How to hold for the Long-term – Part 2 of 2

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Needless to say if you have not read Part 1 yet then it probably makes sense to go back to that one first before you start on this one. You can find it here:
 
https://wheeliedealer.weebly.com/educational-blogs/how-to-hold-for-the-long-term-part-1-of-2
 
Anyway, I was going through various Bullet Points around the subject matter concerned and here are the next bunch:

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• Humans are hyperactive – we really can’t help ourselves and we are in effect conditioned all our lives to ‘work hard’ and ‘keep busy’, and to be doing stuff; which when it comes to Investing probably isn’t a help. If anything it would be better if we were strapped in a Strait Jacket and prevented from using our Computers, Fones, Tablets etc. to place Trades and this would likely improve our Returns. It really is the case that ‘Less is more’ when it comes to Investing I believe. We always want to tinker and we really need to train ourselves to stop doing it. When you get the urge, it is probably better to close down your Computer and get out of the door as fast as you can and get out and do something else and burn off your excess energy in that way. A Golden Rule I use is to never make Trading Decisions to buy or sell during the day when Markets are open. I will only allow myself to make a Buy or Sell Decision ‘Out of Hours’ when the Markets are closed and things are calmer and I can think more rationally and objectively without all the emotional baggage that comes from the excitement and thrills of the Markets with their constant ability to affect my mood with their lurches up and down. I am lucky because I have sort of trained my mind over time to not do unnecessary Trades, but I know many People won’t let themselves check on their Stocks or their Portfolio even once a day because it might induce them to place Trades that should not be done. There are even people who only look at their Portfolio once a week – that seems extreme to me but I sort of see the point and it could work well for many people to stop them tinkering.

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• Psychological influences – these of course are many and varied and the impact of ‘Noise’ has a huge influence upon how our Brains make decisions and how we think about things. I could have included this Bullet in the one above perhaps but I felt it warranted its own and it is something I am writing as a result of @paulwham500 on the Tweets pointing out the ‘Ego’ aspects which can drive us to over-trade (thanks Paul !!). We probably have an in-built desire driven by our Egos to want to ‘beat the market’ and to be ‘proven to be right’ and this kind of thing can encourage us to continually place Trades and to quickly get bored with Stocks we already hold and to dump them simply because they are not moving much (no doubt as soon as we sell them they will jump up !!). This Ego effect is difficult to combat although I suspect that the longer people have been involved in messing about with the Markets the less likely they are to be quite so Ego driven. The Markets have a relentless way of forcing you to be humble and to accept that you can never know everything and that for every Trade you do (Buy or Sell) there is someone on the other side of your Trade and it could just be that they are correct and you are not. Thinking about Trades in this way can be very useful by the way – ask yourself the question, “If this Stock is so great, then why is it that people are so eager to sell it to me?”

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• Distraction Techniques – this is linked to the Bullet Point just above and is really about having ways of working on a Daily basis that are designed to use your time effectively but also to avoid you making silly Trading Decisions. I tend to work very much like a Robot (the WheelieBot) and do the same things over and over every day. Working in this way seems to be a good distraction technique and I have no problems with over-trading. Part of my daily routine is to read the RNS items as soon as I wake up at 8am and I spend a lot of time reading about Companies I don’t hold because it keeps me aware of what opportunities are about and if and when I am in a position to buy a Stock, I have a good idea of what good ones are possibilities for me. This constant keeping up with potential opportunities stops me from spending too much time fretting about Stocks I hold already, and the other thing that helps is putting a lot of focus on Chart Patterns and Candlesticks and suchlike. When I look at any Stock I am also looking at what the Chart is telling me and that can help keep me in a Stock that I already hold because I can see that the Chart is pointing to more gains and it would be silly to sell. If you do not use Technical Analysis tricks, then you could easily sell something where the Chart is actually shouting at you that the Stock wants to go higher. I see people doing exactly this a lot in practice (and I see this especially regarding Stoplosses where people get stopped out just after the Chart tells me it is about to turn up).

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• Reinvest Dividends – This is remarkably obvious but it is also remarkable how many Private ‘Investors’ fail to see the benefits and advantages of Dividends and they actively look for Stocks that don’t pay them – this is utterly daft in my view. There really are very few, if any, ‘Free Lunches’ in Investing but I have no doubt that Dividend Payments are the closest you will get to a Free Gift and to turn your nose up at them is really just cutting off your nose to spite your boatrace (apologies for the mixed metaphors and the dodgy Eastenders, Danny Dyer, slang). The joy of Dividends is that if you are targeting 10% CAGR on your Portfolio and if you pick up 3% in Dividend Payments, then already you have got a third of your work done for you with zero effort. On top of this, if you then reinvest those Dividends then you get the Compounding effect over time and it is certainly the case that over a period of years, a big proportion of the Gains you make will actually come from the Dividend Payments and their Compounding. The beauty of Dividends doesn’t just end there though – another attraction is that if you hold decent and steadily growing Companies, then the Dividend Payments will grow each year as well – and this increases the Compounding effect as you re-invest those. And there’s more – a steadily rising Dividend puts a good discipline on the Company Management and it makes them think about Shareholder Returns and the importance of managing Cash well. In simple terms, apart from a few exceptions, decent Businesses are not those that do not pay a Dividend. Straightaway, whether or not a Stock pays out a Dividend gives you a sense of the ‘Quality’ of a Stock. I view a Stock that doesn’t pay a Dividend in a very dim light…..

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• Segregated Trading – I struggle with this one because I tend to default to the view that mixing ‘Long-term Investing’ with ‘Short-term Trading’ can actually be quite dangerous because although many psychological principles are similar, there are more that are completely opposite and you can pick up ‘bad habits’ from one discipline that then infect your other approach. I would perhaps relent to say that more experienced participants in the Markets who fully recognise the differing psychological approaches needed, might be able to run two separate operations which cover Long-term Investing and Short-term Trading. If you do so though, I would suggest that keeping these highly segregated and having them in separate Accounts and suchlike is the way to go – if you get them muddled up in terms of the ‘mechanics’ of how you perform them, then I suspect you will also get muddled up with your psychological approaches and this will probably impact both disciplines in a negative way. It is up to you obviously but I would most definitely say that Beginners are best off focusing on one discipline (probably Long-term Investing because you are much more likely to succeed at this) and perhaps when you have a few years of profitable experience under your belt you can look into moving to the other discipline either in full or as a sideline, and as a segregated activity. In terms of holding for the Long-term, it is pretty obvious that the much more ‘In / Out’ nature of Short-term Trading is likely to be an influence upon you which will eat away at your resolve and commitment to hold for the Long-term and clearly could be very self-defeating. 

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• Understand Value – I have put some Links at the bottom of this Blog to loads of stuff about Price vs Value etc., but another thing that can help with Long-term thinking and sticking with Quality through thick and thin, is to have a very clear understanding of Value and what that means and how it relates to Price. You want to hold Stocks where the disconnect between the Value on offer and the Price the market is putting on it are widely adrift. Funnily enough, just this week we have had a great example where I have been banging on for months and months about the outstanding Value in MPAC and this has kept me in the Stock because I knew, with an extremely high level of certainty, that given time that Value would be recognised and I would make a lot of money. That has played out almost better than I expected and I will continue holding because it is still silly cheap and I can now project a realistic Target as much as 500p or more.

 
I think that just about covers it. Really I see this kind of long-term thinking and overall approach as the sort of thing that Newbie’s really should be starting out on but sadly it seems to be the case that most people start out with far too much trading and it’s a bit arse-about-face. It would be far better for Beginners to take a long-term view and to learn what to do slowly and then once you have a few years under your belt, you can start thinking about shorter-term Trades and you are much more likely to be successful at it.
 
Sorry to have repeated that but it is massively important and my primary role in doing WD is to help Newbies sharpen up their act and if experience people want to read my stuff then they are most welcome !!
 
Anyway, I have been working on my ‘Scores on the Doors 2019’ blog which should come out soon and from that I suspect many People will have their eyes opened with regards to the kinds of Returns that long-term thinking and not doing much can achieve.
 
Regards, WD.
 
 
Related Blogs
First up a specific blog on Long-term Investing:
 
https://wheeliedealer.weebly.com/educational-blogs/the-appeal-of-long-term-investing
 
The Power of Patience – very much on the subject:
 
https://wheeliedealer.weebly.com/educational-blogs/the-power-of-patience-the-importance-of-being-idle-part-2-of-2
 
This long and complex series covers the Costs involved in trading too much and it is quite an eye-opener and I recommend you put in the effort to read it. There are links at the bottom to the earlier parts:
 
https://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-6-of-6
 
This blog series covers Diversification – a crucial element of holding for the Long-term:
 
https://wheeliedealer.weebly.com/educational-blogs/diversification-am-i-enjoying-too-much-of-a-good-thing-part-1-of-3
 
https://wheeliedealer.weebly.com/educational-blogs/diversification-am-i-enjoying-too-much-of-a-good-thing-part-2-of-3
 
https://wheeliedealer.weebly.com/educational-blogs/diversification-am-i-enjoying-too-much-of-a-good-thing-part-3-of-3
 
Price vs Value blogs and an emphasis on ‘thinking like an owner’:
 
https://wheeliedealer.weebly.com/educational-blogs/price-vs-value-think-like-an-owner-part-2-of-2
 
These ones are very much about understanding Valuations and getting your head around these will help you hugely (at the bottom of this one there are links to the first 3 parts):
 
https://wheeliedealer.weebly.com/educational-blogs/valuation-valuation-valuation-bursting-for-a-pe-part-4-of-4
 
These ones are important regarding TopChopping – there are links at the bottom of Part 3 to the earlier bits:
 
https://wheeliedealer.weebly.com/educational-blogs/the-psychology-of-the-topchop-part-3-of-3
 
This one discusses Averaging Down:
 
https://wheeliedealer.weebly.com/educational-blogs/is-averaging-down-the-root-of-all-evil
 
This one is controversial but very much an element of my Long-term thinking:
 
https://wheeliedealer.weebly.com/educational-blogs/the-diminishing-problem-part-2-of-2
 
I am actually quite proud of this blog – not because it is well-written or anything (I doubt it is) but because it addresses something that is just so fundamental to making money over time on the Markets – understand this and put it into action and you are well on the way:
 
https://wheeliedealer.weebly.com/educational-blogs/why-bother-investing-the-power-of-compounding