I am breaking all the well established ‘Rules’ of Blog scribbling with this one as I am going ahead without a plan and half watching the Lionesses in the Semi-Final against the USA which is very distracting (I am sure if I was watching the Men’s game I would be able to focus almost 100% on the Blog because it would be extremely dull as Men’s Footie often is).
I got the idea for this Blog from a fairly new chap to the Markets who strikes me as very much in the early stages of trying to figure out what the hell is going on (don’t worry, you will always feel like that, even after 20+ years with the Markets forever throwing up new tricks and challenges) and getting drowned in the sheer Wall of Noise that just bombards us. It is by no means a Blog subject I have not written about before and I intend to include Links at the bottom to several related Blogs on the subject which should help understanding (oh boll*x, the US have just scored a second goal……).
I mentioned in my Weekend Markets Blog that I would struggle to get an Educational Blog out this Week and more particularly next Week as I need to pop down to Portsmouth next Wednesday and then on Friday 12th I am going up to the Gaydon Motor Museum for a Meet-up where I am looking forwards to catching up with loads of Readers (you can find details on the ‘Events’ page which sits on WD2 and everyone is welcome to come along – the more the merrier and all that stuff). I will write something on Live Company Group LVCG soon but it won’t be all that in depth – just my reasons for buying and the Risks to consider, but I wanted to get this one bashed out first because I know the chap who inspired me will find it very helpful and hopefully it can give him the direction he is probably finding it difficult to identify.
The crux of the matter is that there is really a Spectrum of Styles/Approaches that you can pursue to attack the Markets and at one end you have Day Traders who sit in front of their Computer Screens all day (going cross-eyed I should think) looking for and managing perhaps many Trades in one day, and then at the other extreme you have Long-term Investors who rarely look at their Portfolios and to a large extent they might even pass off the management of their money to a Wealth Management Company or perhaps they manage it themselves but in the form of a collection of Unit Trusts or perhaps even Passive Funds like Trackers (if you go to my ‘Funds’ page you can find more details on what these terms mean).
For myself I am very much in the Long-term Investor camp but I do not have much exposure via Funds (in fact I only hold 2 Investment Trusts these days – see my ‘Portfolios’ page), and I manage my Shares myself and try to focus on building a collection of Quality Stocks that I can hold for long periods of time (often many years) and I like to pick up Dividends on the way which I reinvest to compound Returns with very minimal effort. I also have a small Income Portfolio which is partly an experiment but I want to move more of my money over to this kind of approach over time but I am in no particular rush. The Income Portfolio really is the epitome of do-nothing Investing with an emphasis on picking up decent Dividends and with a little bit of Capital Growth on top; I have been running it for about 5 years and so far it has done pretty well and takes almost zero effort !!
In fact, the amount of effort required is a big thing for me and a big difference between the extremes of the Spectrum of Styles. For several reasons which are firstly to do with my Health considerations (I am a paraplegic wheelchair user) but also to enable me to enjoy my ‘Retirement’ and to go out and play when I can and also because this Style suits my personality – I feel ‘comfortable’ with it and this is an important consideration. Related to that idea of being comfortable is the concept of Risk – I am happy with the level of Risk I believe I am taking and I see it as very much a low-Risk approach and I can sleep soundly without having to worry.
If you are worrying about your Portfolio then you probably have a Style that is not suited to your Personality and/or your Execution of that Style could be substandard. It might simply be that you are incapable of Executing the particular Style you are trying to pursue – some People will never be good Day Traders because they simply don’t have the skills (I suspect this would apply to myself).
Of course, the trade-off between the ends of the Spectrum is that as a ‘do nuffin’’ passive Investor you have to accept that your Returns will be a lot lower but will still be better than just shoving your Money in the Bank and getting pretty much bug*er all in Interest. Someone using Funds can probably get around 6%/7% a Year on average but will probably have far more consistency than people running a higher Risk Style which might return 10% a Year but there may be a lot more variation in the Returns for each individual Year. I accept that my Style may have more limited Returns than those of People who invest in a focused Portfolio of Smallcap Stocks and churn those over fairly often, but my Target is 10% a Year and I think that is most definitely doable although in recent Years I have struggled to get even that but my experiments with Hedging have not helped. Interestingly my very low activity Income Portfolio has probably done about 8% a Year over 5 years or so which is very decent. A big Risk Fund only Investors run is that they are hugely exposed to Market Risk although they carry almost zero Stock-specific Risk (unless they were unfortunate and bought into Woody Woodford’s Fund disaster).
A very good Day Trader can probably make a lot of money – I am not sure what Returns they would get but it is probably something like 100% a Year or more even but people like this are extremely rare (actually, they are probably rarer than even that !!). Using Leverage as well I would guess top Day Traders can make a huge amount of money very quickly. Someone more towards the Investor end of the Spectrum and perhaps who uses Shares and Stoplosses and stuff and trades quite regularly (think someone like Robbie Burns, the Naked Trader – although he is exceptional I reckon), can perhaps make 25%-30% a Year but it takes a lot of effort and time and also needs a lot of talent which again is something that not everybody can achieve. Know your limits……..
It is simply not easy (that has to be quite a paradoxical and contradictory 5 words !!) to figure out what your Style/Approach is or should be and hopefully the action of reading this Blog will help you recognise the need to establish your Style if you are going to be truly successful and be able to relax with your method of confronting the Markets. If you are new to this business then it must be very overwhelming and I remember a mate saying to me that when you first start investigating the world of Investments, it is like having to learn an entirely new language. I like that idea a lot although it can probably be said that it’s far harder than learning a language and you will never get to a stage where you know all about it.
If you can cut through the noise and focus down on what your Style is or what you want it to be, then the next critical thing is to write down some Rules and they must be clear and simple but also realistic so that you can actually abide by them – if you have daft Rules that simply won’t fit with your personality or the time you have available etc., then there is no point in having them because they won’t help you at all. In fact, bad Rules will probably just add to your problems.
The beauty of having Rules though is that you can keep them forever and they are always there as a reference guide to help in particular when things go wrong – and believe me they will and it will happen a lot. If you have a difficult period with your Investing/Trading, you can calmly look at your Rules and try to figure out what you have done wrong in terms of executing those Rules or perhaps you will realise that you need a new Rule to make sure a particular mistake is less likely to happen again. It is a well known concept of Trading that Humans are extremely bad at following Rules and this is why many people fail at Trading. With that in mind, perhaps a regular review of your Rules is a good idea – you could do it every Quarter or something. If you look in ‘Wheelie’s Bookshop’ you should find a Book called the ‘Way of the Turtle’ which is precisely about Short-term Trading and the importance of discipline to follow Rules.
Over time you can tweak your Rules and add to them and subtract from them as you see fit but I suggest once you have drawn up a well thought out set of Rules you must be very careful about making changes and be very sure you are amending them for the right reasons and again not going to make your own life difficult by putting in a silly Rule. At the bottom of this Blog I will stick a link to a Blog I wrote about my own ‘Rules & Parameters’ and these have helped me a lot over the years and also if you go to my ‘Manifesto’ page you will find lots there about my Approach and things to consider when figuring out how you want to do things.
When you are starting out and am bombarded by all the masses of information and stuff that is chucked your way, it is probably worth taking time out and getting away from all the daily hussle and bustle of the Markets and freeing yourself up to be able to think calmly and in a relaxed and easy manner. I myself find that digging in my garden is brilliant for such thinking but perhaps taking yourself off to a lovely National Trust garden or something is a way to calm your soul and let you think without distractions. You need to get rid of all the jibber/jabber and pare down everything you know to come up with a Style/Approach that you think can realistically work for you. And of course over time you can amend it as the need arises.
If you have been Investing/Trading for many years but do not have a Set of Rules then you (oh my lord !! England have just scored again and levelled it at 2 all !!) may find it very helpful (unreal – the goal has been ruled offside……ugh) to take some time and carefully write down some Rules and simply by doing this it might make you realise a flaw in how you do things or perhaps suddenly inspire you with a change you could make to help improve your Returns or perhaps lower your Risk or reduce the effort and time you need to commit to your Investing/Trading activities (I don’t believe it, she has missed the flippin’ penalty !!).
Well, I didn’t think this would be a huge Blog but it is more like a reminder of the importance of nailing down what your Style is and having Rules to keep you on track and for more details if you look at the Blogs I have included below then this should help you get focus and a clear way forwards.
This is one I wrote recently on Quality:
This one is exactly to the subject:
These Blogs cover the Investor/Trader Spectrum I was on about:
This Blog is about the superb Trading Approach that Jason @stealthsurf uses (there is a link to Part 1 at the top):
This is a 6 part Series about Moving into Cash (at the bottom there are links to the first 5 parts):
Here is my Parameters/Rules one:
Here are some Manifesto Blogs but I recommend you look at the Manifesto page on the website as well:
I talked a lot about the Noise that surrounds us in the Markets and this previous Blog is totally relevant:
This one is related and Readers might find it worth reading. I think my Daily tasks have changed a bit but it is still valid:
This one very much relates to Returns:
A specific one on Long-term Investing:
This is a 7-parter about how to set up and manage an Income Portfolio – there are links to the earlier parts at the start:
Welcome to my Educational Blog Page - I have another 'Stocks & Markets' Blog Page which you can access via a Button on the top of the Homepage.
Please see the Full Range of Book Ideas in Wheelie's Bookshop.