Certain Uncertainty - Control what you can Control and Moving into Cash - Part 1 of 5

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There have been a lot of discussions on the Tweets lately around the idea of ‘Moving into Cash’ when it appears that the Markets are facing what could be a fairly sizeable drop and I wanted to discuss some of the many issues around this and some related stuff. At the time of starting to scribble this we are in the depths of Autumn 2018 which has brought some seriously major Falls in the Markets and the Brexit Talks are in full swing and going terribly - hopefully by the time you are reading this we will have more certainty on the Talks but it wouldn’t surprise me too much if the Parties involved on both the UK and EU sides are still dicking about. 

How true the Paragraph above has turned out to be - I am now typing this Paragraph at the end of November and the whole Brexit thing seems to have got even worse with T May seeming to have lost touch with reality and trying to force through some sort of ridiculous ‘Deal’ where we have given away everything and £39bn for absolutely nothing in return. Unreal.

I have written a lot in the past about ‘Hedging’ and how my personal preference when I see a Drop up ahead is to go Short on an Index to try and offset some of the damage to my Portfolio by gaining on a Short which should enable me to lower the ‘Market Risk’ element of my Collection of Stocks. At the time of writing we have come off the Highs of the Markets a fair bit and I did manage to capture a bit of Gain with a pair of Shorts on the FTSE250 but with the recent changes to Spreadbetting Regulations I did not have enough Cash lying around in my Spreadbet Account to go for a Bigger Position and consequently I didn’t make much but of course ‘every little helps’. In future I intend to Short bigger (since writing that Paragraph I have done a few more Shorts on the Indexes - see my ‘Trades’ Page for details).

I must just mention that as I write this I am in the midst of some Health Hassles I have endured where in essence I damaged my Hip when transferring from my Bed to my Wheelchair one morning after I caught myself on the Side Guard which is over the Wheel. I have done this quite often but usually it has not caused any significant trouble but this time it cut the skin and if I was to continue putting my weight on the Hip then it would have got really bad and this could be extremely serious (it is not strictly a Pressure Sore but it works in the same sort of way). As it happens I did the right thing and managed to avoid a possible Hospital trip but it has meant 4 Weeks of sitting on the Sofa and being extremely careful not to damage the Hip more but it has worked (this has also involved lots of extremely complex and sneaky Dressing of the Wound to ensure that my Weight is never on the damaged area even if I sit in my Wheelchair for 10 minutes or so. Anyway, I wanted to mention that I am finding it really challenging to use my Netbook as I am sort of having to sit sideways on the Sofa so that my Hip is always ‘in the air’ and it is quite uncomfortable (my Body is all sort of twisted about). Mind you, at least I am feeling no pain so that is a bit of a bonus.

And then to add insult to the already very frustrating injury, something has gone wrong with my Netbook where the ‘C’ key seems to be sticking down and whenever I type a ‘C’ the Word Document gains a long row of ‘C’s - somewhat like this:

cccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc  (until I hit the ‘Esc’ key).

Man, that is annoying and in desperation I have grabbed my full size Keyboard and so far that has worked and is making things massively easier. I can almost ‘touch type’ so it has also had the advantage of speeding things up because of course the Netbook Keyboard is tiny and the Keys are all in the wrong places !!

Where was I? Oh yeah, my thinking with regards to moving into Cash is that I have taken some time building my Portfolio and from bitter experience I have found that the worst thing I can do is to sell my Stocks without letting their Value come out -  I often say that the World and his Hound go on about ‘Cutting your Losses’ but I am certain that not ‘Running your Winners’ is what really does the big damage to a Portfolio.

Certain Uncertainty
A Concept I want to talk about first off is the idea that there are some factors regarding our Investing which are ‘Uncertain’ and there are other aspects of which we can be ‘Certain’ - and it is only the latter which we have any Control over. And that brings us to an extremely important principle which also applies to our Lives in a more general sense (and it is useful for keeping your Psychological state in good shape):

“Control what you can Control and don’t worry about anything else.”

There is so much sense to this and in the context of our Stocks it hits the Nail smack on the Head with a mighty wallop. The following are the sorts of things which we can control:

• What Stock we Buy.
• What we pay for it (Entry Price and Entry Method - e.g. Stake build over time).
• What and when we Sell (Exit Price and Exit Method).
• How much we invest in a Stock - Position size.
• Which Broker we use and therefore the Trading Fees to an extent.
• The amount of Trades we do in a given time period (this affects total Fees obviously and therefore is a major component of the ‘Cost‘ side of our Personal Profit & Loss Accounts for our Portfolios and most critically it is something we have Control over).
• Choice of Tax Wrapper - SIPP, ISA etc.
• What proportion of our Assets we put into Equities.
• Allocation of Portfolio to different Assets/Strategies.
• Cash Holding % (personally in ‘normal’ times I am near 100% in Stocks but I know many People like to hold back perhaps as much as 10% ‘just in case’).
• Mix of Stocks from different Market Cap sizes.
• How often we check the Value of our Portfolios.
• The Number of Stocks we hold.
• Holding Period.
• Universe of Stocks/Assets we pick from.
• How Diverse our Portfolios are - do we invest Overseas for example?
• Our Approach regarding different ‘parts’ of the Market - e.g. Smallcaps, FTSE100, FTSE250, AIM Stocks etc.
• Funds or Stocks.
• Dividend Reinvestment approach.
• Use of things like Spreadbets or CFDs  - i.e. Whether or not we use Leverage and the appropriate Level.
• How we organise our Day around Stockmarket Activities, for example with regards to when we read RNS Updates, when we check the Charts, when we sit down and do in depth Research etc.
• What Information Sources we use and our discipline when it comes to avoiding ‘Noise’. How we access Information - who we follow on Twitter, which Bulletin Boards we read etc., which Magazines we subscribe to.
• How we manage our Psychology/Emotions and supporting Behaviours.
• Action to take after a Profit Warning.
• Use or not of Stoplosses and how we use them.
• Approach regarding ‘Averaging Down’.
• Attitude to Risk and our chosen comfortable Risk Level.
• Our Plan for dealing with Bear Markets - Cash out or Hedge etc. (obviously this Blog Series will have more on this one !!).
• Whether or not we use ‘Charting’ concepts and the choice of Technical Indicators/Techniques we use.
• Type of Stocks we Buy - e.g. Defensive, Income, Growth, Value, Recovery, Buffett, etc.
• Factors which we tend to favour for selecting our Stocks to Buy.
• Target Returns we aim for each Year.
• Minimum Deal Size (e.g. I do 1%).
• Method of how we organise Stocks we are interested in - Watchlist, Notebook, Spreadsheet etc.

That’s a fairly comprehensive List but I am sure there are loads more but you should get the gist of what I am going on about. In terms of things we cannot have any control over, we have stuff like this:

• Whether the Market or our Stocks will go up or down.
• The Future.
• The Past.
• Unexpected ‘Black Swan’ type events - both specifically for one of our Stocks and also with regards to the Market (for example the Twin Towers Terrorist Attacks).
• Many Emotional aspects in our own Psychological make-up and the Psychological influences and reactions of other Market Participants (although we cannot necessarily Control these, at least recognising them in ourselves might enable us to find ways to combat unhelpful biases).
• Changes in Regulation that impact your Stocks and/or the Markets in general.
• Etc.

There are probably others but again my intention here is to introduce you to the Principle and you can do your own thinking around this and how it is relevant for yourself. By definition we cannot Control the things that we cannot Control so there is little point creating a Comprehensive List here - the ones that matter are the things we can Control.

Importance of Control
Before finishing off this First Part of the Series, I want to just stress again that really this is a Series to introduce the concept of ‘Controlling what you can Control’ and although the vast majority of this Series will be specifically related to the subject of ‘Moving into Cash’, that is a lucky accident really because I am merely using this as a Real Life Example to give more colour to the concept.

Worrying about things in your Control and ignoring the other Factors which you have no influence over, means that you can focus your Brain and Efforts onto undertaking actions which are pretty much guaranteed to improve your Returns - for example, if you are with a Broker who charges £15 a Trade and you move to one that charges £10 then you are saving a small amount of £5 on every Trade you do - but over many Years that apparently small Sum will add up and, more importantly, COMPOUND, to make a significant difference to your Returns over the Long Term. I suspect for many People this simple change over a Lifetime of Investing would add many £Thousands to their Pot.

A similar thing applies with Dividends. If you always ‘Invest’ in Stocks that do not pay out Dividends, you are choosing to not get pretty much Guaranteed Gains that just steadily flow into your Account with Zero effort on your behalf (and of course they also Compound over time). Needless to say the Trade-off is that in theory a Stock with no Dividend should give very fast Growth and strong Capital Gains but of course in reality Stocks like this are extremely High Risk and for the vast amount of time they do not deliver reliable Returns and it is often the route to the Poorhouse. You are far better off buying Stocks with Dividends around 2% or 3% or something as these tend to often have excellent Growth Prospects and you get that almost certain Dividend Payment which just adds up and Compounds over the Years.

A good example of the Joys of Dividends comes from my own Income Portfolio where I target a Total Return of 7% a Year but it has a Dividend Yield for the Whole Portfolio up near 5% - so by far the vast majority of the Returns I want are almost certain and I only need to see Capital Growth of 2% a Year to hit my Target. That is very ‘doable’ and the Returns on that Portfolio in the few Years I have been running it appear to back that up.

Anyway, hopefully that sets the scene and in the next Part of the Series I will go more specifically into the ‘Moving into Cash’ aspects (cos I know that is the bit your really want to read about !!).

Regards, WD.


Related Blog
I am sure most Readers will have seen this many times but it is always worth understanding how Compounding is the ultimate ‘Free Lunch’ of Investing:

http://wheeliedealer.weebly.com/educational-blogs/why-bother-investing-the-power-of-compounding