You can handle the emotional side of investing This ... · 12/29/2016 · I’m sure you’ve all...
Transcript of You can handle the emotional side of investing This ... · 12/29/2016 · I’m sure you’ve all...
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Who is this newsletter for? You want to manage your own portfolio.
You can afford 3 hours per week
You can handle the emotional side of investing
This newsletter is not for you if
You can’t control your emotions
You don’t have 3 hours per week to manage your Money.
You’re a buy and hold forever investor.
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Current Portfolio Valuation. (up 18% per annum)
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 Comment. We now have 8 stock holdings
Losers >10% -
Losers 5.1%-10% 1
Losers 0%-5% 2
Gainers 0%-5% 1
Gainers 5.1%-10% -
Gainers10.1% - 20% 1
Gainers 20%-30% 2
Gainers 30%-40% -
Gainers >40% 1
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 This week’s newsletter is a little different. This week we’ll cover off some of the things I’ve learned
whilst “managing” this portfolio.
On the topic of Buffett (or I suppose being purely fundamental in
approaching portfolio management)
I’m sure you’ve all read your fair share of Buffett quotes. It’s fairly easy to find Buffett
quotes online…so here are a few.
“We select such investments on a long-term basis, weighing the same factors as would be
involved in the purchase of 100% of an operating business:
(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a
private owner; and
(4) an industry with which we are familiar and whose long-term business
characteristics we feel competent to judge.”
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10
years.”
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten
minutes”
“When we own portions of outstanding businesses with outstanding managements, our
favorite holding period is forever.”
“Over the long term, the stock market news will be good. In the 20th century, the United
States endured two world wars and other traumatic and expensive military conflicts; the
Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the
resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Ok I will acknowledge that if you understood everything that Buffett does and did all the things
that he’s done then startlingly effective investment returns would result. And yet how many
people have managed to be Buffett. Exactly not many. Perhaps because of other quotes about
him.
Firstly he’s reported to read 500 pages per day and is constantly researching. This habit isn’t one
off…he’s been doing it for many decades
He has at least one partner in crime and I wonder how many researchers support him. He can
discuss ideas intelligently and with full trust and examine ideas from many different perspectives
Access to information: When Buffett wants to ask a question it’s highly likely that just about
anyone he wants to speak with will take his call, respond to an email and or write a detailed
response and provide access to required information. The resulting information can be
reviewed and cross checked from multiple perspectives.
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Investment skills built up over many decades and exposure to the best investment minds over
that period.
Now let’s contrast this to the typical small investor, perhaps allow me to suggest a series of
constraints
Limited time to spend on investing.
o If you have a full time job with a reasonably level of responsibility in a big
corporate, then you’re probably working over 50 hours per week (maybe over
60 including car, bike, plane and train travel time, corporate dinners, lunches
events and so on) and when not working you’re likely dealing with a full to
brimming email inbox and the stress of a tonne of incomplete work. Result. Not
a change will you be able to match Buffett’s ability to invest his and his team’s
time.
o Perhaps you’re retired or by some other chance you also have more time than a
stressed executive. Will you be able to match Buffett’s say 50 hours per week of
reading and research. Whilst you may have some chance you’ll know that you
don’t in all likelihood spend hours per day on systematically researching
portfolio management. If you do spend 50 hours per week…then this newsletter
is not for you sorry.
Limited access to information.
o Where do you get your information from.
o Likely you’ll get some of it from services like Lincoln, newsletters, newspapers,
the internet and so on. This begs the question. How detailed, reliable and
timely is such information? How many times have you seen one announcement
and watched the share price of a company plummet 10%, 20%, 30% or even
more once it’s been released. How many times have you seen the share price
start to plummet before an announcement? You watch as a price that’s been
rising starts to drop steeply and then a day, a week or a month later the
catastrophic news is released?
Limited access to multiple perspectives
Trading halt, institutional and retail book build
related to purchase of quindells
Press release denying accounting practices were
subject to ASIC questions
SGH says it’s aware of quindell’s poor accounting
practices and took account of these during due diligence
SGH loses status of “star growth stock”. Quote from Lincoln
analyst SGH enters FY16 on the cusp of a mighty step up in size and scale. The
company has provided total group fee guidance including the Slater Gordon
Services (SGS) practice guiding in excess of $1,150 million, which is a significant
uplift from the reported revenue of $623.3 million. (SGH promises a good future
but financial strength declined to early warning)
SGH annual accounts issued….and they didn’t look all
bad
All sorts of announcements that things are going to be
ok…even though some thought that UK legal changes
would affect future earnings…SGH denied it.
SGH accounts to 30 June finally record
a loss of over 1billion…..Aaarrggghhh
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
o As we mentioned above whilst Buffett has a close partner and probably a team
of researchers (plus a network of highly trained and experienced investors,
bankers, lawyers and so on)….well you and I don’t. We may have a couple of
friends who we talk things through with…none of them likely to be superbly well
trained and experienced.
o Whilst Buffett and his team can consider an investment, all of the likely current
and future competitors, substitutes, the current and likely future legal
environment, suppliers current and future powers and conduct an evaluation of
management. They can also then look at an investment from many of those
perspectives. Can you feel confident that you’ve done just that? I know I can’t, I
simply don’t have the firepower and nor does my investor network.
Limited investment skills.
o Whilst Buffett has worked in the investment game for probably over 50 years
and during that time spent perhaps 125,000 hours, studying about, thinking
about, learning about, managing etc in relation to investments most of us have
not. In fact even if we lived for another 50 years we are unlikely to match
Buffett’s experience, let alone putting him and his team together.
o So if we take it for granted that Buffett is approaching 10 out of 10 for
investment skills where would you rank yourselves. I can propose an answer. A
recent survey of about 20 experienced stock doctor users found that they
ranked themselves 3/5 (or lets say 6 out of 10) for investment skills.
o I suspect that investment skills are a bit like golf.
To get from zero (never played golf before) to say 3 out of 10 (I can hit
the ball most times off the tee) might take say 2 hours of lessons.
To get from 4 out of 10 to say 7 out of 10 (handicap of say 18) might
take a 2 or 3 months of practicing with lessons.
To get from 7 out of 10 to say 9 out of 10 (handicap of say 8) might take
2 to 3 years with practice and lessons.
To get from 9.0 to 9.5 out of 10 (handicap of say 3) might take 10 years
of multiple times per week practice plus natural skills.
To get from 9.5 out of 10 to 10 out of ten probably takes a lifetime
dedicated to golf, plus natural skills, plus access to good coaches and
more. (ie at this level you’ll be able to regularly beat par and mix it at
the pro level.)
o So how much do you put in towards learning investment skills. How much time,
how much energy, how much dedication. Do you learn from the best coaches.
Do you hang out with people who are better than you are. Do you have
mentors. How many books have you read and learned from. How highly do you
really rate your skills. I thought so…most of us have little chance of learning all
the required skills.
Conclusion?
For me the big question is, “can I profitably follow a purely fundamental investment methodology?”
Personally I found the answer to be no!. I spent 20 years reading about stocks trying to pick those
with good fundamentals. I used all sorts of information sources including eventually Lincoln
indicators and generally found that whilst I bought companies that seemed to have good
fundamentals, all too often I ended up selling them after they’d declined by 40%, 50%, 60% or
sometimes even more.
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
The buy and hold forever strategy didn’t seem to work for me. All too often the stock with good
fundamentals eventually developed massive problems or the market changed or the laws changed
or something else changed and the stock suffered. All too often if a stock went down…I’d buy more.
If you need an example then perhaps WOW is a good example of mine. This was a good stock with
great numbers, a large and growing share of the market, good management etc etc. Then what
happened?
Did you follow a buy and hold forever because of good fundamentals. How has it worked out for
you? Honestly how has it worked?. If you were like me it didn’t work. And this then brings the
quote from Einstein on the definition of insanity being “doing the same thing over and over and
expecting a different result. In other words there’s no point in my applying Buffet’s buy and hold
strategy and expecting outsized returns in the future.
On the topic of “Wisdom of Crowds”
The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom
Shapes Business, Economies, Societies and Nations, published in 2004, is a book written by James
Surowiecki and here is a quote, but first is a thumbnail summary
Thumbnail summary. If you collect a diverse range of decisions from independently acting
individuals, then the collective decision is likely to be very good and probably better than most
individuals or experts. Here’s the story
“One day in the fall of 1906, the British scientist Francis Galton left his home in the town of
Plymouth and headed for a country fair. Galton was eighty-five years old and beginning to
feel his age, but he was still brimming with the curiosity that had won him renown—and
notoriety—for his work on statistics and the science of heredity. And on that particular day,
what Galton was curious about was livestock.
Galton’s destination was the annual West of England Fat Stock and Poultry Exhibition, a
regional fair where the local farmers and townspeople gathered to appraise the quality of
each other’s cattle, sheep, chickens, horses, and pigs. Wandering through rows of stalls
examining workhorses and prize hogs may seem to have been a strange way for a scientist
(especially an elderly one) to spend an afternoon, but there was a certain logic to it. Galton
was a man obsessed with two things: the measurement of physical and mental qualities,
and breeding. And what, after all, is a livestock show but a big showcase for the effects of
good and bad breeding?
Breeding mattered to Galton because he believed that only a very few people had the
characteristics necessary to keep societies healthy. He had devoted much of his career to
measuring those characteristics, in fact, in order to prove that the vast majority of people
did not have them. At the International Exhibition of 1884 in London, for instance, he set up
an “Anthropometric Laboratory,” where he used devices of his own making to test
exhibition-goers on, among other things, their “Keenness of Sight and of Hearing, Colour
Sense, Judgment of Eye, [and] Reaction Time.” His experiments left him with little faith in
the intelligence of the average person, “the stupidity and wrong-headedness of many men
and women being so great as to be scarcely credible.” Only if power and control stayed in
the hands of the select, well-bred few, Galton believed, could a society remain healthy and
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 strong.
As he walked through the exhibition that day, Galton came across a weight-judging
competition. A fat ox had been selected and placed on display, and members of a gathering
crowd were lining up to place wagers on the weight of the ox. (Or rather, they were placing
wagers on what the weight of the ox would be after it had been “slaughtered and dressed.”)
For sixpence, you could buy a stamped and numbered ticket, where you filled in your
name, your address, and your estimate. The best guesses would receive prizes.
Eight hundred people tried their luck. They were a diverse lot. Many of them were butchers
and farmers, who were presumably expert at judging the weight of livestock, but there
were also quite a few people who had, as it were, no insider knowledge of cattle. “Many
non-experts competed,” Galton wrote later in the scientific journal Nature, “like those clerks
and others who have no expert knowledge of horses, but who bet on races, guided by
newspapers, friends, and their own fancies.” The analogy to a democracy, in which people
of radically different abilities and interests each get one vote, had suggested itself to Galton
immediately. “The average competitor was probably as well fitted for making a just
estimate of the dressed weight of the ox, as an average voter is of judging the merits of
most political issues on which he votes,” he wrote.
Galton was interested in figuring out what the “average voter” was capable of because he
wanted to prove that the average voter was capable of very little. So he turned the
competition into an im-promptu experiment. When the contest was over and the prizes had
been awarded, Galton borrowed the tickets from the organizers and ran a series of
statistical tests on them. Galton arranged the guesses (which totaled 787 in all, after he had
to discard thirteen because they were illegible) in order from highest to lowest and graphed
them to see if they would form a bell curve. Then, among other things, he added all the
contestants’ estimates, and calculated the mean of the group’s guesses. That number
represented, you could say, the collective wisdom of the Plymouth crowd. If the crowd were
a single person, that was how much it would have guessed the ox weighed.
Galton undoubtedly thought that the average guess of the group would be way off the
mark. After all, mix a few very smart people with some mediocre people and a lot of dumb
people, and it seems likely you’d end up with a dumb answer. But Galton was wrong. The
crowd had guessed that the ox, after it had been slaughtered and dressed, would weigh
1,197 pounds. After it had been slaughtered and dressed, the ox weighed 1,198 pounds. In
other words, the crowd’s judgment was essentially perfect. Perhaps breeding did not mean
so much after all. Galton wrote later: “The result seems more creditable to the
trustworthiness of a democratic judgment than might have been expected.” That was, to
say the least, an understatement.”
Ummmm why is he quoting some weird book, what’s this got to do with portfolio management?
The stock market seems to me to be setting prices based on the individual decision making of
hundreds of thousands (or perhaps even millions) of investors. Some of these investors will view a
stock bullishly. Some will view a stock bearishly. The bulls will believe that a stock is under priced,
or fairly priced or even over priced…. and perhaps is likely to go up in future or at least stay the same
but pay an acceptable return. The Bears believe that a stock perhaps is over priced or is trending
down or that they can do better elsewhere. (maybe others just need some cash to pay their tax
debts for example)
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 Everyone can see the current price. Everyone can see historical prices. Everyone has access to some
pieces of information and use that information to make a judgement about whether the prices are
going up or going down in future.
The market is where all these people come together and set a price. If there are more buyers than
sellers…then the price trends up. If there are more sellers than buyers then the price trends down.
If everyone agrees on the price…then volumes dwindle and prices remain flat.
If there are way more buyers than sellers…then prices can increase possibly even rapidly. If there
are way more sellers than buyers…then prices can decrease…usually much more steeply than they
can increase.
Do markets sometimes get prices wrong? It seems so. Almost every day there are surprising surges
in prices and surprising drops in prices. Sometimes this happens when “seemingly” new information
is released to the market. Sometimes it happens for no apparent reason. Sometimes there are
more and more optimists appearing every day, driving prices higher and higher. This time it’s
different. Growth can continue forever. Everyone seems to be making money. If I don’t join in now
then I’ll miss out. There’s little chance I’ll be losing out. Good news means higher prices. Bad news
is ignored.
So prices drive higher and higher and higher until something changes somewhere, somehow, some
time…then all of a sudden the mood changes and everyone becomes a pessimist. Suddenly it seems
I have to get out now, but where have all the buyers gone. Prices drop sharply. People stop
spending. Bad news means lower prices. Good news is distrusted and down the prices go even
further. The world as we know it is going to end. Let’s put money into gold as inflation is going to
make us poor. And then one day prices seem cheap…perhaps it’s time to buy again.
Conclusion.
So can we trust the markets to properly value a stock. Well I’d say that the markets are made of
millions of decisions made rationally and emotionally and most of the time will reflect the push/pull
between those who are bears and those who are bulls. Yes they will be manipulated by those who
can control what sort of information is released and the timing of that. Yes they’ll sometimes be
emotional rather than rational. And yet the information is probably the best we can get. And we
should pay attention to it. As close as reasonably possible.
On the topic of decision making.
Key questions.
How can I make good decisions (knowing that I’m a human driven by faulty thinking and
emotions)?
What’s the value of stop losses?
What’s the other “hard bit about stop losses”?
What should I do now that I know that?
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Making good decisions is hard.
In the past when I analysed a stock with my Buffett hat on I’d carefully think about a stock’s position.
I looked at its financials, profit and loss, cash flows, balance sheet, ratios, dividend payouts and so
on. I’d read about its position in the market, what the management thought future prospects might
be. I’d also check what analysts thought (reading several broker reports and newsletters for
example). Eventually a light would turn green. “aha…I like this stock. I like this story. I’m going to
buy and hold this stock forever. I’m confident in my decision. I know I’m right” and so I’d buy
Then later the stock price began to drop. There was no new news…not material anyway. Nothing to
help me change my mind. I was sure I was right…it was the market that was wrong. So I’d hold. Or
perhaps I’d buy more (the price had dropped so it was a bargain right?). And then the price would
drop further. What now. Pain. No point in taking a loss…the price will turn up. I’m sure I’m right.
Keep going until eventually the news changed. Disaster. No point in taking the loss now might as
well hold on…the price is sure to trend up…don’t want to be stuck with a loss…don’t want to sell at a
low point do I? (is this familiar?)
Conclusion. Message to my brain. “Don’t believe that my decisions are right. Instead believe that I
made the best decision available to me based on
(a) information that I chose to pay attention to,
(b) other information that I chose to ignore,
(c) my emotional state at the time
(d) and my investing skills or lack thereof.
Be willing to change if (a) new information comes to my attention (b) my emotions change or (c) my
investing skills change.
What’s the value of a stop loss?
Ok so the price of my stock has dived. I spent a lot of time deciding to buy (and keep holding) that
stock and now it’s gone down. What should I do now. If I sell it…it might go back up (and I’d feel
pain). If I sell it I’ll be locking in my losses (and I’d feel pain). Perhaps I should hold a little longer?
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Conclusion.
Deciding when to sell is hard work. I need to overcome my emotions as my emotions will try to trick
me into holding on longer than is healthy for my bank account. I value losses 2x gains and my brain
does not like to lock in losses. I need another way. I need a system that will override my emotions.
I need to be disciplined. I need to recognise that I won’t like being disciplined…it’s just not human.
And that’s why the newsletter portfolio uses stop losses. I’m not saying that they’re perfect. I am
saying it helps with decision making.
I can also say that after reviewing many tens of stop loss sells over a long period of time I believe
that approx. 80% of stop loss decisions were right at the time. About 1/5th of sells were not good
decisions meaning the stock price rebounded after I sold. However 4/5ths seemed to be “right”
meaning that stock prices either stayed flat or declined after selling.
I think that in portfolio investing if I can get 80% of my decisions right then I’ll make a decent return
and I’ll be happy. (I’ll do my best to not be unhappy about the 20% I get wrong…sometimes the
prices go almost straight up…arrgghhh….I’ll just grit my teeth one those ones knowing that I’m just
being human)
If I’d sold out here…I would
have locked in my losses and
then missed out on the next big
gain!
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
What’s the other “hard bit about stop losses”?
Let’s look at this graph for DMP
In this case the stop loss at about $68 was about 12% below the peak. If I sold at the stop loss point
I’d be “down” 12% from a recent peak. Darnit…why hadn’t I sold earlier.
This is a pain point in using a stop loss. By the time it’s triggered I’ve already “lost” a large part of my
recent gains. It makes it harder to sell. Really. I don’t want to lock in a loss do I.
Conclusion.
I have to remind myself that about 80% of stop loss decisions are right. I collect all my sell decisions
and the tools I have quickly allow me to see if they were “right” or “wrong”. It gives me confidence
to stick with the system…and take the pain. Its ok I tell myself. It’s just being human
What should I do now that I know that?
1. I know that many of my decisions will be “bad” based on incomplete information,
untrustworthy emotions and lack of skill or persectives. So I won’t be wedded to them. I
won’t be superglued to those decisions. Instead I treat all of them like scientific hypotheses,
once I buy a stock based on that hypothesis the market will help me quickly weed out those
that are incorrect and hold onto those that seem to continue being correct.
2. Stop losses. I know that I’ll regret firing my stop losses about 20 or even 30% of the time
and yet I’ll be happy with 50%, 60% or perhaps 80% of my stop losses. Winner
3. I’ll use a system to help me overcome my emotions. And yet I’ll be flexible …I know my
system isn’t perfect and I’ll have to evolve it over time…hopefully continually testing it and
then improving it over time.
Price
peaked at
about $77
Stop loss
about $68
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
Bonus Charts:
In this section I’ll sometimes list a chart that catches my eye and provide a brief comment.
If you want a stock reviewed, perhaps email me and I might include it (no promises)
Chart Comment
CAR** Looks a lot like it’ll cross upwards perhaps event this week. Will it then give a solid rebound?
REA. Also looks like it might cross upwards…again perhaps even this week. Will a solid rebound follow?
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27
ANZ Has been rising solidly since about mid year 2016. Several other banks have also got similar patterns. Have you noticed this trend. R U onboard?
Parting comment
It’s generally tricky to observe the markets based on market prices at this time as so many buyers
and sellers are on holidays so volumes are low. If the wisdom of crowds do get prices right then the
size of the crowd has dropped dramatically
I wish you all happy holidays and happy new year. May 2017 be your best investing year ever. May
you learn more in 2017 than any year previously.
Warning. This newsletter is provided for your entertainment only, I’m not a financial adviser, I have not taken account of your objectives, financial situation or needs. You should therefore consider the appropriateness of any descriptions of my Newsletter and its newsletter portfolio in light of your objectives, financial situation and needs, before taking any actions.
All views and information expressed in this newsletter are not the views of Lincoln and or its directors, agents, representatives and employees.
I do invest and trade in shares, I’ll mark the ones that I own with (**)