So, Just Average Is Best…

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averaging, fear and greed, investment checklists, investment process, investment theme, noise, risk vs. reward, stock picking, technical analysis, worship the spreadsheet

It’s New Year’s Eve…and in the end, it’s been a pretty tough & frustrating year for many investors out there. [‘Less you’re Irish & stuck close to home – just look at this friggin’ chart!] And while the holiday season’s all about celebrating the year gone by & ahead, it can be tough (as the booze kicks in) not to get a little disheartened and experience some real doubt about your portfolio & your stock-picking prowess.

And the financial media’s no help – the talking heads & market strategists chatter about the biggest winners of the past year, and opine on the stocks & trends to focus on in 2016. How on earth are they be so confident & so prescient? It’s simple…’cos that’s how they get paid & promoted! Just like CEOs, just like politicians, just like your boss, the big bucks are paid almost inevitably to the big swinging dick. Not the fidgety little guy in the corner, analysing stacks of data & second-guessing himself to death. Truth is, they don’t need to be right, that’s irrelevant. Because they’re looking to attract attention, earn fees, increase AUM, etc…and ultimately, confidence sells.

Trouble is, you need to be right.

But you don’t feel confident, like they do. And so the dance continues… They go on TV, and dish out all the confident narrative & commentary you crave. Except the only obvious market truism (‘stocks go up, over time…’) isn’t a good soundbite. Instead, they analyse monthly data points. And speculate about a possible Asian pandemic. And worry over an escalating Middle East war. And hyperventilate about a junk bond-induced economic melt-down. Or a terrorist attack, or maybe even an assassination, if they get lucky. And so on, ad infinitum.

But almost inevitably, it’s all just noise…

Welcome to the Floating World…

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bubbles, bullish, cash allocation, coin clipping, fear and greed, floating world, inflation, negative yields, QE, quantitative easing, stock valuation

I regularly write about fear & greed here. And I often worry about the tentative & fragile recovery we’re hoping for/seeing in the developed economies (led obviously by the US), and whether it’s built on a foundation of sand…or, more correctly, of printed money. I also worry about markets’ headline valuation ratios, which keep marching higher, and question if they’re priced to reflect a growth renaissance, or simply fool’s gold. And sometimes I talk just as much about preserving wealth, as I do about increasing wealth. Most of all, I incessantly interrogate the diversity & robustness of my portfolio, and cling to the comfort its deep value & special situation stocks offer – I demand they help me sleep soundly each night…

Lots of investors deal with this kind of free-floating market anxiety by keeping a healthy slug of cash in their portfolios – but my current cash allocation is actually minimal (& this isn’t a new phenomenon). Which starkly highlights an inherent contradiction of my portfolio:

If I worry so much, how come my entire portfolio’s invested in stocks..?!

Now, I could offer a prior argument – as I usually don’t consider cash a necessary component of a portfolio, with (low risk) event-driven investments generally serving as an acceptable & more attractive substitute. But that would just be a red herring, as I haven’t actually maintained a big allocation to such a cash alternative either. In reality, the answer’s much simpler…as I’ve often said (about management):

Watch what they do, not what they say!

Which is obviously an exhortation that can just as usefully be applied self-critically… OK yeah, I worry, so I obviously rationalise & anaesthetise these anxieties accordingly – but in reality, my fully-invested portfolio is a resounding confirmation of my past, present & continuing bullish stance on the markets. Hopefully, this doesn’t come as a surprise to you – despite the concerns I express regularly, I believe this bullishness has been a predominant & underlying theme of the blog all along.

[This Jul-2014 post is perhaps the best & most recent expression of my underlying bullishness – it just might be worth a read in its entirety].

How About Some Market Perspective..?

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bear market, business media, compounders, de-leveraging, fear and greed, growth investing, hindsight, investment checklists, over-confidence, value investing

Go on, admit it…at this very moment, you’re glancing at a business anchor who’s busy losing their mind on your telly. Yes, left, right & centre – lots of markets are correcting. Or should I say collapsing, tanking, plummeting, nose-diving, slumping, free-falling, or simply never ever recovering ever..! And if you can look past the hyperbole, some are unfortunately entering actual bear market territory. Kinda gets the blood pumping, eh? You really should switch off the TV, and just go meditate (or run a marathon) instead! It definitely could save you a few quid & a few stupid decisions. But we’re all too human – and now we’re addicted to this 24/7 diet of escalated corporate & market drama, so it’s become easier than ever for the media to stoke fear (and greed) in our hearts.

Traditionally, a 10% market reversal was defined as a correction, while a bear market was at least a 20% decline. But now the business media’s upped the ante, unilaterally adopting something like 3% & 10% as the new thresholds (respectively). [And I suspect politicians & central banks aren’t far behind]. Look at them now – glued to their desks, fuelled on Red Bull, and kitted out with adult diapers (think about it…live TV, energy drinks & too much excitement?!), they can barely contain their glee at this renewed market turmoil. Which is, of course, sheer madness…

But here we are, lapping it up – feeling so very serious about the market yet again. Because a reversal invariably hits us out of the blue, with the reasons why only trailing after, in its wake… [How many talking heads highlighted a global growth slow-down two months ago?! But now it’s the glib explanation you’re hearing on every business channel]. I mean, we began September with so much promise?! Personally (& somewhat counter-intuitively), I was fairly bullish myself – and I still think I read the charts correctly as being quite promising (though I definitely wasn’t keen on a 2,000+ S&P). Unfortunately, the price action & the charts never quite followed through, and now September & October are living up to their more usual grim reputation.

So, what am I going to tell you here..?

Investing Haiku

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abstract art, Basho, existentialism, fear and greed, Guy Spier, haiku, investing, Jean-Paul Sartre, Samuel Beckett, The Checklist Manifesto, The Education of a Value Investor

So, I was reading Basho the other day – as you do…

He is, of course, the most famous of the four great haiku masters. Haiku were originally hokku, the opening stanzas of collaborative linked verse poems (haikai no renga, or renku), which gradually evolved into independent poems – in the late 19th century, Shiki renamed them haiku. They have 3 main characteristics:

– Their essence is ‘cutting’ (kiru) – the juxtaposition of two images, separated by a kireji, a Japanese form of verbal punctuation. [There’s no specific English equivalent – a caesura is functionally similar, while Western haiku writers usually employ a dash or ellipsis]. This two-part structure, with the kireji prompting a mental leap, ideally links and contrasts two distinct (but related) images or ideas.

– They consist of 17 on, arranged in three phrases of 5, 7, 5 on. On are (uniformly short) Japanese sounds, which Western writers interpret as syllables. Since English syllables are generally longer & more varied, 12 syllables are about equivalent. Despite this, many English haiku writers adhere to a traditional 5, 7, 5 syllable format, while using three lines to reflect the three phrases of a haiku.

– They include a kigo. Again, this doesn’t translate easily – Western haiku writers often focus on nature, but won’t necessarily include a specific seasonal reference. Ultimately, the intent is to use objective imagery (show, don’t tell) to illuminate a feeling, a scene, or even the human condition…

Following in the footsteps of Ezra Pound, the mad old fascist himself, I decided to tackle some haiku – in English obviously, but otherwise in (fairly) traditional format. And just to complicate matters, I also chose to focus on investing as an underlying theme – arguably, just another reflection on the human condition:

Mea Culpa (II)…

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blogging, diversification, fear and greed, Margin of Safety, portfolio allocation, size effect, value investing, Warren Buffett

Continued from here.

vii) ‘Sorry, I don’t have any sure-fire winners’

Do I feel confident about my portfolio? Yes, I do…

But with an important caveat:  I feel long-term confident. I’d even dare to say I expect to out-perform my benchmark indices. [Well, another caveat: That’s really not my objective – I’m more focused on absolute returns & generally improving my risk-reward ratio].

But do I feel confident about my individual stock picks? No, not necessarily…

Unfortunately, this is a reality we all face as investors. No matter how diligent your research, no matter how rigorous your quantitative & qualitative analysis – all too often, individual stocks feel just like a roll of the dice. Most obviously, the insidious effects of fear & greed are to blame – but no matter how hard you stamp these out, you’re still subject to the tender mercies of Lady Luck. And there’s no escaping her. [Though it helps if she looks like this…] As any good boxer will tell you:  If you box, you will get hit… The sooner you resign  yourself to rolling with the punches, the better – but don’t forget, the best boxer (usually) wins in the end.

And over time, investing skill & experience will inevitably beat luck, while diversification is also your ultimate secret weapon. Sure, I confirm my portfolio allocation for each stock I write-up – and that’s a great indicator of my confidence level – but the real lesson I preach is diversification, not concentration. Imposing relatively mechanical limits within your portfolio (see Well, Are You The Right Size?) is a great way to remove emotion from the equation. [Over the years, I’ve homed in on 3-7.5% as an optimal allocation for a single stock, in a portfolio of 15-20 (core) holdings]. As any smart investor will tell you, they’re usually confounded by their portfolio winners & losers in any one performance period. And trying to predict (or buy) just a few top picks is a fool’s game. So, no matter how confident you are, you still need to spread your bets…

viii) ‘I’m sorry it’s a micro-cap, and you hate the price & spread’

Well, really, I’m not…

Cheap & Interesting!

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blind stock valuation, cheap and interesting, fear and greed, growth investing, growth vs. value, investment writeup, reading, stock ideas, value investing, worship the spreadsheet

There’s one category of email I receive ’bout every second day. A typical example will thank me for the blog (yes, always good to hear!), stress they’re a regular reader, often cite a share we own in common, but then we reach the real meat – usually a somewhat impassioned plea:

Please tell me…where & how exactly do you come up with your ideas?!

All appear to be from genuine readers & investors – I certainly don’t think anybody expects some kind of get-rich-quick answer. [Though it gives a taste of how such a desire is so regularly exploited by the unethical & downright criminal]. I suspect this plea reflects a pretty common frustration for investors – where & how do I find new ideas…and how do I know if they’re actually bloody good ideas? Of course, I’ve no magic short-cut to offer here. My definitive answer’s still:

Read, read, read & then read some more…

I covered this ground in ‘Why I Read…’ (Parts I, II, & III – probably my most popular blog series ever). [‘Why I Write…’ may be a useful companion piece]. Looking back, I think these lines (from my final post) nicely sum up the challenge & benefits of reading:

‘I’m talking about territory where the greatest opportunities, and the greatest investors & traders, reside….For them, you can probably chalk it up to pure innate talent. For the rest of us, I think huge swathes of reading is the inevitable toll you pay to get there – however you go about it:

But reading annual reports will give you the figures. Reading non-fiction gives you the facts (& the right context). And most importantly, reading fiction allows you to recognize the fear & greed in yourself (& others), and enables you to see & imagine the world very differently.‘

2013 – A Game of Two Halves

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AIM stocks, Alternative Asset Opportunities, Asta Funding, benchmarking, correlation, fear and greed, hedge funds, home bias investing, KWG Kommunale Wohnen, Petroneft Resources, portfolio allocation, portfolio performance, Richland Resources, Saga Furs, Tetragon Financial Group, Titanium Asset Management, US Oil & Gas

Yup, it’s that time of year again… [For reference, here’s my mid-year 2013 performance report, plus my FY-2012 report]. Right off the bat, I have to admit assessing annual performance isn’t my most favourite of activities (as I’ll explain). It also reminds me how easily our (personal) fear & greed equation can magically transform itself as we finish an old year & head into a new one. While most traders tend to start a new year cautiously, investors often set out brimming with over-confidence – which can prove pretty hazardous…

The UK’s AIM market, for example, has enjoyed significantly positive returns in 14 of its last 18 Januaries. This annual love-fest is even more remarkable when you realize the AIM index has declined 17% since its 1995 inception. [Growth and value investors, take note!] My favourite muppets provide a more ludicrous example: Shareholders of US Oil & Gas (USOP:G4) (I’m presuming no new suckers are buying at this point) hailed the new year by immediately buying/running up the price 60% from its yr-end close! Sure, hope springs eternal…but with most USOP investors having lost 95%+ of their investment to date, this kind of new year exuberance is wildly irrational.

Thinking about & tracking your stocks (& portfolio) on some kind of calendar basis is yet another fixated version of tracking individual stock gains/losses. And that’s how fear & greed grabs hold & encourages you to play the ‘if…‘ game. I’ve already recommended you Forget Your Purchase Price – now I recommend forgetting your Year-to-Date Gains. Free yourself of those deadly anchors, and you’ll be forced instead to look afresh at your holdings every single day. For each stock, that’s an exercise in assessing upside potential (i.e. current share price vs. your latest estimate of intrinsic value), and then weighing that reward against the level & range of risk(s) involved. Which boils down to one simple question for each of your portfolio holdings:  Should I buy, sell or hold this stock today? And your cumulative or calendar gains/losses on a stock are irrelevant to that question – no matter how small, large or goddamn painful they might be…

Why I Read (Part III)…

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activist investors, autodidactism, books, Bruce Kovner, consensus, contrarianism, fear and greed, Howard Marks, investing, Isaiah Berlin, latticework of mental models, literature, Magic Eye, mosaic theory, Nosce Te Ipsum, reading, Warren Buffett

OK, back in June & July, I covered two key benefits of reading:

Knowledge, Experience & Inspiration – a constant & wide-ranging diet of non-fiction reading’s essential for any investor, and something you’ll find all the great investors practice & recommend. 

Nosce Te Ipsum – I believe reading literature’s equally important, it’s one of the few ways you can truly know thyself (& other people). And painful self-awareness & examination offer the best hope of avoiding the potentially devastating impact of fear & greed on your portfolio.

It’s been a long time coming – let’s tackle the final benefit of reading, which I call:  Magic Eye. It’s definitely the most exciting – I guess I’d classify it as offensive, versus the rather defensive nature of the other benefits. But some context would be useful – let’s first talk a little about how I actually read:

Ever since I was a kid, I’ve always found it incredible how the entire world (even multiple worlds) can be encapsulated in a single book. And there’s almost never-ending mountains of them, just waiting to be discovered! In fact, they really are never-ending: In the UK, for example, 150,000 new titles are published each year! Faced with those kinds of numbers, I’ve always felt an overwhelming sense of urgency – how can I ever bloody read quickly & widely enough to ever make a dent in such a mountain?!

Fear & Greed (II)

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charting, diversification, Expected Value, falling knives, fear and greed, intrinsic value, investment checklists, momentum, portfolio allocation, position limits, stop losses, sunk costs, technical analysis, trading, value investing, value-trap

Continued from here.

I labelled as tricks some of the techniques I’m writing about here – which might have put off some readers. But surely you’ll try anything that might help combat the impact of fear & greed in your investing? Reconsidering, I’d now argue the five techniques I’ve already documented are actually essential tool-kit for any serious investor. Have another look, and I hope you’ll agree – to put it another way, it would be hard to argue your investing would actually improve if you omitted any of the following:

Learn To Love The Black Box:  Document all your investments, and analyze & learn from your mistakes.

Checklist It:  Develop checklist(s) for every stage of your investment process.

Valuation Orgy:  Value your investments using as many different valuation techniques & metrics as possible.

Watch What They Do, Not What They Say:  Focus on facts, figures & performance, not just the ‘story’.

Well, Are You The Right Size?:  Set pre-defined position limits within your portfolio.

However, a majority of my remaining techniques do perhaps deserve to be called tricks. Which means they may, or may not, suit your investing style & personality. Trouble is, how will you ever know if they’d work for you, unless you give ’em a whirl..?! Or figure out how they’re best adapted to your particular circumstances? Right, let’s soldier on:

vi) Learn Some Bloody Voodoo

Fear & Greed (I)

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biofeedback, black box, fear and greed, home bias investing, investment checklists, literature, Nudge, portfolio allocation, The Checklist Manifesto, trading, value investing, value-trap

Great traders don’t necessarily have to be that smart, but mastery of their emotions – specifically, fear & greed – is absolutely essential. The same is equally true of great investors, except it just happens in slow(er) motion… But most people end up choosing investing over trading. Which is pretty fortunate – the trading gods delight in seeing meticulous logic & analysis abruptly savaged by fear & greed.

Many would-be traders never recognize this, and fail accordingly. Others grasp it, but remain trapped in a never-ending struggle. Only the brave few ever learn to fully master these emotions. Investing, on the other hand, seduces you with the luxury of time & positive long-term equity market trends. Which often makes it far more difficult to recognize the corrosive impact of fear & greed on your portfolio returns. The fact many of us shy away from any kind of critical self-examination doesn’t help either. But there are two solutions available to us:

The first is reading. In my last post, I argued for an important alternative to most investors’ non-fiction diet – literature, and lots of it. The great novels, plays & poetry are windows into the hearts & minds of other people – and in turn, yourself. Learning to actually recognize emotions like fear & greed in yourself, and their potentially disastrous impact on your investing, is the first & likely most difficult part of the battle you face.

Now, I didn’t cover the second solution – how to actually conquer those emotions. Because unfortunately, when it comes to that challenge, we are all truly alone…