In the Investors Chronicle dated 17th to 23rd May 2019 with ‘The Activist Effect’ as the main headline on the front cover, on page 32 there is an article called ‘Fund Managers are human after all – that’s the problem’, which makes a very good read although it is perhaps a bit ‘academic’. I guess that is where I come in and if I am doing my ‘job’ correctly then I hope I can convert what seems academic into something that normal people can digest.
It was written by Nilushi Karunaratne and the high level summary would be that Portfolio Managers make good Buying Decisions but make poor Selling Decisions – and the interesting bit is that some of the conclusions are perhaps worth taking onboard ourselves as Private Investors (assuming you are not a Portfolio Manager reading this !!) because, contrary to what many people think, institutional investors are often no better than we are (and many are worse). And the simple fact is that human psychological biases apply whoever you are. Later in my Conclusion bit I will address what we can learn.
Clearly this is Part 2 of these particular Blogs and you can find Part 1 here if you have not already endured it or you need a refresher:
What can we do to control ‘Panic’?
However much experience we have and however much we prepare and work to reduce the negative impacts, to an extent I think feelings of Panic are pretty much inevitable although perhaps with time we Panic less and it is more a feeling of mild anxiety than a full-on Panic Attack. Anyway, bearing this in mind, it is really about what can we do to lower the dangerous occurrences of such feelings and to reduce their severity when they do strike? I suspect the ‘solutions’ come in 3 categories: Forward Planning, Careful Portfolio Management and Psychological Techniques.
The ‘working title’ for this Blog when it was just a mere whisp of an idea in the WheelieBonce was ‘Only the Inexperienced Panic’ but the more I thought about it the more I felt this was a bit insulting and in reality we all panic but there are ways we can reduce such episodes and I wanted to talk about how to do this.
As usual with my Blogs, a lot of the ideas just come out of thin air and no doubt my Brain is triggered by something which seems unrelated that I then twist (probably much too far) into a topic loosely related to Investing !! My inspiration for this one came from the icon Thomas Weekes on ‘Misfit Garage’ on Discovery Turbo when he came out with the line, “My old daddy used to say, only the inexperienced panic”, and that cemented the thought in my head.
This is a Book that is literally ‘hot off the presses’ and if you fancy a copy you can find it right at the top of ‘Wheelie’s Bookshop’ at the time of publishing this Review (don’t worry, if you are reading this some time later, then the Book will still be in the Bookshop but most likely further down the page).
I met up with Mark (you can find him on the Tweets as @DangerCapital) at a recent ‘Meet-up’ I organised at Gaydon Motor Museum and it was extremely valuable for me because I was hugely impressed by Mark’s knowledge and obvious experience and it is rare I find someone who wows me this much. I have been aware of Mark for many years via Twitter but not ‘spoken’ much with him directly although it had always been obvious from his Tweets that he was fairly on the ball. I understand that Mark used to run a Blog called ‘Danger Capital’ and I have certainly read items on this a few times over the years but had not made the connection that it was Mark who was writing it.
If you follow me on the Tweets and/or manage to read them by some other convoluted method, then you may well have noticed that I got myself involved in some right old shenanigans at the start of last week. In essence it resulted in a night long trip to the Accident & Emergency Department (A&E) at Wexham Park Hospital in Slough but thankfully it turns out that I am absolutely 100% fine and I had really got myself worried about not a lot.
I had intended to work on the second part of the Hotel Chocolat HOTC Blogs but to be honest I still feel a bit jet-lagged at the time of writing this first draft and I’m not really in the right frame of mind for it. It also struck me earlier today that there could be some useful insights into Psychology that apply to life in general and very much to Investing and Trading that arise from my recent nonsense and it makes sense to get them down on electronic paper while they are still very much fresh in my memory recall circuits. I’m sorry the HOTC Blog will be delayed but in the current Markets it’s not like there is a huge urgent need to buy any Stocks and it won’t hurt if it slips a bit. I am not sure what I have on next week but in theory at this point in time I should be able to do it then.
I’m sure by now you have probably figured out that I am a bit of a Bike Nut and although I got nastily bitten by a Honda VFR750FM 21 Years ago which means that I am unable to ride myself now, I am still a huge fan of Bike Racing and in particular the top class which is MotoGP is a big passion. Some while ago I wrote a Blog which was to do with the psychology of Sport and this one was based on Jo Conta and Tennis but the principles of a Positive Mindset without doubt apply across all Sports and are also necessary if you are to achieve success in Investing / Trading.
What has prompted this Blog was an interview I watched when the fragrant Suzi Perry was talking to one of this Season’s hot favourites to win the MotoGP Title, Andrea Dovizioso (that’s a bit of a mouthful and I have probably spelt it wrong but fortunately even Andrea refers to himself as ‘Dovi’ so that’s what I will use !!). What is notable about this is that if you had asked almost anyone who knew a bit about MotoGP if they thought Dovi would be chasing a Championship 5 years ago, you would probably have got a response like, “You must be joking, he’s a great Second Rider for a Team but no way he could win the title”, yet here he is right at the front and in the last 2 years he was battling for the title. This could be his year.
If you haven’t read Part 1 yet, you can find it underneath this Blog on the ‘Educational Blogs’ page or simply click this link:
This next paragraph from the Article is interesting – it essentially says that all Market Participants can be a bit mad and prone to psychological errors but that these cancel each other out if these traits are common on both the Sell and Buy side of the market. Problems start when everyone starts thinking the same and this makes sense in my experience. For example, when Fear grips the markets and we get a general sell-off, then people are mostly thinking the same and there are lots of people selling and very few buying – it is only once it gets extremely low that the fearful Sellers dry up and the Buyers can then take the upper hand and before long the people who were Sellers now become Buyers and everyone starts thinking alike again and driving the Prices up. Herd mentality and all that.
“The presence of overconfidence alone doesn’t create an inefficient market. Indeed, a market with overconfident buyers and sellers on both sides creates a heterogeneous, diverse, and therefore wise crowd. But crowds tend to go mad (and thus inefficient) once investors all start to follow the same rules and think alike.”
I was reading Investors Chronicle from 26th April to 2nd May with ‘Breaking the Mould’ on the cover and on page 32 I came across a very interesting article by Alex Newman entitled ‘Finding the Edge’ and it got me thinking and it also struck me that there were some useful concepts in here for me to look further into and to share with a Blog that Reader’s might appreciate.
If you have access to a copy of the mag or the online version, it is certainly well worth a read although I must say that it is rather too academic and theory based for my tastes – I found myself re-reading several bits a few times before I really figured out what point was being made. It suffers I think from the usual issues of being far too over-complicated and I suspect the Academic Research was done by someone who is more of a Professor and Economist than an actual person who Invests or Trades in Shares (or any Asset for that matter). I see this sort of thing all the time - I find it useful because I can take snippets of what the Academic Research covers and think about it in the context of what I do with Stocks and my experience and understanding of how Markets work in reality - and of course in The Real World things tend to be highly different.
Following on from a different Blog I put out recently that was inspired by some text written by Chris Dillow in Investors Chronicle, again I have been reading one of his Articles and taking inspiration from it. This one appeared in the Magazine from 13th July to 19th July 2018 which had ‘Income Majors’ on the front cover and the Article was entitled ‘In the genes’ and appeared on Page 16. If you are a subscriber to the Magazine then I suggest you go onto the online version and do a search for the article because it is well worth reading. Having said that I have reproduced a few sections of the text here so this will give a good flavour of what is in it.
The starting paragraph is based on some Research that had been done which suggested that Investment Performance was related to our genetic make-up (presumably intelligence levels and Chris mentions the genetic factors that increase our potential Educational Attainment) and that factors such as ACTUAL Educational Attainment, Income Levels and inheritance had less influence. So this suggested that our genes predict how well we save and invest and further on in the article he mentions that such Genetic Factors explain about a third of our Investment Results; and I take from this that at least a part of the other two-thirds is down to how we manage our Portfolios in terms of things like Running Winners, Chopping Losers, Averaging Down at the right time, Avoiding AIM Garbage, TopChopping, Risk Management, Hedging, etc. And of course another chunk of that two-thirds will be down to pure dumb Luck (but if we control as much as possible of the other stuff then the Luck is less of a hindrance and of course sometimes we will get Good Luck which is the sort I like !!).
I have found it very useful creating this Blog Series because it puts down in Black & White what the true likely Costs of ‘Moving into Cash’ are and then the exercise of relating this to Portfolio Size has been highly revealing and has essentially indicated that unless your Portfolio is over at least £100k then it really isn’t worth the bother - and arguably when you consider the hassle and timing issues of doing it, the whole thing might not make sense unless your Portfolio is worth over £300K or so - it is obviously for Readers to run the Numbers and see how it would work out for their own Portfolios in the same way that I have done. And of course it is very much a personal preference thing and related to how comfortable you feel about perceived Risk at any point in time.
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