I am sure that in much of my scribbles over the years I have touched on the subject of ‘Over-thinking’ but perhaps not really brought it all together in one blog that hopefully puts the subject nicely to bed. The essence is that I get a strong sense that I have spent many many years learning things about Stocks and Markets and Investing and Trading, and all the related stuff, but it is only in more recent years that I have been actively trying to ‘un-learn’ much of the stuff I know and be a lot more basic and elemental in my approach.
Less is More.
Keep it simple.
Complex is bad.
To a huge extent I think that experience is essential to getting to this stage in my Investing ‘Career’ – it would probably be highly unusual to get to such an approach without having first gone through the earlier stages of learning everything and being obsessive in your quest to ram your brain full of information and understanding about the Markets. I know there are some exceptions, but I suspect they are very few and most Investors go through this ‘cramming your head’ phase which is likely to last for many many years. It is only natural – when faced with something so seemingly complex and puzzling and chaotic and unstructured and just plain downright bloody difficult, the natural response of any human will be to apply themselves 110% and to try to learn everything about the subject that is possible. And of course this is not helped by countless textbooks that encourage deep thought and analysis which could lead to Over-thinking.
So it is easy to get into this situation of a fully overloaded brain and to know so much and still to strive to know more and to be ‘on top of everything’ but it might not be helping us. I have come to the conclusion that the complexity and the general ‘Noise’ of everything is actually a big negative force and has been/is not really helping me. This is why I am trying to unlearn so much and get more focused on what I think I really need to know.
What exactly is Over-thinking?
I’m not sure this is easy to define but I will have a go. I have hinted at it already in saying that it is a state of getting your brain just utterly overloaded with information about the Markets and Stocks etc., but it is also related to the whole concept of ‘Noise’ and how that can affect us in very negative ways and this is largely down to human psychology.
The essence of Over-thinking is when you worry about everything and you are too absorbed with details and obsessed with Price moves, however small. A lot of stuff really is trivia and, in a way, the big moves on any Stocks in a Portfolio are caused by significant news such as Profit Warnings, Takeovers or “Ahead of Expectations” Updates and much of the rest is merely yet more Noise.
In a way, rather than saying what Over-thinking is, it is easier to say what the opposite is !! If you are Over-thinking then you are probably obsessed about every bit of News that appears for Stocks you hold and you could easily be a bit of a ‘Worrier’ who perhaps sees everything as a potential problem and picks up on any minutiae of News and climbs all over it and does contortions to try to figure out what its meaning is and what its impact on the Company will be. And often there is perhaps a sense of a piece of News actually being a cover for some ‘hidden’ information and the mind starts racing and in effect dreaming up and worrying about scenarios that are not actually there. I know people who do this and I am sure there are times when I have succumbed to what could easily be leading me astray.
Someone who is Over-thinking is likely to see every tiny move in the Share Price as signalling something and perhaps a small pullback makes the person think that a bigger fall is coming. And of course it can work the other way where a fairly trivial move up is read as being a precursor to a huge jump in the Price. This kind of thing is prevalent amongst all those Junky AIM Stocks where People fall in love with their total Turkey and start dreaming of never ending riches as the Price continues to slide downwards !!
One of the best examples of this is when people obsess about the ‘Trades’ Information that you can get on ADVFN and MoneyAM and suchlike. I almost never look at it and see it as pretty much useless. If you are serious for wanting to use such stuff, then get Level 2 and do it properly. Those ‘Trades’ lists are really incorrect with ‘Buy’ or ‘Sell’ guessed by computer based on the time they went through and the Price of the transaction – it is often wrong. Also many Trades do not show on these lists. Forget them – they are misleading and a great example of Over-thinking. If you look in the ‘Related Blogs’ section at the bottom of this Blog you should find more on this subject.
I am slowly moving to a frame of mind where I am much more relaxed and much better at ignoring Noise and stuff that is irrelevant and to a large extent when News comes out, I shrug my shoulders and don’t worry about it. This is helped of course by having a very diversified Portfolio with a lot of Stocks and by mainly buying Quality Stocks from real businesses that are growing and making money and paying dividends and all those old-fashioned basic ideas. Such a relatively low risk approach makes it a lot more easy to be nonchalant and relaxed about Bad News even - and wiggles and silly Price moves are nothing I particularly worry about.
Over-thinking can certainly take the form of spending far too much time in front of a Computer, Fone or Tablet Screen and jumping on every bit of News and all the Noise that is constantly being chucked at us. An example I used to do, and I am sure many people do this, was to read a Results Statement of a Company I held and then to read all sorts of versions of these Results which were put out by various Investing Platforms and Newspapers and Online Financial News websites and suchlike. So I was reading all sorts of opinions and variations of the Results and to be honest it probably just confused me very often or worse still it could have led me to make poor decisions like selling the Stock when there really was no good reason to - and no doubt much of this was a waste of a lot of time.
I have hugely improved on this now and something Robbie Burns, The Naked Trader, said in one of his excellent Books was that he never reads anything written by anyone else about any Stock he holds – he just reads the Results himself and makes up his own mind. I think this is an excellent idea and I now do very similar and it is a great way to ‘Cut out the Noise’. I think for Stocks he is thinking about buying he will read other views but I am not totally sure that is his approach. If he does do this, it is on a limited basis and the bottom line is that he makes up his own mind whether or not to buy something.
I remember in my early days as an Investor I used to read Tips a lot and follow many of these Tips – and with varying and often terrible results. To a large extent I think this was down to lack of time because I had a job and stuff but it was also a lack of confidence in my own ability to pick Stocks but fortunately this is something I grew out of and I still find Tips useful but I see them more as a source of ideas or a way to check on my own thoughts about a Stock, than to be something I just blindly follow and buy or sell like a clueless automaton. I am also very selective about which Tips from which sources I read and I always try to do so in a detached, objective, rational and relaxed frame off mind.
Other ways we can overcome Over-thinking
Over-thinking can result from Technical Analysis (TA or Charting) and looking at Share Price moves very easily. Again this is related to the general topic of ‘Noise’ and so much about how a Share Price wobbles around is simply irrelevant Noise. Obviously if you are a Short-Term or Day Trader then such wobbles are important and are your Bread and Butter but for Long-Term Investors they are often just ripples on the stormy Atlantic Ocean.
Part of the problem with Charting and TA techniques is that people can easily go down the Bunny Hole of over-complexity and learning about too many Signals and Indicators and analysis techniques etc. This smorgasbord of Technical ‘Tools’ just confuses the user and you will get countless contradictions between the Indications/Signals and this is dangerous because I find it is extremely important to know how ‘fast’ or ‘slow’ your Tools work and which ones need to be given more weight in any decisions you make regarding what the Charts are telling you. All Technical Signals/Indicators have different percentage probabilities of ‘working’ and you need to understand which ones work best and most reliably and which ones are useful on occasions as a Confirmation of a different Signal but on their own are quite unreliable.
The approach I use is to have a well-established set of simple TA Tools that I use over and over and over and ones that work well across many Assets such as Indexes, Individual Stocks, Currencies and Commodities etc. They will need to be interpreted in a flexible way especially on different Assets but after a while you learn how to do this and you can get very good value out of the Tools. If you read my ‘Weekend Markets Blogs’ that appear on the WD2 Website usually late on a Sunday night, then you can see me using the Tools in the Real World.
The big danger is that all this Noise from TA Signals can lead you to make poor Selling decisions and also poor Buying decisions. As a Long-Term Investor with a big emphasis on the Fundamentals of a Company and a large focus on many subjective elements, I use Charts and TA to help with timing of Buy and Sell decisions, and to an extent for Risk Management. If you put too much emphasis on TA this might not work very well and the big problem is that it is so easy to Sell great Stocks far too early and too much focus on the wobbles on the Charts and the scary Signals that your TA Tools throw up, will lead you to be dumping Stocks you really should be holding on to. It is important to realise and remember that TA Signals from longer timeframes are dominant over shorter timeframes.
Despite some of what I have said above, I think decent Technical Analysis (i.e. simple and well understood) can help you ‘read’ what the Share Price is doing and actually help you avoid Over-thinking and help you understand what is Noise and what is actually useful. Such an ability means you are much less likely to be caught out by the Market’s various shenanigans and devious tricks.
Techniques such as use of Stoplosses can help reduce Over-thinking because they make the decision for you. I will include Blogs about Stoplosses at the bottom of this Blog. This is a tough subject for me because on my Stocks I don’t tend to use Stoplosses but for Index Trades I have been forced by much pain to learn that they are a good idea. There is no doubt that my Over-thinking on Hedging Strategies and using Index Trades caused me a lot of unnecessary pain and that by using Stoplosses I could have taken the thought out of it and had much better outcomes.
In a similar way, TopChopping (TopSlicing or Trimming) can help reduce Over-thinking and make a Sell Decision for you and this works very well if you have Size Limits on Positions within your Portfolio. For example, I have an absolute Limit of 8% in any one Stock in my Portfolio so once a Stock grows to over 8%, then I am obliged to Sell a bit and reduce my Risk and bank some profits. There is a small bit of discretion around this in that I don’t have to sell the exact day it goes over 8% but once I hit this limit, my Brain needs to focus on taking action and I start to look closely at the Charts and some Fundamental Factors to see when it is a good time to start Selling some.
By removing a large part of the Human element, Stoplosses and TopChop Rules can help reduce Over-thinking and help keep things simple.
OK, that’s it for Part 1; in Part 2 I will continue to look at ways in which you can help to reduce and avoid Over-thinking and its dangerous consequences,
These Blogs go into how Trades are actually executed etc. This is part 3 but there are links to the first 2 parts at the beginning:
Here are my words on TopChopping – there are links at the bottom to the earlier parts:
This Blog talks about Stoplosses and there is a Link at the top to an earlier one that probably covers the topic in more detail:
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