This probably won’t be a particularly long Blog but I just wanted to scribble something about how my ‘Style’ or ‘Approach’ so far in 2018 (and with barely 2 Months left it ain’t gonna change much - although of course I might stick with the Current Style for a while yet as we go into 2019), has been markedly different from how I usually do things.
In most ‘Normal’ times I tend to focus on picking Stocks and I sort of relax in the fairly certain belief that more often than not the Stockmarkets are going to rise (after all, this is by far their usual way of doing things with Bull Markets vastly outnumbering Bear Markets) and perhaps I switch to more of an Index or Market focus when we get towards Autumn or if other one-off Events like a General Election or something mean that there is likely to be a Short Period of pain ahead which will need me to Hedge by focusing on the Indexes and using Spreadbet Shorts to try to offset some of the damage that my Long Portfolio is likely to suffer and soon after the ‘Problem’ I normally find that Markets and my Portfolio recover quite promptly.
However, my stance for 2018 has been entirely different as Regular Readers will probably have noticed. In fact, because of the impending Exit from the EU of the UK, it was obvious that things might get a bit uncertain for a while and due to this I was cautious right from January 1st 2018 and I have barely bought any Stocks this Year and I have Shorted the Indexes a few times (with varying Success !! But at least it has given me something to do……). In addition, I have focused on accumulating Cash which has meant just parking any Dividends which have come into my Accounts and I have also put an emphasis on Selling Stocks or TopChopping and any Cash from such activities (and Takeovers) has again just been ‘parked’.
This inactivity in terms of my actual day-to-day Management of my Portfolio has also had a side effect in that because I am not in the mood to Buy any Stocks I have not put anything like as much effort into looking at Potential Stocks to Buy and the ‘Research’ side of my Daily ‘Work’ has been reduced massively. I have to admit that has been rather nice and it has freed me up for a few Pub Trips and of course it meant I could spend a lot of time doing the Paintwork on my BMW Z3 back in the Summer and it has worked out very well that whilst I have had some Health Problems with a knackered Hip recently, it hasn’t impacted my Investing too much because there is not a huge amount of stuff to do anyway. And even with my dodgy Hip I managed to keep on top of the Indexes and did quite well on a Short as the Market initially fell.
So that’s really what this Blog is about - I just wanted to stress how I have changed my Style/Approach for 2018 and that at some point in the future I will revert to more of a Stock-focused Approach and probably do a lot more Buys and Sells but I have no idea when this will start and at the time of writing this around early November I am still in Caution Mode and with Brexit at the end of March 2019 I will probably not be doing much for many Months from here. Today the US Midterm Election Result was established and that has taken away another potentially nasty Risk.
And then there is a wider ‘Educational’ Point that sometimes we need to adapt how we do things to suit the prevailing circumstances - again this is probably something that takes Experience but on the whole it never hurts to take a Cautious Stance if you foresee trouble ahead in the Markets as a general thing. It is important to distinguish between ‘Stock Specific Risk’ and ‘Market Risk’ and this has very much been a Year where the latter has been the issue that requires focus, particularly in October which was a pig of a Month. In such circumstances it doesn’t matter much how great a Business is or how ‘cheap’ the Stock appears to be - when so many Market Players are nervous and reluctant to buy or simply just wetting their pants and panic Selling, even the best Stocks will get dumped. Note, in such circumstances Robbie Burns, The Naked Trader, removes Stoplosses on many of his Stocks (I think I have understood that correctly !!) - which makes total sense because a Stoploss should be there to lower ‘Stock Specific Risk’ not to deal with ‘Market Risk’ which is a different beastie. Once things have calmed down in the General Market the Stoplosses can be put back on. I am sure most Readers know my ongoing angst regarding Stoplosses but to me it makes a lot more sense to use such a nuanced and adaptive Approach to Stoplosses than just rigidly sticking them on to ‘Sell at 15% drop’ etc.
To flesh that out - Stock Specific Risk is the sort of Downside Risks that can hit Individual Stocks and I mitigate this by Diversification and varying Position Sizes depending upon my perception of the Risk each Stock brings along (in practice Market Cap and Index is a good proxy for such Risk with Smaller Stocks needing Smaller Position Sizes). Market Specific Risk is that which arises because People in general just hate Stocks and the Markets (usually on a Global Basis and across all Major Indexes) are really bad and just all drop together. I reduce this Risk to an extent by Hedging via Index Shorts.
Something else I want to add to finish off is the concept that we should ‘Make Hay when the Sun Shines’ and what I am getting at here is that when the Markets are behaving nicely and slowly rising as they should do with no obvious Major Shock Events on the horizon, that is the time to be active with Buying and Selling and all that and to ‘Put the Pedal to the Metal’ and accelerate efforts to squeeze some extra Return out of the Markets. When times are tough, like they have certainly been this Year (and that was 100% predictable), it is time to stop playing ‘Offence’ and concentrate on protecting your Portfolio and playing ‘Defence’. I think that is an American Football metaphor but I am getting Trumped out today especially with the latest News that he has fired Jeff Sessions. Forget Soap Operas and Political Dramas - Real Life with The Orange One (with Panda Eyes) is the best Entertainment ever !!
Ok, that’s it. Remarkably short for a WD Blog !!
I included this one on Hedging in my latest Weekend Markets Blog but I am chucking it in here again to save you lot hunting it out:
These next ones cover Sizing to Perceived Risk:
These ones cover my Approach to using Indexes to Hedge my Portfolio which I have tweaked recently to make it much more effective. There are Links in this one to the other Parts (I can‘t remember what happened on these ones but the Date Order seems all really weird !!):
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