I often get asked how I managed to accumulate enough Capital so that I could retire at the ripe old age of 44. OK, it is time to come clean about one of my Dirty Little Secrets - I am one of the UK’s most prolific National Lottery Winners !!
Obviously I am far too modest to talk about this much and it is no big deal because I have never won the Top Prize or anything but I have a ‘system’ by which I regularly make small Wins which of course add up to a large amount over time.
And the best bit about it is that I have never had to buy a Ticket or a Scratch Card - yet I have won at least £5,000 over the years by sticking to the system. Yes, you guessed it, I never go near the Lottery and would never be so daft as to buy a ticket for something where the Odds are so ridiculously stacked against me that I am simply wasting my time and just feeding the Dopamine Hit that addicts to the Lottery get a huge and pleasureable surge of every Saturday Night.
So the Paradox of the Lottery is that the People who don’t actually take part are far more successful and wealthy than those who do.
Yes, we are back to good old WheelieBin Stocks, or ‘Junky AIM Stocks’, or ‘AIM Trash’ or ‘AIM Garbage’ or ‘that sh*te in the murky depths of the AIM Market’ - you know the sort of Stocks (if you don’t, and I guess your only excuse is that you are new to this game and rarely read my Website before, then if you skip over to the ‘WheelieBin’ Page then you should find a full description of the types of Stocks which would fall into these categories.) Chris Dillow of Investors Chronicle has a great way of putting this as he refers to them as ‘Lottery Stocks’ - they are Shares where you have a miniscule chance of making Money on them but if (mostly by sheer dumb luck) you do pick one that takes off, then the Winnings can be enormous - and this is the attraction to many People of such Stocks - mostly inexperienced Newbie Investors.
Let me be clear here - because I know many Readers do manage to make Money on these kinds of Stocks - but they are the exception rather than the rule and it is best left to very experienced specialists in this field. The People who succeed tend to have much more of a Trader Mentality and they do not see these things as ‘Long Term Buy and Hold’ types of Stocks - the almost exact opposite to the kinds of Top Quality Stocks that I am constantly seeking out. If you Trade such High Risk Stocks in and out, then you can do very well on them but you must be under no illusions that this takes effort and skill. Most people are not prepared to put in the former, and don’t possess the latter.
It has often struck me that most of us go about things in totally the wrong way. We start our Investing Careers buying the Trashy stuff and after losing lots of Cash we finally see the light and start buying Quality - whereas it would be far better if we started with Quality and then when we have a much better understanding we could Invest small amounts of our Dosh into the more Risky AIM stuff.
So as with the National Lottery (or any kind of Lottery for that matter), you’re most successful way of Investing with AIM Trash is to just totally avoid it, and to use your Valuable and Limited Cash Resources to buy Quality Stocks which will make very predictable Returns which you can compound steadily over time. That is how to make serious money with the minimum of effort.
The Appeal of the Big Drop
In an Edition of the Investors Chronicle earlier this year, the one with ‘Mastering Megatrends’ on the Cover dated 19 January - 25 January 2018, on Page 19, Chris Dillow wrote a short piece headed ‘Don’t pay attention’ which addresses a similar theme whereby Investors are often unhealthily attracted to Stocks which have put out a Profit Warning and subsequently sunk like a Brick in a Pond. This is very much a psychological thing where our less rational and more ‘automatic’ ‘Fast Brains’ (please see Daniel Kahneman’s book ‘Thinking, Fast and Slow’ which you can grab a copy of from Wheelie’s Bookshop) are attracted and fixated on sudden Events which are out of the usual experience. Think of the Cave Women and Cave Men sat in their BearSkins (sorry Bears !!) around the Fire when suddenly a Woolly Mammoth charges into view - obviously those Primitive Human Brains are shocked immediately into the Danger and Fear of the situation and the full resources of the Brain are channelled into Survival and Escape - it is exactly this kind of response that is hard-wired into our Modern Brains and makes us fixate on unusual and unexpected events - especially when the Crowd is turning its attention to them as well.
In a way this is very similar to a Lottery Stock - when we see such big Drops we think we can make a Fast Buck and of course if we catch a Bounce then yes it is very possible to do well on such an occurrence. However, just like with the Trashy AIM Junk Stocks, the best way to deal with such Opportunities is to have more of a Trader Mindset than a Buy & Hold Mindset - chances are that if you continue to hold such a Stock awaiting a Rebound, you will be badly disappointed because it will continue to fall. Momentum works both ways - what you want to be exposed to is Positive Momentum when a Share is going up, not Negative Momentum when a Stock is falling.
As a General Rule and a useful concept to remember, Profit Warnings nearly always come in Threes - and it is highly unusual for a Stock to put out a Profit Warning but then to recover quickly in the months immediately afterwards - it does happen but it is very rare and best not relied upon. This is the exact reason why many People have a rule whereby they sell immediately after a Profit Warning - by doing this they are not exposing themselves to Negative Momentum and the ongoing likelihood of more Profit Warnings and grief ahead.
“Run your Winners, Sell your Losers” (ok, great quote but I am useless at the latter but good at the former !!).
“Don’t catch a Falling Knife” - another good one and I am much more betterer at this principle !!
Let’s go back to what Chris Dillow has to say:
“Investors should resist the temptation to buy attention-grabbing stocks that have fallen a lot”.
“However, we have a large body of evidence which tells us that stocks that have fallen a lot continue to do badly.”
“All this evidence suggests that investors pay too much for stocks that are in trouble. One reason they do so is that such shares are often in the news and attract attention.”
“Of course, one or to such shares do bounce back and earn high returns. But the evidence suggests that investors overestimate the chances of them doing so. And they are apt to forget that the mere fact that a company is in the news is no reason whatsoever to buy it”.
Funnily enough, on the very next page (page 20), Mr BearBull in his article ‘Value’s hiding place’, adds to this theme:
“Value is often where you least expect it and in the dullest vehicles. Or it’s least likely to be found in racy, exciting vehicles that everyone’s ogling and chasing. That’s probably to be expected. After all, the exciting situations are the ones that grab the attention. They are likely to stimulate lots of dealing activity - which should or at least could - mean that prices are driven out of the musty corners where value hides and into the spotlight where it evaporates in the heat”.
Such poetry !!
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