This is the Second Part in a small Series of just a couple of Blogs and you probably need to read Part 1 first for this to really make much sense. You can find it here:
This is personally a tough one for me. I am fascinated by Macroeconomics and Politics and as a result there is a huge problem that I most likely give far too much weight to Macro issues when it comes to managing my Portfolio. I envy people who just seem to be able to blindly ignore Macro and as much as I try to do it, I just tend to find something in the Outlook that worries me.
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.
I strongly recommend that you read Part 1 of these Blogs before attacking this chunk - otherwise it probably won’t make a whole lot of sense and it is really key that you understand what is meant by Upside Breakouts and Consolidations in particular. You can find Part 1 here:
The Stages of the ‘Trading Bases’ Approach
Right, you need to concentrate for this bit. If you are a bit jaded - you know, big night on the Fevertree and Gin last night or ‘too many beers’ (yeah, I know that is impossible but I‘m sure that never stops you trying to find the limit) - then go and get a stiff Black Coffee and take some deep breaths to get mentally and emotionally focused.
There is a bit of common Folklore that goes along the lines that the moves of a Share Price can indicate what is going on within a Business and that this should be a major factor in our Buy, Sell or Hold Decisions. I guess it is an extension of the Efficient Market Hypothesis (EMH) which is more of a Macro concept whereby Economists make the claim that a Share Price, Asset Price or Index Level is merely the Market reflecting all known information about a Share or Economy or whatever and it purports the idea that “The Market is always right”.
Or is it?
Well, perhaps there is some validity here but overall I would say the EMH is utter garbage - it is perhaps a wonderful Academic Exercise (and regular Readers will be aware most likely of how much I see little use for such Trash and I only respect such Theories if I have seen them to be true in my immersed experience of Markets over many years) but in truth it probably would only apply to a ‘Perfect’ Market where all Information available at a Point in Time is known to all the Participants in that Market and they react rationally and with 100% accuracy in an instant. I guess the flaws here are rather obvious apart from the simple fact that in The Real World (ah, the WD strapline !!) there is no such thing as a Perfect Market. It is a theoretical construct to help explain how Economies and Markets work but it is of little value to us as Investors (or Traders).
This is the 2nd Part of a Series of Blogs - if you haven’t read Part 1 or need a refresher, then you can find it here:
Looking for ‘Excuses’ to Sell
This is very much a danger that is linked to what I have been talking about in Part 1 with regard to being unfocused in the Information Sources you use, and it is also a key Psychological failing that I know I suffer from although I hope I am slowly healing from this terrible and expensive disease. We all know the infamous and sadly banal Market adage “Run your Winners and cut your Losers” and I wouldn’t be surprised if the latter bit about “cutting Losers” gets 98% of attention from Market Players where as the bit about “Running Winners” barely gets a look in.
I am always reading/hearing about how we must “Cut our Losers” but very rarely hear anything about how to practically “Run your Winners”.
I am personally useless at “cutting Losers” after many years of trying to cure this ‘Bad’ habit, and I have pretty much given up on even bothering now - I have a partially written Blog all about my current thinking on Stoplosses but it probably won’t appear on the Website for some time - however, I now take the stance that “Running Winners” is by far the more important part of the adage and is where more focus should be put.
THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY.
If you’re keeping up with the tinkering I have been doing to the WD Portfolio, you may remember I bought a small stake in Devro DVO some weeks back after they had a Profit Warning and the Shares had dropped a lot. This was quite unusual for me as I tend not to buy into ‘Trouble’ if I can avoid it - however, in this case, DVO is a Stock I have dabbled with in the past and I know the Company reasonably well. My logic here was that this could be a decent chance to buy into them at a good price and I was particularly interested in the increased Capacity that the new factories have brought along and how this could give them space to grow in the future.
The Psychology behind the ‘No Maximum Size’ approach
Right, now we are finally onto the nitty gritty of the Blog Series - sorry it has taken so long but I felt a strong need to set the scene in Part 1 and make sure Readers had a decent understanding of what the Techniques practically meant before we plough on with the Psychology and Thought Processes lying behind them. If you have not read Part 1 yet, I suggest you read that first as this one may not make a whole load of sense otherwise. You can find it here:
It has been on my mind for yonks that I need to write more on the Psychological Aspects of Investing / Trading and I regularly get asked for material along these lines via Twitter etc. The catch is that I have found it difficult to really get started on the subject although I am not totally sure why that is. Partly I feel that I know a fair bit about the subject but perhaps not in enough depth to write about it really well - and this could be holding me back from getting the enthusiasm needed to put fingers to keyboard.
Fortunately I might have found a way through the logjam (oh no, is this a form of Writer’s block?) and recent discussions on Twitter about Position Sizing and TopChops (Topslicing, Trimming, Cutting, that sort of thing) have inspired me to write some stuff about Psychology with a very clear practical basis around these Portfolio Management techniques. As you may have gleaned by now, I dislike detached, academic, theoretical writing regarding Investment and I prefer things to have a more practical and ‘Real’ underpinning - I am sure it makes it easier for me to write and far easier for Readers to understand and to put into context with their own Investing activities.
THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY. SHORTING INDIVIDUAL STOCKS IS VERY HIGH RISK.
You may have spotted that I Shorted Tesla TSLA via a Spreadbet yesterday at 22537 ($225.37) - please see my ‘Trades’ page for specific Trade details. This won’t be a long blog, I just wanted to outline the main reasons for my Short and a few other points worth noting.
Once a Blog is finished and I upload it into the Wheelie Website, one of the tasks is to assign a ‘Category’ or two for it. On this particular Blog I am not sure what to classify it as - I guess it is really about Investor Psychology and to a smaller extent about Investment Analysis………(ok, if you were expecting culinary advice you will now be very disappointed). Whatever the Category, I think it is largely about the importance of identifying and cutting out Noise.
This one came about as a flash of thought whilst I was watching ‘Question Time’ recently and getting more and more irritated as per usual - and trying not to throw anything hefty at my Flatscreen TV. It struck me that perhaps as many as 75% of the points made by both the Panel and the Audience were probably pretty much irrelevant to whatever subject was being debated - in other words there was an oversupply of ‘Red Herrings‘………(to be honest, they are stinky, boney, things, I would steer clear).
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