The ‘working title’ for this Blog when it was just a mere whisp of an idea in the WheelieBonce was ‘Only the Inexperienced Panic’ but the more I thought about it the more I felt this was a bit insulting and in reality we all panic but there are ways we can reduce such episodes and I wanted to talk about how to do this.
As usual with my Blogs, a lot of the ideas just come out of thin air and no doubt my Brain is triggered by something which seems unrelated that I then twist (probably much too far) into a topic loosely related to Investing !! My inspiration for this one came from the icon Thomas Weekes on ‘Misfit Garage’ on Discovery Turbo when he came out with the line, “My old daddy used to say, only the inexperienced panic”, and that cemented the thought in my head.
Panicking is a very bad idea
Of course when things go bad and we get in a state of anguish and panic, this is certainly not a pleasant feeling but more than that, it is actually an extremely dangerous state of mind and can lead us to make some really daft decisions which will impact on the performance of our Portfolios in a bad way. At the time I am embarking on this First Draft of the Blog, it is roughly mid-August and the Markets have got a bit grumpy and been falling for a couple of Weeks and thankfully my frame of mind is pretty solid and I am riding it out OK and I hope I have made some reasonable decisions in adding to my Index Shorts. By the time you get the opportunity to read this Blog we will probably know a lot more about what happened in late August and into September !!
What I would give to get my hands on a Time Machine that could be relied upon to not turn me into a splatted and crispy Fly !!
The trouble is that when Markets are tanking and day after day our Portfolios get battered or perhaps even if they just slowly lose value in a drip, drip, drip ‘Death by a Thousand Cuts’ manner; it is easy to start worrying and stressing and panicking and this means our Brains are not in the kind of relaxed and calm state that we need to make good decisions and of course in the absence of this harmony, we go and do something rash and unthinking and highly costly. This also happens when we hold a Stock and we wake up only to see our beloved Company has put out a Profit Warning and the shares forthwith decide to plunge 44% and we just feel sick to our toes.
So when we start to think about what we can do to avoid such unpleasant and dangerous Panicky feelings, we need to think about what can be done to reduce Market Risk which comes from a generalised Sell-off when everything drops and for Stock-specific falls which come about form Profit Warnings and Contract Losses and Accounting Scandals and Bear Raids and suchlike. I have written before about these different types of Risk and I will try to remember to include a Link to the Blogs if I can find them.
Of course if we take it to extremes, then the big risk around the onset of Panic is that it will scare us so much that we decide we have had enough and we leave the Markets and stop Investing. That is a terrible outcome but I have seen it many times and I have even seen people announce such a sad occurrence on Twitter along the lines of “I have had a terrible time on the Markets lately and I have decided to forget about the Markets and to buy Property” or something like that. Truly awful.
This risk is even higher when you are quite new to Investing and you need to try to keep a calm head and to realise that although there are many Good Times in the Markets, there are also lots of Dark Days and it is your ability to ride out the cruddy bits that enables you to still be around and able to take advantage of the Sunny Uplands and that is where your Wealth is seriously built. If you can minimise the damage that tough times inflict then you are able to crack on once things improve.
It’s funny how the Markets can affect your emotions and how you feel. I had a truly horrible 2018 on the Markets (outside of the Markets I have to say 2018 wasn’t great either !!) where it seemed like every day I would wake up and look at the RNS News Feed on Investegate and there would be a Profit Warning from one of my Stocks. In fact, I think it got so bad that on one occasion I had 2 Warnings in one Day !! That was ridiculous and this seemingly never-ending pain just sapped away at my ‘enjoyment’ of the Markets and to end the year with my Portfolio down around 14% was sort of an epitaph or gravestone to mark a truly unpleasant year.
But the weird thing is that now in 2019 with a Portfolio that has gone pretty much nowhere because of my ongoing battle with the Hedges I have on, my mood this year regarding the Markets has been really good. I am not sure why although I have not had many Warnings and that has probably helped a lot. I have also had a few Takeovers and of course they are a nice shot of adrenalin. I suspect a lot of it comes down to simple resilience and experience. After something like 20 years of pitting my wits against the Markets, I have probably built many psychological defences which enable me to ride out the painful bits in the (probably mistaken) belief that better times will be on the way at some point. And of course there is no doubt I do a lot of behaviours and methods of working that help to maintain this resilience and to perhaps add to it as I learn new things and see yet more innovative twists and turns that the Market lobs my way.
Reasons for why we Panic
Anyway, at the risk of repeating myself (but it is an extremely important principle), it is no good panicking in the midst of a Market Sell-off and you need to have a Strategy and a Plan and a way of working that means any negative effects of Panic are reduced as much as you can in advance. If you find yourself in the middle of a crisis and you have not taken action prior to this to ensure it doesn’t hurt you too much, then you are too late.
If you find yourself Panicking and in a right old state as the result of a Stock-specific Event such as a Profit Warning that spanks one of your Holdings, then it will be because you hold too few Stocks in your Portfolio (you are too concentrated); or because you have too large a Position in that Stock (this comes from letting a Winner rise but with no limit and not TopChopping); or because you have no Exit Plan which might involve Stoplosses if that is your ‘thing’.
If you see yourself as a Long-term Investor but you cannot just drop everything and spend all day in the Pub, then you are doing something wrong and the most likely cause is that really you are behaving like a Short-term Trader. Even a Short-term Trader should be able to leave their Screens and head off down the Pub if that is what they choose to do. If you cannot do this then you are probably failing to take advantage of essential Trading Tools like Stoploss Orders, Stop Limit Orders, Buy Orders etc. You should be able to set your Trades up on autopilot where you just set them and then leave the screen and go and do something a lot more fun and far better for your physical and mental wellbeing. The automatic Orders should cut losses for you and capture Profits for you once the Price has moved your way to a predetermined Target.
For Long-term Investors, the problems usually arise from poor Research and Analysis (it’s important to realise these are not the same – you can read all you like and ‘Research’ until the Moo Cows come back to their Barn, but if you are just reading garbage then it ain’t gonna help. Likewise, the ability to ‘Analyse’ the Information you locate is crucial and I think many people do not recognise or understand this difference) and the biggest error Newbies make is buying crappy Stocks like those Junky AIM Garbage Story Stocks – fatal. The other problem is simply copying other people (far too easy these days with the gallons of ‘information’ that is readily available on Twitter and Bulletin Boards etc) with the consequence that you might do alright for a while on their coattails, but because you don’t actually understand what you are doing, once things get tough, or because the people you are copying disappear, you will be gripped by a sense of terror and panic and I can assure you it will not be nice.
Right, that’s it for Part 1 and I have hopefully covered most or all of the Dangers that Panic can bring and why we need to try to reduce it and its impacts. In Part 2 I get into much more specific things you can do to get yourself calm and in control.
Part 1 of these blogs, which I suspect you might have just read if you are down to this bit, is really about the dangers of panicking but Part 2 covers ways to avoid this. Anyway, I felt there was a mismatch of ‘Related Blogs’ in Part 2 so I have pulled out a few a bit early but at least you can get a flavour of ways to control Panic.
I expect many people who are new to the whole WD ‘thing’ follow me on Twitter and see my Portfolio Numbers every evening and think “What on earth is all that about?”. Anyway, here’s your answer and some details on the superb FREE ADVFN App:
This one relates to how I do the same things every day in a very robotic manner:
Charting techniques are a huge help in avoiding Panic as I will explain in Part 2, but anyway this old Blog should help you get your head around where to start learning about Technical Analysis:
I think there was one called ‘Thinking about Downside Risk’ which covers Market Risk and Stock-specific Risk – ah yes, I managed to find it and here it is !!
Here is an epic series about Spreadbetting – this is the final part but there are links at the bottom to all the earlier bits:
And of course the ‘Taming the Bear’ blog has to go in here !!
This TopSlicing one is important (there are links to the earlier bits in it somewhere):
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