If you can cast your mind back a few days, you might be able to recall that when I posted my Blog on ‘Scores on the Doors 2014’ I promised to address things that I need to do better in 2015 - so this is the Prodigal Blog (very topical Wheelie, with all that biblical Xmas stuff.…)
So, to kick off this Blog on what I need to improve on, I am going to first of all totally ignore the purpose of this Blog and bleat on about some other nonsense - by now you must be getting a feel for my rather tangential Blogging style !!
This particular Tangent is about Perceptions and Context and Realistic Expectations. I should really have put this at the end of my ‘Scores/Doors’ Blog as it would have made a nice Conclusion bit but, alas, it was not to be.
Potential Yearly Outcomes
My point is that the overall Performance I achieved in 2014 of a 1% gain on my Stockmarket Activities must be set in the context of many years of Long Term Investing. Think about it this way, for any given year, there are 5 possible Outcomes:
These percentages are just indicative numbers I have guessed at, but hopefully they help make the point (for example, rather than 20% you could argue it should be 15% - whatever, talk to the hand…..) This ‘Market’ thinking can also be applied to a Portfolio of stocks. For the Mathematicians and Statisticians and Campanologists among you, this should approximate to a ‘Bell Curve’ or I think it is also known as a ‘Normal Distribution’ (well, that’s what I normally call it….)
From this list, the ‘Outliers’, Outcomes 1 and 5, are probably quite rare - let’s say that in a 10 year period each of these might happen once. In practice, it is probably a lower probability but this is to illustrate the idea.
Outcomes 2 and 4 probably happen a bit more often, maybe each one is 2 times out of 10 years.
Then, for Outcome 3, this probably happens the remaining 4 years.
Therefore, if I think about my 2014 Performance of being up 1%, this would fall within Outcome 3 and is just one of the 4 years that it might happen. In other words, my 2014 Performance is just a ‘Snapshot’ in time and I have to consider it within the framework of a 10 year period. I hope that makes some sense. I am not sure it does. I know what I mean anyway !!
I note that ‘Bearbull’ in the latest copy of Investor’s Chronicle (2 January to 8 January 2015, Front Cover ‘The Final Investment Frontier’, page 16) talks about how Investment Returns over years have a certain Random Element when discussing how his Income Portfolio disappointed in 2014 - I guess even Warren Buffett gets disappointing years (I know he does, cos he hugely underperformed in the Dotcom Bubble at the end of the 1990s).
By the way, this 5 Possible Outcomes thinking can be put to use for your 2015 Planning activities. This is an idea I have stolen from the great Ken Fisher - he uses exactly this approach when planning for each new year (he probably uses different Percentages - I have not checked). I read about this in his book ‘The only Three Questions that Count’ - sadly it seems to be out of print but it was very thought provoking. His other books might be worth reading as well - maybe I will have a quick look and shove one in Wheelie’s Bookshop.
The simple logic is you try to guesstimate which Outcome Number 2015 will fall into. If you think it will be a tough year, but we will end up higher, then maybe you will count it as an Outcome 4. If you are more negative but not overly so, you might expect and Plan for Outcome 3. This can be a very useful way of thinking about your Total Exposures and your approach to Market Capitalisation sizes - e.g. will you hold Small Caps or Big ‘Blue Chip’ FTSE100 stocks? For what it is worth (probably not much), I guess I expect an Outcome 3 year.
Improvements / Changes for 2015
OK, after that diversion, we are now back on the Subject of this Blog. The following are things where I screwed up or was sub-optimal in 2014 and I will put more focus into sorting them out:
So, the bullet points above are the things I will address in 2015 to try and sharpen things up a bit. However, I have always felt that there is a ‘Plan B’ in my pocket which I reserve for if and when I have a series of Years where I am just not making enough Money (it‘s a bit of a “Press here in Emergencies“ type button). This Plan is essentially to move closer to Robbie Burn’s strategy - for instance, at the moment I do not use Stoplosses - I am sure if I put my mind to it, I could make Stoplosses work - maybe I am so bad at them because I seem to get along fine without them most years…..
Robbie is much more of a Shorter Term momentum trader than I am. One method he discusses in his first 3 books (I don’t know if he covers it in Book 4 as I am only on page 26 !!), is that he looks at the Top Movers lists on advfn.com and picks stocks that are already showing signs of life (something is ‘happening‘) - I think there could be mileage in this approach and I could adopt it if I needed to. In addition, Robbie seems to often sell after a 10 to 20% gain - I could do more of this and trade more often - but obviously I would need to be careful not to ‘overtrade’……….I am sure I could operate more like this if I needed to. But at the moment, I like a nice, sedate, lifestyle. I have a sort of way of life thing going that I am quite happy with and I am reluctant to change the approach too much. The bottom line is that there is always this Emergency option if I need to do something radical.
Plenty there to think about then, let’s hope 2015 can be navigated effectively. Anyway, if not, then it will be sort of Fun anyway……
Happy New 2015,
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