The Great British Trade Off at 1: a thumping defeat for Humbug
Thumping win for Fagin (trading) as The Great British Trade Off (trading vs investing, £100,000 of their own money) reaches the end of Year 1 – now aggressively investing in funds Humbug (investing) has it all to do and fears he may never overhaul his trading partner
Sorry about the April Fool’s posting on the 1st; yeah I know it was a bit childish, but hey after the year I’ve had I needed a bit of light relief.
To business, first of all I want to offer MONSTER congratulations to Fagin on not only winning the Great British Trade Off (GBTO), but by beating me by such a wide margin. He’s turned in a brilliant performance this year and whilst my own efforts were patchy at best and very poor at worst, nevertheless he would have won no matter how well I might have done.
A stunning result. Well done him.
There’s no way a sensibly diversified investor, rather than a trader, can generate those kind of returns without taking the kind of stupid risks that can so easily blow up an account (i.e. betting a £1k a point on the Dow (DJI)) and given that I invest to be financially free and for my eventual retirement, that’s the last thing I would want to do.
The purpose of the GBTO was to establish, is trading more profitable than investing? And whilst one year isn’t a long enough period to be certain, my guess is that even after another few years the answer is still going to be trading. Albeit trading as Fagin does it requires a great deal of hard work, whereas, by contrast, the way I now invest only takes about one hour a week. So we are comparing what is almost a full time job to something that takes no time at all.
‘He’s turned in a brilliant performance this year’
But regardless of that, with the kind of results Fagin’s been banging in month after month last year and so far this, if he keeps that up in the future the writing’s on the wall me thinks, trading is very likely to be more profitable than investing.
So if that is, or is becoming my view, and given that I’m trying to increase my wealth, why do I only want to be an investor, if trading IS likely to be the better vehicle to make money? The answer is complicated, after a health scare last year that proved to be nothing, I had a serious rethink about everything I was doing and how much time and effort it was taking me to do it.
There’s an old gag that the only free lunch in the stock market is diversification, it’s also very true that equity markets are volatile. Now that volatility can be a hugely powerful engine for profit if its judged correctly as Fagin demonstrated last year, but it can also shred your money if you get the wrong side of it, or your just plain unlucky.
For me, lunchtimes haven’t been as good since I stopped drinking, but even so I decided to take the free lunch that diversification offers and the bulk of my stock market monies from now on will only be invested in funds, thus spreading my risks far and wide, or sitting in cash in times of danger. Fagin will argue differently about the risk that is inherent in taking large positions in single stocks but I believe that by spreading risk all over the place on the one hand I’m unlikely to lose all my capital with a flash and a bang, the trade off is that I’m unlikely to generate the returns he does when his system is working well. But nought is for nought as they say.
‘I decided to take the free lunch that diversification offers’
Even so I’m looking forward to the next round of our competition starting in a couple of day’s time. I must say I learnt a lot of hard and expensive lessons from last year’s GBTO and am quietly hoping that that experience will stand me in good stead going forward and whilst I doubt I’ll win next year’s contest, I’ll be very disappointed if I don’t make a decent return for myself in what must surely be close to the end of the current bull market.
Let’s look at some of those hard and expensive lessons that I trust I’ve learnt. By nature I’m a risk taker and a trader, so although I wanted to become an investor to give myself a calmer easier life, to begin with I found the different approach I needed to adopt was almost alien. My four biggest mistakes were:
Not catching momentum
I’m reasonably good at spotting short term upward momentum in individual shares but I found translating that ability into the longer time frame I needed to make the bigger but slower generated profits all but impossible. Taking a view on the likely course of events over ten days is much easier than taking the view over a number of months or years.
Putting my stops in the wrong place
I believe that avoiding a capital loss is equally important for both a trader and an investor, but for any given share the stops need to be in very different places depending on your likely holding period. Early on in the GBTO my stops were too tight and I wasn’t allowing my positions enough room to ebb and flow, all too often I was tipped out of a trade that subsequently came good, then I did something equally stupid and made them too loose running up needless large loss’s as a consequence.
Failing to do effective fundamental analysis
Companies will always put a spin on what they’re doing and will always present their figures in the way that suits them best.
Paul Scott of Stockopedia, Robbie Burns aka The Naked Trader and Fagin and my friendsTeresa Day and the Wheelie Dealer are all world class at drilling down into sets of accounts and sorting the good from the bad from the fraudulent.
There are no two ways about it, this is something I’m crap at and doing it makes me lose the will to live anyway. I tried hard to invest in strong companies with good prospects that were unlikely to suddenly disappoint the market and that were displaying worthwhile medium term momentum, very difficult I found. I had some successes but not enough of them.
Not sticking to one proven system and also making things too complicated
I wasn’t consistent enough in my approach and I chopped and changed my ideas too often. I started the competition using the weekly signals generated by the system that Fagin and I used, allied to my own (inept) fundamental analysis as well as trying to balance and to some extent hedge the various positions, I wasn’t getting good results and started overriding my own rules. I wrote at the time that I fetched up with a camel when I’d been trying to design a horse.
The whole thing was way too complicated, too clever by half and just didn’t work for me.
‘In times of either crisis or danger my traders instincts have served me well’
But here’s the thing, in-spite of making numerous errors of judgement, sometimes investing in the wrong companies at the wrong time, changing systems as I went along, twice being hit with a profits warning and a couple of times just being unlucky nevertheless one year on, even after a very bad March the bulk of my capital is still intact.
In times of either crisis or danger my traders instincts have served me well; let’s hope my alter ego continues to be my guardian angel for the rest of my investing life.
It could have been so much worse, just suppose and imagine how much fun it could be watching Bitcoin run up to $19k before Christmas and deciding this is how to make your fortune as it goes to $50k.
You’ve not got any real money but you’ve got £20k on a subprime credit card at 29% APR and a spread betting account. The £600 or so in monthly fees and interest that the credit card is costing you is the least of your worries, the grown up problem is meeting the spread betting company in court to explain how you’re going to pay them the £200k plus costs that you owe them as instead of hitting $50k Bitcoin slumped to $8k.
Think I’m joking? Think again, this is the sort of scenario some guys have faced, having literally lost everything betting wildly on Bitcoin and indeed not just Bitcoin.
There are some very sad stories out there, google ‘Bitcoin loss’s’ you’ll see what I mean. As a side issue, if you want a great read about some wild gambling, there’s an old book from fifteen years ago by Jonathan Maitland called ‘how to make your million from the internet (the diary of a share trader)’, recounting how he re-mortgaged his house for £50k and tried to turn that money into a million pounds in a year by investing (if that’s the word) in ‘internet companies’ at the time of the dot com boom and bust.
A long time ago I worked on the same radio station as Jonathan, he’s a great broadcaster and a talented and very funny man; I particularly commend the chapter where he discovers spread betting to you, I began to cry with laughter as I read it. Jonathan had the nous as well as the media and market connections to make up the monies he lost spread betting by other means, so all ended up well in the end. But it was one hell of a ride while it lasted. It’s both a great read and a salutary lesson at the same time.
Back to me, the first two thirds of the GBTO were not good, but my trader’s nous kept my losses under strict control enabling me to fight another day. Since October/November I’m solely invested in funds (with a safety position of cash), have an automated system for buying holding and selling in place that I did ten years of back testing on and follow without deviation and in-spite of the flash crash of February and the most recent decline things could be a lot worse, although the last month has been pretty grim.
‘March has been my worst month of the year by a wide margin’
March has been my worst month of the year by a wide margin, to put it in perspective, in round figures my loss for the month isn’t far short of my loss for the previous eleven months put together.
My system looks to put me into trends, it back tests well but it’s vulnerable to being whip-sawed in and out both at the end of an old trend and the possible beginning of a new one.
Except for my Japanese holdings everything else fell back in value quite sharply, although only four of them have so far fallen down through my stop loss. The four I lost were the Fidelity China Consumer Fund for a loss of £308.87, the Fundsmith Equity Fund for a loss of £384.36, the Goldman Sachs BRIC’s Equity Fund for a loss of £271.30 and the JPM Emerging Markets Fund for a loss of £263.16.
I finish both the month and the year down -£7708. Going forward, my head’s in a calm good place and I’m confident my system will produce profits or keep me out of trouble once clear market direction comes back.
Finally Fagin and I have launched our own website, do check it out if you’d like to at www.seekingfinancialindependence.com
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