I first wrote the text in the following Blog back in September 2019 and tweeted out that I had written it but that it would be ‘parked’ in my reserve of half completed Blogs until a time when I was under pressure of having too much on, and I could pick it up and release it.
Funny enough in light of a bit of a Twitter Storm I have caused today, this actually seems highly appropriate although it is very much at the risk of chucking more petrol on the inferno !!
I’m not expecting this to be a lengthy Blog and it was just something I was thinking about earlier today and I wanted to get on the keyboard and set it down in the form of electrons. I have no great plans for releasing it and the chances are that if you are reading this then it is because for whatever reason I don’t have a Blog ready and this is being used as a Filler !!
I am going to break all the Statutory Laws of Blogging, and all the EU Regulations, and this may infringe many Reader’s Human Rights, but I can’t be doing with the formality of setting out a Blog Plan and I am just diving head first into it.
Very often I see this idea about how Investing and Trading is a battle between ‘you’ and all the other participants in the Market, and it has got me thinking about whether or not this is true and even to what extent it might be true. This is certainly something which is explicitly the subject of Robbie Burn’s superb ‘Trade like a Shark’ Book which throughout talks about how you need to be the Big Bad Nasty Shark gobbling up all the terrified little minnow fishes and this exemplifies the concept precisely (of course you can find a copy of this excellent book in Wheelie’s Bookshop and I think I wrote a fairly detail blog about it).
I do wonder if this is really a ‘Trader’ thing as opposed to something that is quite as pronounced for Long Term Investors and my thinking is that they are very different and that Investors can actually group together to an extent to all benefit from an idea for a particular Stock to buy; and of course apart from talking about specific Stocks and/or Trades, it is obvious that whether you are a Trader or an Investor then teamwork can be helpful even if it is just to share techniques and methods.
This is obviously the essence of what I do with my Website and Tweeting and it is very much a Teamwork feel amongst all the decent people on Twitter and the overwhelming mindset is one of people all throwing in ideas and methods etc., and it is without doubt to the benefit of all the people involved. Very rarely we get the odd muppet who upsets everyone (usually that is me !!) but you tend to find that fairly soon they calm down and either go away or they amend their behaviour to fit in with the collegiate attitude that pervades – and of course that is how it should be.
With Trading I can see how it can be a ‘Zero Sum’ game in that if one person wins, then someone else has to lose but I don’t think this is quite so much the case in Long Term Investing – although there will be degrees of how much success you have on a particular ‘Trade’ or Share Buy.
Of course, with all that nasty AIM Garbage it probably is a Zero Sum game where the Rampers and Manipulators are pushing up Share Prices and putting out all these Tweets and posts on Bulletin Boards about how amazing a Stock is and how it is going to Uranus (my arse it is !!), and of course whilst the Stock charges up on their Ramps as the naïve and inexperienced buy in, the Rampers are actually selling out although they keep saying how brilliant the Stock is and how they are “holding forever”.
That probably explains why it is so unpleasant and vicious amongst these Bulletin Boards and suchlike and how it all gets so emotional and personal – the whole ‘system’ of how such interactions take place is literally bound to be something that brings out the worst sort of Humans and the worst examples of their behaviour.
When it comes to Long-term Investment where Stocks are to be bought and then held for perhaps as many as 10 years or so, the whole ‘system’ of how Investors interact with each other is by its nature totally more positive and supportive. It really is in everyone’s interest to work together to identify the best Stocks and the best ways to do things regarding Portfolio Management etc., and this pretty much ensures a very encouraging and helpful atmosphere (as opposed to atmosFEAR what you get with the AIM Junk Traders !!).
The way it works is this. It is not unusual or impossible to find a Stock that has potential to rise one heck of a lot over a period of many Years and there are obviously stacks of Stocks that have done this. Of course it is not easy to spot them in advance and that is why we need a Portfolio of Stocks and why we need to do thorough Research and Analysis into what we buy; but if and when we get it right, there is potential to make perhaps 200% in Capital Gains over a few years or whatever. Now on top of this we also have a Dividend Payment in most cases where we are buying into Quality Stocks (these are the sorts of Stocks that can deliver 200% or more gains over several years) and it is normal for these Dividend Payments to steadily rise over time and of course as we reinvest these Dividends we get the Compounding Effect which drives our Returns up more and more.
Now let’s think about this for a particular Stock in a totally nonsensical and theoretical example (“hey, Wheelie, what’s your game? You hate the abstract theoretical stuff you always say ! What happened to The Real World?”). Let’s say one of our wonderful Twitter mates discovers a brilliant Investing Stock and they buy into it at 80p and then lots of other people see this and we do our Research and investigate and all that, and we conclude that our genius buddy has got it right yet again, and this is a cracking Stock and we must buy it. So a load of us Buy and some pay 77p because even though our amazing pal is brilliant at choosing Stocks, no one can get it bang dead right when it comes to the timing and others pay 85p or even 90p, or those who are late to the party pay 100p or so.
Anyway, time goes on and we all pick up a nice Dividend (it might be 3% of what we put in or whatever – obviously the people buying at the lower Prices do better on the Dividend Return but it doesn’t make a massive difference if the Buy Prices are quite close) and let’s say after a year the Shares have done pretty well and are now up at 120p. Most of us will be happy with this (although there are bound to be some who are even greedier or who see another Stock and for whatever reason they sell out and bank a reasonable Profit) and we keep holding and again we pick up a Dividend and this should be slightly more than the Dividends we got in the year before.
Then after 2 years let’s say the Price has got up to 140p and again we are happy but some will sell. Anyway, this goes on and on then after let’s say 6 years, the Shares are up at 320p and have done pretty well and lots of Dividends have been picked up and reinvested. Now at this point we might start to generally conclude that they have run up too far and some of us will be TopChopping and some will sell out entirely but the chances are more Profit will be banked and it is all good stuff. Teamwork has paid off.
Now this example has been all rather rosy and nice (they rarely go like this !!) but of course in reality it would have wiggled about and given us lots of angst along the way but in this scenario there were no Profit Warnings or Bear Attacks and it plodded along nicely. Now the problems start when things change and in essence we get to the end of the Bull Run in the Stock. It could be that there is a Profit Warning or perhaps the Valuation has just got too high and the Market reassesses its view and the P/E Rating the Market will put on the Stock drops. In such circumstances, it is the people who are still holding the Parcel when the Music stops that suffer. So again there is an element of Winners and Losers but the people who worked together at the start did very well and it is the ‘Johnny and Joanna come Latelys’ who get their butts kicked.
The lesson here is around Valuation and thinking seriously about whether or not you are about to buy into a Stock that has had a very strong Run Up already and if you are risking buying right at the end of the Uptrend and being left holding the Ticking TimeBomb. I think to an extent if you use Valuation techniques and don’t overpay, then you reduce your chance of getting caught out in this way. But the point is that Teamwork in this example has worked for the benefit of everyone who was prepared to work together in a positive and helpful way to understand the Business and the Buy Case, and the Risks, and then to take the plunge and buy in at or near the start of the Run up.
So when you think about it, this idea of Winners and Losers and how you need to beat everyone else probably doesn’t hold true for Long Term Investors and working together and using Teamwork can actually work out well.
Good old compounding here:
Here’s that review of ‘Trade like a Shark’ – even if you don’t fancy buying the book there is a lot of useful information in here:
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