Clearly this is Part 2 of these particular Blogs and you can find Part 1 here if you have not already endured it or you need a refresher:
What can we do to control ‘Panic’?
However much experience we have and however much we prepare and work to reduce the negative impacts, to an extent I think feelings of Panic are pretty much inevitable although perhaps with time we Panic less and it is more a feeling of mild anxiety than a full-on Panic Attack. Anyway, bearing this in mind, it is really about what can we do to lower the dangerous occurrences of such feelings and to reduce their severity when they do strike? I suspect the ‘solutions’ come in 3 categories: Forward Planning, Careful Portfolio Management and Psychological Techniques.
Readers need to figure out their own methods but I tend to think very strategically and am looking ahead probably 6 months or so (arguably 3 to 6 months is the sort of timeframe to consider) to see what is coming on the near horizon and to make sure I am ready for it. There is the usually trotted out line that ‘Macroeconomics is a waste of time’ but personally I think that is naïve and foolhardy.
For instance, at the time of writing this in late August 2019, you don’t need to know much to be able to pick up that a ‘No Deal’ Brexit has potential (rightly or wrongly) to spook nearly 50% of Investors (that is dead easy to figure out because most will be ‘Remain’ Voters) and it is extremely likely that this will cause turmoil in the Markets. In addition, there is plenty of evidence that the Economy of Europe is stuttering with Germany on the brink of Recession and the UK actually had one Quarter of ‘Negative GDP Growth’ which means one more Quarter like this and the UK will be in Recession. China is difficult to discern but appears to be slowing and the US is not growing at anything like the rate it should be with all the stimulus it has seen. We then have Japan in permanent stagnation and the Gold Price rising strongly (that suggests something is very wrong) and some bizarre unheard of situations like lending to the Swiss Government for 50 years and in effect having to pay them to borrow from you !!
It’s pretty obvious something isn’t right in the Global Economy and Financial System and the Charts are confirming this with recent behaviour (see my ‘Weekend Markets Blogs’ on WD2 where I cover this stuff every weekend. Note, at the time of publishing the Charts are looking better but things are very volatile). My point is that big picture events are far more easy to spot than most people think and it is all about weighing up the various possible outcomes and making decisions based on what is most likely. It is vital to keep things simple and I don’t take much notice at all of the masses of Macro ‘Noise’ but I just look at basic stuff like Political mess, GDP Growth (or not) and what is happening to Central Bank Interest Rates. The same applies with the Charts – I just keep it simple with a very limited set of Indicators which I use over and over and over and over like a Robot. I wrote a lot about this in my recent Blogs on ‘You can’t time the market’ which you should be able to find on the Educational Blogs page not far below this one.
When you see the Big Picture looking potentially very messy like we are seeing now, you can sell off a chunk of your Portfolio to lower your Market Downside Risk on your Portfolio and of course you will also have Cash for when things finally settle down to your satisfaction and you are prepared to Buy again. I do a similar thing in essence by Hedging using Index Shorts on Spreadbets but the difference is that it keeps my Portfolio intact but otherwise has a similar effect, although the Shorts gaining when the Markets fall should work better than just sitting on a Cash Pile which obviously just holds its value rather than increasing in value to reduce the hit to your remaining Stocks.
The other thing you can do in advance is precisely what I have been doing for all of 2019 where I have really been buying very little. I think the WD Buying Boots have probably just been worn on 3 occasions this year and my stance has been mainly to sell when the time looks right usually via a TopSlice and I have been building up Dividend Cash in preparation for a significant fall which I think is extremely possible. I have been careful not to sell stuff too early and have been very inactive all round but I have been lucky with a few Takeovers which have helped to add to my Cash and to make the Selling Decisions for me !!
Hopefully I will remember to include some Links to old Blogs on Hedging at the bottom of this one.
Careful Portfolio Management
There are lots of things we can do which lower our Risk and enable us to stay calm and feel ‘in control’ yet still to gain from upside when our Stocks do well. Diversification is probably the Number 1 most important technique and personally I diversify across many factors such as: Market Cap Size, Sector, Investment Strategy (Growth, Income, Value, Turnaround etc.), Geography, varying Position Sizes depending on perceived Risk. Such Diversification can save you from a lot of angst as a small, concentrated, Portfolio is fantastic in the good times and an absolute piglet in the bad times.
When buying a Stock I tend to buy it in stages. I start off with a tiny ‘Starter Position’ sometimes which can be as little as 0.5% of my Portfolio or even smaller and is really a placeholder to ‘wedge my foot in the door’ because otherwise I get distracted and forget all about what I think is potentially a really good Stock. This is particularly useful on small, high risk, AIM Stocks and means that you don’t get over-exposed which is extremely dangerous as these sorts of Stocks regularly tank 50% in a day.
Probably most normally I will buy 1.5% or 2% of my Portfolio in a Stock and then over time as I get even more familiar with the Company I will buy more if the time looks right. I use Charts a lot to help with the timing. I am not at all averse to Averaging Down (or Averaging Up !!) but when doing so you need to be extremely careful – again I will include a Link to a previous Blog about Averaging Down at the bottom of this one.
In a similar way, when it comes to Selling a Position I tend not to Sell it all in one go and it is done in stages. So if the Share does well I will Topslice it once I think it has run up a lot and my Position is getting too chunky and I want to ‘Sell into Strength’ where I sell as a Stock Peaks, not when it is down in a Trough (of course this is not easy in practice but it is worthwhile at least trying to time your Sells in this way). It is so important to ‘Run your Winners’ and I am certain that in the past my Number 1 silliest mistake has been to sell good Stocks far too early in their entirety. TopChopping removes the psychological pressure that you feel a need to Sell and it also means you are still in the game and running your Winner.
Position Sizing is crucial and I wrote a very long and detailed Blog about how I do this in the early days of the whole WD fiasco and I will put a Link to it at the bottom of this one. In essence I size my Positions to what I perceive the Risk to be so that in a High-Risk AIM Stock I might only put 2% of my Portfolio in, yet for a boring FTSE100 Stock I might have as much as 6% or more. I also have a Maximum Position Size of about 8% where I will think seriously about TopChopping if the Position grows over this proportion of my Portfolio and this is a very useful discipline (I am sure many people who got hurt by the Burford BUR Bear Attack will appreciate why I do this). Any Stock can be whacked by something unexpected at any time.
I also have a Minimum Size in that apart from the occasional Starter Position I will not Buy or Sell anything smaller than 1% of my Portfolio Exposure. That helps to keep Dealing Costs under control because these can really mount up unnecessarily if you do lots of silly little small Trades.
I put a big emphasis on Dividends even in my ‘Normal’ Trading ISA and I want to be getting at least 2% to 3% on Stocks I buy because those Dividends compound up over time and this has a hugely beneficial effect. In addition, taking those Dividends together and reinvesting them also keeps boosting the Returns and exploiting compounding. Obviously in my Income Portfolio the focus is on getting near 5% Dividend Return on any Stock I buy and that compounds in a very powerful (and lazy !!) way.
Careful and prolonged Research is also vital to lowering Risk and avoiding the sense of Panic that can be so damaging. Over time I am going more and more towards getting extremely fussy about what is allowed to enter into my Portfolios and by doing so I have a lot more confidence in what I actually buy. I now think that my approach of many years ago where I was much more active was quite often just a case of being a ‘Busy Fool’ and I see so much of this sort of thing on the Tweets all the time where people are buying and selling great Stocks like frenzied Banshees and all they are really doing is helping their Broker become stinkingly rich. They often buy excellent Stocks and if they were to hold them much tighter and to stick with them they would probably make more money (and they would have a much easier and more relaxing life).
Of course it is not good enough just to do ‘Research’ – you must also have a framework for Analysis which means that the Reading and Studying you do actually results in the correct conclusions. I suspect there is a lot of this going on where people say “I have done lots of Research” and what they really mean is that “I have read everything I can find about a Company and I have ignored all the negative bits and I have just convinced myself this is a Great Stock that will go to the Moon and beyond because I have fallen head over heels for the ‘Narrative Fallacy’ and I have fed my confirmation bias…..”
I hope to write more about the Research vs Analysis conundrum in a future Blog – let me just skip to my list of Blog Ideas and to make sure I jot this one down as I think it could be an interesting subject !!
Anyway, the point here is that if you understand the Businesses you have a Stake in you will be much more resilient when it comes to the point of Panic and you will be able to have confidence that you can ride out short term Storms. There is also an added bonus that if you have high confidence in the Stocks you hold then you will be much more likely to stick with them and ‘Run your Winners’ which is how the Big Money is really made.
Simply by following the points I have already raised about how to lower your feelings of Panic this will help your psychology hugely and make you much more resilient and confident in the Tough Times. There are thankfully several other more psychology-specific things you can do which I will try to outline here.
One obvious one is related to the Research stuff I just discussed and this is about only making Buy or Sell Decisions for any Stocks in (or not in !!) your Portfolio outside of Market Hours when you feel calmer and more at ease and you are not being influenced by what the Overall Markets are doing that day or by what the Stock you are thinking of buying or selling has been doing in terms of the daily wiggles. I always make Decisions this way and I put a huge emphasis on Charting techniques to help with my timing – and this requires me to decide out of Market Hours anyway because I want Candlesticks for a Full Day and lots of other Indicators can change on a Daily basis or over just a few Days.
Making snap, on the spot, decisions to Buy or Sell during Market Hours is very dangerous I think. For Short Term Traders of course it is their stock and trade but they are people who do this all the time and they have honed their senses to do such Trades and they have strict Entry and Exit Rules etc. which help to manage such frantic Trading effectively. Having said that, bear in mind that most Short-Term Traders fail………
It is a different thing if you have a simple and automatic Rule whereby if a Company you hold puts out a Profit Warning then you sell it straightaway. That is fine and dandy if you have such a Rule and I suspect in many cases it is very a good Rule. I don’t do it myself but there are occasions where I dump a Stock straightaway on a Warning or I will think about it overnight and then dump it the next day.
Something that really helps me is to ‘Plan ahead’ with regards to what a likely Fall will be. For example, just a couple of Weekends ago I did a Blog as usual with FTSE100 and S&P500 Charts and I looked at the Big Picture on them going back to 2009 when the Bull Run started and I identified the Key Support Levels that must hold if we are to avoid a massive Sell-off. Doing this simple and quick exercise massively helps my psychology because it means that I am prepared for what might happen and I have a sense of how big a Fall will be. You can do a similar thing using stuff like Fibonacci Retracements and I have done this in the past although it is only something I do occasionally and I don’t find it a tool that I use all the time like my other ones. Getting the sense of a likely Drop will hugely help you stay calm as it removes a lot of sudden ‘Mental Shock’.
If you understand Technical Analysis in very simple terms, it helps you stay calm and at ease with the Markets because you often see things coming far earlier than people who think TA is hokus-pokus. For example, when a Stock falls and then forms a Sideways Ledge, it is highly likely that if that Ledge breaks to the downside, then you will get a move that is similar in size to the earlier move down to the Ledge. It is simple stuff and worth knowing and being able to ‘read’ Candlesticks and to identify Triangles is highly useful. If you get in the habit of reading my ‘Weekend Market Blogs’ every week then the simple Charting stuff I use will slowly worm its way into your head.
Cutting out the Market Noise and Chatter also helps massively. If you let yourself be constantly exposed to all the incessant Good and Bad news then you will just get completely confused and you will lack objectivity. It’s vital to understand how the News is generated – what happens is that the Market moves up and then CNBC and Bloomberg et al wheel out all the ‘Experts’ who say the DOW is going to 1 billion in the next month, and then the Markets turn down and they then wheel out all the Doomster Experts who say the Markets are toast and going down to Zero. It is no wonder you panic with such abysmal ‘advice’.
I picked up on something Robbie Burns, The Naked Trader, does and that is that he never reads anything written by anyone else about a Stock he holds once he has bought it. Before buying in he will read the odd thing by other people I think but once he is in his focus is totally on just making his own mind up and his own assessment and opinion of the Stock – there is a lot to be said for this and it is a huge help in ‘Cutting out the Noise’.
Noise can be a huge distraction in Technical Analysis as well and this is why I stick to just a few simple and reliable Indicators and this means that I get to learn how well they work and which ones tend to be more predictive and which ones work well in particular circumstances etc. I see so many people who are TA ‘Experts’ who know every single minutiae of TA theory but when it comes to putting it all together and making Money they are hopeless and are just confusing themselves. Keep it Simple Silly Billy.
Operating like a Robot is extremely helpful and keeps you mentally on an ‘Even Keel’. I am a huge believer in this concept and I have put a lot of effort into creating a Daily way of working which is repetitive and almost automatic and follows the same sequence pretty much every day. I am convinced this helps hugely and working in such a routine way means that I don’t get over-excited and emotional in the Good Times and more importantly, I work exactly the same way in the Bad Times and my emotions stay under control and stable.
For example, every evening I put out my Daily Numbers for my Portfolio on Twitter and I also list the Stock movements up and down which are larger than 1.2% (don’t ask me why I have chosen 1.2% but it has sort of happened by accident !!). The point is that I do this whatever the Markets have been doing – it is just something I always do and is entirely robotic and part of my daily routine. Of course it is also combined with me looking at my Stocks and reading the Candles and stuff which is always helpful. Funny enough though, I see lots of people putting out their Daily and Weekly Numbers on Twitter but you can guarantee that when the Markets get more unpleasant, you suddenly find that People are less eager to post their Numbers !! It’s a shame because following a Robotic and discretion-free approach really helps with keeping your mind stable and objective.
I have left the best til last with regards to Psychology tools and without doubt the top one is simply that when you feel stressed and anxious and worried and panicking, you must turn off your PC/Laptop/Fone/Tablet etc. Screen and chuck your Fone in the bin and go out for a long walk in the local Park or go swimming or something or go to Tesco or whatever else you fancy doing which forces you to think about something else and to calm down and get a grip.
Absolutely the worst possible thing you can do when you feel panicky because the Markets are tanking or because a Stock you hold is having a Bear Attack, is to keep your Screen on and to keep reading stuff all about it. This is madness and it will almost certainly drive you to the local Loony Bin (can I say that in 2019?) and all you are doing is ‘Feeding your Fear’ and not helping you get calm and objective in any way. You are just adding to your sense of Panic and making yourself more and more screwed up when you should be getting safely away from your Screen and doing something totally different to calm your nerves and to enable you to get into a relaxed Frame of Mind where you can make proper, well thought through, decisions.
I think that covers it. As Shakespeare would say on the Steve Wright Show,
At the top of this particular Blog, it has a link to a much more detailed one about using Stoplosses:
This is a bit of a beast all about Hedging:
This one covers Averaging down and when it is a good idea and when it isn’t:
These are to do with Position Sizing and matching your exposure to perceived Risk:
Cut out Noise – such an important Blog series here:
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