The importance of being idle: Part 2 – Patience and the DIY investor

 

 

 

 

In Part 1 I was partly going on about where my own reserves of Patience come from and I am pretty sure being a paraplegic wheelchair user forces immense patience upon me.

 

I wasn’t going to say any more on the subject but if you follow me on the tweets then you might have noticed that I have been doing some sanding and painting work on my BMW Z3 to sort out some rusty aluminium on the leading edge of the hood – anyway, I have to tell you this because it’s a great example of where patience is drummed into me and also it is ironically quite funny !! (in a Sod’s Law kind of manner).

Earlier this afternoon I decided to try and get the job finished and it was really a case of just touching up some bits where I had not covered all the red primer stuff and there were some bits I had missed where I needed to put the primer on and let it dry and then do the topcoat.

Anyway, it should have been a fairly straightforward thing despite the extremely hot weather but it was annoyingly complicated when I went out to the car and picked up the roll of masking tape only to drop it and see it roll under my other car!

Of course, it can’t just roll a little way under so I can easily reach down and get it – oh, no, it has to roll to exactly the half way point under my Seat Leon so there is just no way I can get it. Why can it never just roll the whole way underneath the car so it pops out the other side? So infuriating!

I nearly exploded in utter intense frustration but I did the classic thing of checking myself and taking some deep dreaths and then focusing my mind on how I could fix the problem. It was extremely annoying but the simple solution was to go back to my house and get a long stick thing (I think in a former life it was a pea stick) and use that to sweep under the car and knock the darned masking tape out from underneath.

But it did get me thinking. The lesson from this is that some things are simply beyond our control and there is no point getting upset and emotional about it.

Accept that the problem has occurred (take some deep breaths if you need to but above all keep your calm), and then focus your brain power on how to fix the problem. It is irritating and frustrating but getting all emotional doesn’t help at all and if you apply this thinking to how you approach the markets it will definitely be a much more positive and helpful frame of mind.

This kind of thinking helps build resilience and persistence – two character attributes which will really help with investing and trading. Never give up and have a stubborn belligerence to beat the markets at their own often immensely perverse game.

Lots of things happen in the markets which are entirely beyond your control – if you can’t shrug your shoulders and put your effort into seeing how to minimise or eradicate the problem or avoid it getting worse, then perhaps you need a rethink on your approach.

For example, if a stock you have is falling and it is grating on your nerves, there is no point panicking and doing something rash and stupid.

Take your time, go back to basics, why did you buy the stock in the first place? Does it still represent value on the criteria that you use? Is it just a natural pullback in a lazy summer market (probably!).

If you cannot take such moves in your stride and just shrug them off then perhaps you need a more rules-based system such as using stoplosses; using such an approach makes the decision to sell automatic and removes the emotion – you set a stoploss level when opening the position and if it hits your stoploss you should just sell it with no emotion and take the loss and move on.

If you do not use stoplosses and get all stressed out and worried on even small moves downwards on your stocks, then perhaps your portfolio is too concentrated and you need to have more positions so that a weak stock does not impact your overall returns too much. You will sleep a lot better.

And another highly important concept is to remember the clear distinction between price and value – keep your brain focused on the latter and let the market throw the price around however the hell it likes but just use such price moves as an opportunity to buy more or sell some or whatever you want to do – but don’t let price moves affect your emotions and lead you into doing dumb things – see my blog about ‘Price Vs. Value’ 

 

Particular Instances where a High Level of Patience is a big help

 

When you boil it all down, Patience really comes into its own for 2 particular types of Decisions:

 

• Exiting or Selling or Top-Chopping an Existing Stock Holding – this is most clearly an area where I have put a lot of thought and focus on being more patient and less eager to sell a great quality stock. I have no doubt that probably one of my biggest errors of the past has been tos ell a great stock far too early – this is something I have put enormous mental power into resolving and I am without doubt getting better at letting my winners run. I find that the ‘urge to sell’ sometimes becomes utterly overwhelming however much I try to suppress it but the solution I have found (I guess this is a ‘Ulysses Pact’) is to only allow myself to topslice a position rather than Sell the whole lot. This seems to do the trick and once I have chopped a bit off, the unbearable obsession with trying to sell the stock goes away from my ridiculous caveman brain (to give a practical example of this, I actually topchopped my Fevertree (FEVR) holding earlier this week – see my ‘Trades‘ page). Of course on some occasions I will be selling a position entirely but I think this should be a rare thing and the generally better approach is to topchop and ‘scale-out’ of a stock holding (‘scale-in and scale-out’) and in practice this is most definitely something I have been doing. This is also even more crucial if you have a large holding in a small market cap stock which has low liquidity – often it is simply impossible to sell such stocks in any size and most investors underestimate this limitation (be particularly aware of this if you only hold a few small stocks but in large positions – it becomes even more of a problem when markets turn ugly which may well be when you really want to sell).

• However, there is an exception perhaps to my careful and thoughtful ‘scaling-out’ tactic and that is around how to deal with profit warnings. This is something that I have been thinking about a lot lately and I have yet to really fall down on one side of the argument or the other. It strikes me that perhaps my performance would improve if I adopted a global policy of ‘sell instantly on a profit warning’ – I think this could be an excellent rule and I know many people do just this. I am in two minds about this and have not really decided yet but a bit like the proverbial stoplosses, I take the view at the moment that if I was to go though a sustained period where I simply was not making money then this approach of no-tolerance to profit warnings might be something I could introduce as a rule to help turn things around. Part of my reservation stems from the fact that quite often a stock will put out a profit warning and straightaway it will drop 30% and at that point it might actually be better as a buy than a sell. There is considerable evidence that cutting on a profit warning works best because stocks tend to keep drifting lower after a profit warning and because profit warnings often“come in threes” – but I counter this with my experience of making some of my biggest gains after stocks have done a warning. Particular examples include Boohoo.com (BOO) and Fiberweb (FWEB) a few years ago which made me something daft like 300% and recently I have done really well on Devro (DVO), St Ives (SIV), Mpac (MPAC), Paysafe (PAYS) (this one was taken over) – and the trick is to buy more as the recovery starts to kick in but you must never average down before this point. I am not sure there is any particular answer to this conundrum – I suspect it is better for investors to make a rule and to stick by that – if you are going to ‘sell on the first profit warning’ then you must follow that rule with no exceptions.

• The urge to sell or topslice should not be something that suddenly takes your fancy – it should not be a whim or a snap-decision – you should be thinking ahead and planning your exit of a position well in advance. Quite often I will be looking at my ShareScope charts late at night and I will look at one of my stocks that has been doing really well and keeps going up and I will put a text box note to myself on the chart which might say “sell a third of position when it gets to 420p” or something like that – but the key point is that I am perhaps writing this weeks in advance of when I actually do the trade. I also help myself well in advance here by putting a target on the chart also in a text box – and quite often when it gets to the target (or gets near it) I will re-appraise the situation and I might raise the target – doing things in this way means that I am making myself ‘run my winners’ and this is very helpful.

• Buying a New Stock and building a Stake by adding over time – Patience also applies to the entry of a position (buying a news hare) and again these kinds of decisions are not something to rush and careful thought and forward planning is the best way to proceed. My normal method is to buy an initial position which might be something like 2% of my portfolio or perhaps less if it is a very small illiquid share and I will then be tracking the progress of the share price and perhaps if it gives a nice buy signal (like a breakout over a horizontal resistance level) and is still decent value etc. then I will add to the position. Sometimes if I find a stock I really want to own but the chart is not perfect for an entry or perhaps if I have limited spare cash to buy it with, then I will just do a small ‘pilot’ position that ‘gets my foot in the door’ – I like this approach because I find that if I have got my eye on something really good it is very easy to forget about it and get distracted by the siren-calls of so many other glorious and appealing stocks – and the one I really should have bought gets forgotten about. Once I have a pilot position, it is then in my Portfolio on the ADVFN app and I add it to my ShareScope charts which get checked every night – so I soon get more in-tune with the share price action of the share and when I have the cash available or when the chart gives a nice buy signal, I can buy more and add to the stake. My usual approach is to buy a spreadbet position at the same time that I buy a normal shares position but this varies on such factors as the size of the stock, the nature of the stock (it might simply be too slow moving for a spreadbet or perhaps I would prefer a better entry for a spreadbet than I am prepared to accept for normal shares), my overall exposure to leverage that I already have, etc.

• I never rush buying a stock. Quite often I have been looking at a stock and investigating it with regards to its fundamentals for months before I actually get around to buying it and I will have been watching its chart and trying to figure out where would be a good entry point and all that sort of stuff (indeed, several times I have written and published a blog about a stock before I have even bought it myself – the process of creating the blog is a very structured way of doing my research). One of the huge advantages of having years and years of experience of mucking about with the UK Markets and focusing on a subsection of the stocks available (i.e. in the main I avoid whole areas of the UK Stockmarket like the small AIM mining stuff, the small biotech, anything that is loss-making etc. etc. and this focus on quality means a far reduced universe of stocks), is that I have a pretty good knowledge of perhaps 90% of the stocks that appear on my radar scope. This means that a large chunk of the usual fundamental analysis that needs to be done has already been addressed by myself many times in the past and it hugely reduces both the time taken to do research but also means that I can direct my focus on the aspects of the stock that really matter. For example, I recently bought primary health properties PHP for my Income Portfolio but I had been watching this for years – it is actually surprising that I have not bought it before. But in addition to this, I am also toying with the idea of buying Vodafone (VOD) Shares for my Income Portfolio and I have been going on about this for months – don’t worry, at some point I will pounce but at the moment I am holding back from the leap until the summer is out of the way and perhaps an autumn Sell-off if we get it will be a great chance to buy. I take the view that I will often hold a stock for years and years so taking a few months over the buying decision is appropriate and wise as it helps avoid making dumb errors which come from rushing to buy and not properly thinking things through. Investment done well should never be exciting.

• Adding to a position after an initial buy or even previous top-ups again is something that should never be rushed. Usually I have a clear idea in my mind that I want more of a particular share I hold and when I am checking my charts every night and indeed during the day when I am looking at my ADVFN app which has my portfolio setup in it, I am watching the price movements on the share and looking for pullbacks in an uptrend channel or situations where a share price is looking like it will breakout over a horizontal resistance level or something like that. So I am ahead of the game and I am looking for opportunities to buy more all the time as a baked-in aspect of my usual way of operating every day.

• I touched on this earlier in the selling and top-slicing section but when it comes to a stock that is in freefall (this could be after a profit warning or just simply when the stock is out of favour etc. and in a downtrend channel), there is simply no need to rush in and buy it. So many people make this entirely avoidable and silly error. It is the classic ‘buying a falling knife’ and we need to be really sharp (sorry !!) to avoid making this school kid mistake. The only time that perhaps such a buy could be justified (I am talking here as a long term investor – for traders, with appropriate risk management and stoplosses then buying something in freefall is very different) is perhaps to buy a very small ‘starter position’ to get your foot in the door on a share with a view to buying more once the downtrend is broken and the share is turning up again – but this would have to be a very rare occurrence because if something is falling like this it will probably go a lot lower. In most circumstances if a quality stock is in a major downtrend channel (this will mean the 50 day and 200 day moving averages are falling), then at some point it will breakout (or walk-out) of the downtrend channel and it will go sideways for some time. The best time to buy is when the share moves up out of the sideways channel and is starting off on an uptrend channel – usually you get lots of chances to buy more in these situations. Be patient, let the trade come to you.

 

 

The Critical Role of Patience in difficult Markets

I wasn’t going to add this bit but I thought that it was worth chucking in. At the time of writing this blog it is early July and we are having glorious sunny weather and it is the World Cup and Wimbledon – so markets are very dull and volumes are low.

In market conditions like this it does get very tedious and for me personally it feels like I have had weeks and weeks of a slowly falling portfolio (‘death by a thousand cuts’). This is a classic turgid market where patience is essential. It is no good getting all worried and biting your fingernails and all that – the key here is to be patient and to take a step back and to think about the big picture.

For myself I know I can do this stockmarket investing malarkey – I have had nearly 20 Years of experience and that is plenty of time to know I can cope with pretty much anything the markets rudely throw my way – and it is this kind of rationalisation and thinking about ‘the big picture’ that helps me stay calm and patient and to just ride it out.

I know what I am doing, I have proved that many a time, I just need to stick to my rules and stick to my proven and established approach and things will come back my way.

Markets go up and down all the time – it is what they do and I have no control over this – but I can control how I react to the markets and how I deal with them and it is better to put my careful rational brain energy into thinking about these aspects than to get all emotional and panicky and stressed out.

One thing that helps me immensely in this is that I often run scenarios in my brain when I am out painting the car or digging the garden!

Things like what would I do if the overall stockmarket fell 10%? How would I react? What would I use to hedge my portfolio and when would I place a trade on and in what size? What cash have I got available to buy bargains if we do get a big drop? These sorts of things.

Another top tip of course is to forget about the markets and turn off your fone and your laptop etc. and grab that copy of the book by some or other investing legend you have been meaning to read for years and head out to your garden or a local park or somewhere calm and pleasant and go and do something useful and direct your brain to that task. Stop stressing about the markets and go and do some useful learning and/or research or whatever.

The real bottom line here is to be patient and stick to your own established approach and to wait for the markets to improve. They will, it is part of a normal cycle. See the big picture.

 

Conclusion

That’s about it really. I hope this blog has made readers think about the importance of patience and their own levels of this critical resource/skill. If you are impatient it probably does not help your investing activities and it is a huge failing to be trying to always do something and to be really active – investment should be a very relaxed and leisurely business.

I take the view that the ability to exploit our in-built reserves of patience and to train ourselves to be more patient is a very under-appreciated ‘skill’ and the big irony is that of all the various attributes an investor needs this is perhaps one that anyone should be able to attain if they apply their thinking to it.

I often talk about the concept of having an ‘edge’ as an investor and I see the ability to use patience to our benefit is a real example of an edge and really anyone should be able to do it.

A lot of it is recognising its importance in the first place and then working on becoming more relaxed and more willing to ‘go with the flow’. Maybe yoga and all that is the way to go! (it’s a stress relieving kind of exercise I understand, not a fruit flavoured dessert….)

In terms of our portfolios I think that having a diverse and mixed portfolio of quality stocks lends itself to a patient and relaxed approach to investing and interacting with the markets.

Buying junky AIM Stocks like you find in the WheelieBin needs attention and focus and will no doubt test your patience beyond the limits of human endurance!

If you are someone who works full time and has lots of other stuff going on in your life then the ability to exploit your reserves of patience when it comes to your stocks is clearly a big advantage and this is similar for me where investing is just part of my life and I have lots of other things I have to do and others I enjoy doing etc.

 

 

Stay calm and take your time, there is no need to rush.

Cheers, WD.