Luck vs. Skill – Part 1 of 2
I think it could be very likely that we underestimate the role of Luck or even just simple Market Beta, whereby Markets over the long term tend to go up; so as long as we hold a large enough basket of half-decent Quality Stocks, then it is almost impossible not to make money if we are swimming with the powerful flow of the river.
I’ve been fixated by this subject for some time now and we even discussed it in the Podcast TPI 36 which you can hear here:
It’s been obvious to me for a long time that Luck, both Good and Bad, has quite an impact on the performance of my Portfolio and I suspect many Investors (and Traders) might not fully appreciate, or even bother considering, what kind of influence Luck has.
What is a Quality Stock?
I’m not expecting this to be hugely lengthy and I am living on the edge by having no plan or anything, but hopefully I can stitch something together that is just about readable and might even make a smidgeon of sense.
Whilst creating that ‘Educational’ Blog about Consistency & Volatility the other day (scroll down on the Educational Blogs page and you should find it very quickly), I realised that after 7 years or something of bandying around the term ‘Quality Stocks’ I had never actually made any attempt to try to define that, and this Blog is obviously an attempt to fill the gap (is ‘bandying’ an actual word? The Spellcheck seems happy with it anyway……perhaps it is something to do with Groupies……)
On the morning of 11th September 2020, for some unknown reason it came into my mind about the kinds of Returns that people can make on Leveraged Spreadbet Accounts - and I got a bit carried away and chucked loads of Tweets out. I think there was some really valuable stuff in there and as a result I have copied the Tweets into this Blog and embellished them with some further comments and hopefully more clarity where appropriate.
The original Tweet text (with spelling errors corrected !!) is shown in italic and the new text is not in italic !!
How I Attempt to time Buy Trades
Big THANKS to regular Reader Jim (that’ll be the prunes, mate) who gave me the idea for this Blog during an email discussion we were having. In essence we were discussing how I go about timing my Buy Trades (please note, this Blog doesn’t really address Sell Trades although at the nub of it they will be partly the opposite in practice), and it struck me that this was a great subject for me to drone on about and that many Readers might find it helpful (especially if insomnia is your particular affliction).
Breaking with my recent lazy tradition of just ripping into my Blogs and hitting the keyboard from a blank sheet of Microsoft Word, I have actually done a Plan for this one and as a consequence you might notice a little more structure. This is exemplified by me having a section that talks about the Principles behind my Buys and then a section that goes into the Practice of actually doing it.
Optimising the Wheelie Wash Plant
This Blog has come into being after a long string of Tweets I sent out recently which were essentially about my Approach and how I intend to go forwards with ensuring that I can exploit how I do things to maximum effect but with minimal Risk and Effort.
I have actually captured the Tweets and put them into another Blog Draft and hopefully that will come out soon as well. I have added some other thoughts to those Tweets so it should make a decent read and in combination with a recent Blog about my Approach, Readers should have lots of detail on how I have evolved my methods and they can mull over any aspects they wish to copy etc. I will include a link to that Approach Blog at the bottom of this one.
One of the concepts that I mentioned in the string of Tweets was that I see 3 key parts to my Approach which I have classified as System, Execution and Optimisation.
From various comments on Twitter recently it is pretty clear to me that some thoughts on how to use Funds to best effect would be worthwhile. This should be fairly straightforward to write so I am diving straight in without a plan but I have been mulling it over for a while.
If you nip over to the ‘Funds’ page on my Website (it might be on WD2 – I really can’t remember !!), then that has some definitions on it with regards to what the various types of Funds are and it also has an example Portfolio which is based on something I constructed with a Friend a few years ago for her own Investing. Recently she has sold about 80% of this Portfolio because she is moving house and I must get around to confirming with her what she still holds. Anyway, that Portfolio example does give an indication of how you can diversify across Funds if you have a Portfolio that only uses Funds and has no Individual Shares in it.
Fairly recently I caused a bit of a stir on the Tweets when I suggested that People who have regular payment plans into Funds (normally Unit Trusts – see my ‘Funds’ page for definitions of what the different types of Funds actually are), might be wise to suspend the automatic payments prior to the Coronavirus problems when it is highly likely that we could see Stockmarkets really struggling.
I got a lot of flak for this and it is very understandable why because there are maybe some advantages of such drip-feeding over time; but for me personally, I wouldn’t do this at all. But then I am perhaps a different type of Investor to many others and there is an element of ‘Horses for Courses’.
I am bashing out this blog as a result of a conversation with a mate which was along the lines that he finds it hard to hold things for the long-term and tends to bottle it at some point and end up selling when a decent Profit has built up; but often this might not be the best approach. Even a bit of a numbskull can figure out that if you continually sell Stocks after making perhaps 40% Profit, you will never ever get gains of 200%, 300%, etc., which are the ones that really transform your overall Returns.
Buying high quality Stocks and then holding them for long time periods has many advantages and of course many drawbacks. The benefits are really around ease of execution and low activity; which of course can lead to lower Dealing Fees and costs, and effort around selecting Stocks and general Portfolio Management activity.
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.
I am extremely grateful to Michael for providing this Guest Blog and making my life easier this week, which has also enabled me to make very good progress on the Stock blog I am working on. I am sure most Readers will already know of Michael as these days he is a huge celebrity in the Private Investing and Trading world with regular articles in Investors Chronicle and SharePad etc.
Michael has a Website and if you go to the ‘Weekly Performance’ page on WD1 you should find an image of his FREE eBook and if you click on that you will be taken to his site. The book is well worth reading and of course I am biased because I was involved in the latter stages of proof-reading and tweaking it. You can find him on Twitter as @shiftingshares.
So big THANKS to Michael for letting me share this with WD Readers and I hope you all enjoy it.
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