Trader/Investor. Impossible to do as well as Robbie.’
 
(Those remaining Tweets pull together a lot of the concepts outlined earlier. The bit about Robbie is bang on the money I think – he is an exceptional natural talent and I suspect that few people will ever get near to his level of achievement. However, I am pretty sure my kind of System/Execution/Optimization can achieve very good Returns within the constraints of my personality and lifestyle. In one of them I said I had done 1 trade in 2020 and that was right at the time, but since then I have bought into BGO and bought more TM17 – all on the ‘Trades’ page.)
 
And finally, something that I did not Tweet about but which has occurred to me more recently, is that by using Hedging I can be much less concerned about the seemingly crazy High P/E Ratios we are seeing across the piece. Whereas lots of Investors will now be sitting aside on big Cash Piles, I can carry on Investing at near 100% in my Stock Portfolio and if the Markets take a wobble because they are seen as over-valued, then I just need to watch my Charts closely (like I always do as you know !!) and if I see the need to Hedge, then I will just flick the switch.
 
That was some string of Tweets – hopefully my additional words I have added in this Blog will help Readers to get their heads around my crazy ways and you might even see a grain of sense in there somewhere !!
 
Regards, WD.