The first draft of this Blog was called something like ‘Is it possible to be too cautious’ but I decided that this was a pee poor Title and I have gone for something more racy - after a lot of waffle at the start of this Blog, as we get further in it should all start to make sense.
Simplistically, I tend to write 2 basic types of Blogs - one is sort of more Research-based and takes a lot of time and effort but is probably in some ways easier to write in terms of WheelieBrain power, and then another type where I write from my own thinking and these tend to be quicker to produce but need focus and tend to require some planning and structure to make them work. Don’t get me wrong here though, in fact the Research-type ones need a clear Structure and once I have a Skeleton of Headings I can then start filling in the text - these tend to be ‘Buy Rationale’ Blogs. The other type tend to need me to turn off the TV and to have the Radio down low and I need to summon up full power from my ‘Slow Brain’ - and by a bemusing quirk I tend to flow better when lubed by Tea (and probably not Beer !!)
I have had on my mind for some time that I want to knock out a Buy Rationale on Somero Enterprises SOM and was even considering one on Air Partner AIR - however, I am just struggling to find the time to do these and I have others on my mind that I want to write and also several that are part written and need to be finished. My plan was to start on the SOM one tonight (this is Saturday 25th March 2017 when I am doing this first draft) but I have had one of those typical days where I have got up late and then some health issues have conspired to delay me even more and then various TV programmes like one on the 60s Space Race have totally distracted me and fuelled my procrastination.
I have always pretended that Winter was a time when I could write loads of Website material but I have to admit that this Winter my motivation for pretty much anything has been rubbish - I am no fan of the cold and dark of the Winter months and this has really fed my Seasonally Affective Disorder this year. Yes, I know that is SAD.
On that basis perhaps I will be more productive and fruitful during the Summer months and the Clocks are changing tomorrow so the Seasons are clearly changing - of course, the only catch here is that I need to get stuck into the WheelieGarden and that will be burning a huge part of my time. And of course Bike Racing is back on the box so that will be distracting me also.
Ah well, I don’t intend going anywhere and at least if I don’t exhaust my Blog scribbling reserves now I will perhaps have half a chance of producing something that might be worth reading over the next few years !!
I have had this Blog in my brain for quite some time and I was driving back from Basingstoke last night after seeing Rob Bryden at The Anvil (very good, well worth seeing - don’t park your butt in the front row though. Come to think of it, don’t sit even in the first half of the theatre !!) and got talking to my mate Becks about how my whole demeanour towards the Markets has changed this year over 2016 and this helped to clarify my thoughts.
Becks is great for such crystallisation of thoughts cos she is not a Trader/Investor but has a deep understanding of psychology and has known me for long enough to actually appreciate many of the impacts that how we think can have on our performance in the Markets. She works in HR (Human Remains) so that might explain part of the mind-reaming……
I could have made a start on the SOM one that I really should write but with time moving on and this subject so fresh in my mind, I decided to crack on with this one instead - it is supposed to be quick but in practice it is taking a while as I ramble on in my usual unconstrained style. I knew I should have written a Plan first but I thought this would be a good one for some ‘Freestyling’ (if you watch American Pickers you will understand this concept !!). In addition, in many ways you can read stuff about Stocks and do analysis yourself and whatever and of course I have already written a fair bit on the Website about SOM at a high level and I have put out millions of Twitters about it no doubt - however, the kind of thing in this Blog you will probably struggle to find anywhere else - this is what maybe WD should be all about.
You really won’t believe it when I tell you that I am actually revisiting the Fiasco of 2016 - “enough already, Wheelie” I hear you scream in exasperation - “we have read way too much on that tedious drawn out episode already - please don’t subject us to more !!” Well, I’m deeply sorry but there is this final shoelace that needs tying up and please stick with this because I honestly think there is something of real value here for Investors to get their heads around. It has certainly helped me to explore this idea in my head and to discuss it on the A30 and now to sublimate (don’t look that up in the Collins Oxford Dictionary unless you are over 18 and I mean it in the scientific sense) it in WheelieBlog form.
Ah, it might be a good move for me to actually tell you what this Blog is about - after scribbling for countless hours and words, maybe now is the time. Well, the basic idea is that last year (2016) my whole Mental Attitude towards the Markets was very cautious and defensive (chicken more like - cluck, cluck), whereas this year I have gone in confident and assertive (note, I originally phrased this in the Seat Leon as “aggressive” but this I decided was way too strong a word and suggests some recklessness and arrogance in my approach - “assertive” I think is a far better representation of what I actually mean.) Following on from these Mental States, my thinking has evolved to how I see my previous cautiousness as probably being a big driver of my poor returns last year and how such a mindset is actually very unhelpful in the Markets.
I have read and also heard on Podcasts and stuff how having the demeanour of a “Cautious Optimist” is the right kind of mindset - I think it is Fund Manager Nick Train who uses this phrase. If you dig into what this means, I see it as a reflection of the fact that over time, Stockmarkets tend to rise - ok, for certain Periods of time they will fall but for the vast majority of Years Stocks do rise and this is a very positive tailwind behind Investors who are Long of Stocks and of course a hindrance of major significance to People who dare to go Short (not to mention other Headwinds such as Shorters having to pay Dividends and Lending Fees). I often say there are very few ‘Free Lunches’ in Investing, but I suspect this tendency for Stockmarkets to rise over time is most definitely a Free Lunch that we should take advantage of.
If I think back to the start of 2016 and in particular the dying Weeks and Days of 2015, I remember tuning my mind to be Defensive and Cautious because I knew the Brexit Vote was coming up mid-year and we had the Presidential Election soon after - so there were some pretty major events clearly visible that I thought could really rock the Markets. As it happens I was right in my thinking here, but in practice I got totally wrong sided and caught out with my Hedging Approach - which I will explain in a bit no doubt. If you were to look back at some Blogs I wrote at the tail end of 2015 and into 2016, I am pretty sure you will find that I was writing about my fears for 2016 and already planning ahead.
It really causes me a wry smile when I think back in particular to the Donald Trump victory - I remember staying up until something like 6am in the Morning of the Election Results and at the time I bedded down for a few hours, the Futures Markets were tanking big time and my FTSE100 Short was massively in Profit. You can imagine the shock I had when I woke up something like 4 hours later and the Markets had totally whipsawed and all my Profit had turned into a Loss - and then things went from bad to worse which I won’t go into here because I have talked about it and bored everyone and myself to tears. Suffice to say I really c*cked up.
This cautioness hurt me in 2 ways - firstly I screwed up my Hedging using FTSE100 Short Positions which was the most costly impact but secondly I think my whole defensive attitude stopped me from taking Opportunities to make Money on the Long Tack that I would normally leap upon. I have written ooodles of text on the screw ups I made with the Hedging and how my New Approach is simply to use Stoplosses and just this one simple step would easily have changed my Year from a slightly worse than Flat result to probably a gain of maybe 6% or so - much better !! On that basis, I won’t dwell on the Hedging bit but I will explain more about the missed Opportunities now - because it is critical to understand.
I like to believe that every year of Investing I live through sharpens my game and improves my ability to make Money consistently and safely - however, with Outcomes like I had last year, I sometimes even doubt it myself, but when I think back to 2015 I know I was Investing really well and the key difference that I can sense when compared to 2016 is that I was taking Long Opportunities as they arose and I was in no way scared and cowed by the Markets - whereas in 2016 I think I was really timid - and this was not a good stance.
Now in 2017, I really feel like I am at the top of my game again. I have the same attitude I had in 2015 and I am really taking the Opportunities as they arise and I do not feel in awe of the Markets at all. I am in a mood where I am happy to take on Risk and I am comfortable in my own ability to assess the level of Risk and to get stuck in with a confidence and assertiveness that was utterly absent in 2016.
Now of course I am suffering from appalling (and perhaps very dangerous) Hindsight Bias here and it could simply be that my success in 2015 and at the start of 2017 has absolutely nothing to do with my Mental Outlook or any Investing Skills (analytical and trading related) I have but is purely a result of strongly moving up Markets. This could well be the case. There is another angle here though. Leading into 2016 I felt that I could and should control my Risk by not buying much and by keeping my Long Exposure firmly reined in - hence I did not take Opportunities that were screaming at me on the Long Side and this must have hurt my Returns. However, something that has struck me recently is that I do not need to control my Long Exposure in this way - in fact, within sensible limits, I can actually be quite ballsy on the Long Side because I can quickly switch from an Assertive/Confident Bull mode into a Defensive Bear mode.
What I am meaning here is that my ‘New Improved Hedging Approach’ enables me to stride confidently into the Markets with the knowledge that I can turn on a sixpence to take myself into a Defensive Stance simply by banging on Short Positions on Major Indexes - with the FTSE100 and S&P500 probably being my favourites but with forays into others like the DOW, DAX, Nasdaq 100, if I feel the urge.
I want to stress this because it is so important. I am in essence saying that I can be 100% Long and buying strongly where Opportunities arise, but if I sense that Markets might be about to turn down, then I can almost instantaneously switch to a much more Defensive Stance by banging on some Short Hedges on the Indexes. It is this speed and virtual “flicking of a switch” to Bear Mode that I want to stress here. The recognition of this ability to change tack so damned fast is what is helping me be really assertive and confident in the Markets.
A quick piece of clarification - when I talk about “taking Opportunities on the Long Side“, what I mean is that many of the Stocks I hold look far too cheap as they are and I am keen to buy more of them. However, rather than just buying willy nilly, I like to TopUp when there is a specific Technical Event that means the Shares are likely to rise - for instance, a great example is when a Stock I already hold breaks-out from a Horizontal Resistance level.
There is of course another factor to do with Risk Management that I cannot overlook and it deserves a mention. This is the profound belief and adoration I have of wide Diversification - I hold around 60 Stocks and this gives me a wide spread of Assets with their own volatilities, weightings and Risk Levels and the combined Portfolio has far lower Risk than much more focused Portfolios with perhaps 15 or less Stocks in them - this means that much of the individual idiosyncratic Risk has been removed and overall Market Risk has considerable bearing on my Portfolio - however, I can address and hugely reduce this Market Risk by using my Hedging Methods.
One other thing to mention here is that the Market itself really tricked me bad in 2016. As you already now, my mindset at the backend of 2015 and early 2016 was already pretty fragile and reserved, and if you remember, almost straightaway we had a major Market Pullback and the Indexes dropped really heavily in January and February - this just exacerbated my nervousness and caution and I think the Market really played on my emotions and fooled me big time.
Clearly this plays into the Hindsight thing again - as we progress in 2017, such a Meltdown has not happened and it is easy for me to feel “Confident and Assertive” - but would I feel the same way if Markets had fallen off the cliff like they did at the start of 2016? For all my bravado, I suspect that my mindset now would be very different if we had seen a collapse over the last couple of months - it’s very easy to be a Bull when markets are rising and you are sat on a nice Cushion of Profit !!!!!
Something else that screwed my head up in 2016 was that I suffered a string of Profit Warnings on my Stocks - this was really painful and made me question my Stock-picking abilities and my analysis - however, looking back on things now I suspect there was an element of randomness and bad luck in here - such a spell of Warnings is actually quite unusual over my Investing Experience but these episodes will happen. It is a funny thing though - as much as I can write down now how I think things played out in the past, this is with the huge bonus of Hindsight and ‘Outcome bias’ and I can only postulate/guess at how I will think/react in future if I suffer another similar string of Profit Warnings - although hopefully with the experience of 2016 I will be able to rationalise it and not be too impacted emotionally so that I cannot bounce back fast and take it in my stride.
I won’t dwell on this because I have mentioned it many times in the past, but I think that part of the reason I tend to be cautious is because Preservation of Capital is very high up my list of priorities because whatever else happens, I really don’t want to ever have to get a job again. If you are young and fit and OK with doing work, then you can take on higher levels of Risk because you have time on your side to recover from Losses in your Portfolio and because you have your ‘Human Capital’ which represents your ability to work and earn Money. In theory I have such capabilities but the key point here is that it is something I really never want to have to suffer again !! And I find the PUB far more conducive to my wellbeing……
Right, I think that pretty much covers it - I hope Readers will have found something of use buried deep in the concepts I have covered here - as you know, I am a big believer in the importance of Investor Psychology and this is a blog which very much plays into these themes - and I guess my overall conclusion would be that “yes, it is entirely possible that you can be too cautious”…..
I wasn’t going to put links in here because I know we are all bored with this - but then it hit me that there might be one or two new Readers who have not had the pain yet and I include them for their masochistic tendencies (the ‘Scores on the Doors’ one really just shows the impact of my balls up):
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