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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: https://soundcloud.com/user-479955511/conkers3-wheeliedealer-36-market-bounce-winners-tm17-uls-hfd-gaw-purp-arw-reci-hsp-ai 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.
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This is a blog I have been formulating in the deep dark recesses of the WheelieBrain for quite some time now, and finally it has pushed itself to my frontal lobes and is starting to emerge through my arthritic fingertips; and with a staccato accompaniment of the tapping of my keyboard. I remember reading in various places over time the idea that you could improve your overall Returns by reducing the Volatility of your Portfolio, and I wanted to look into this and see how true or not this was.
Now this plays very much to my obsessions with Hedging because my fixation on that is with the aim of reducing big Drawdowns on my Portfolio, which is very much in line with the goal of lowering overall Volatility. On top of this, there are a few things we can do to lower Volatility and I will be exploring those later in the blog.
Introduction
This Blog builds on one I wrote back on the 3rd September 2020 on the subject of focus and specialisation, which you can read here: https://wheeliedealer.weebly.com/educational-blogs/screening-out-to-reduce-your-opportunity-set I doubt this will be all that long (as usual with my Blogs, I tend to have little idea of how much will be in them until I actually crack on and get some text down on my electronic paper), and the approach I am using is to take some text from an excellent article that Chris Dillow wrote in ‘Investors Chronicle’ on 9th August 2019 on page 18 with the title ‘Is ethical investing doomed?’, and then I will add my own comments around this text (Chris’ text is in italic). Don’t be fooled by the title of Chris’ article, I am not really focusing on the ethical funds but more the principles around what Chris is saying. Perhaps there will be the side-benefit that we can learn something about ethical funds as a bonus !!
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 !!
On a recent Twin Petes Investing Podcast I mentioned the idea of an ‘Opportunity Set’ from which to pick Stocks, and I remembered that I had written a draft blog on this subject that I had not managed to finish with all the other distractions of life. From looking at the draft, I can see that I started this back in May 2019 so it has probably matured a bit and no doubt has a bit of mould on it !!
Most of what you will read below these opening paragraphs was written back then - so don’t get too hung up on the timeline if I talk about events which don’t make a lot of sense. It has just struck me that back when I wrote this draft we hadn’t even heard of Covid 19 !! I hope you find it a decent and worthwhile read, Cheers, WD.
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.
Like so many things regarding the task of Investing, it really isn’t easy to do in practice but if you can find those relatively rare ‘Long Term Buy & Hold’ (LTBH) Stocks, that just have a habit of going up year after year and also paying you a decent Dividend, then you will have a very easy and very prosperous life (especially if you slam some Leverage on it as well but that’s another matter !!).
To an extent I am looking for Stocks like this but in practice I recognise that apart from the fact they are not too common, they tend to do well for a few years and then the performance drops off. The ones that have pretty much risen for 10 years or more are exceptionally rare.
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
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. |
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