The importance of being idle: Part 2 – patience and the DIY investor
In Part 1 I talked about where my own reserves of patience come from; I am pretty sure being a paraplegic wheelchair user forces immense patience upon me.
Some things are simply beyond our control; there is no point getting upset and emotional, accept a problem has occurred and focus on how to fix it. If you apply this approach to the markets it will be a much more positive and helpful frame of mind.
It builds resilience and persistence – two characteristics that 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.
‘Investment done well should never be exciting’
Markets are beyond your control – if a stock you hold is falling and it is grating on your nerves, don’t panic and do something rash and stupid.
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 market?
If you cannot shrug such moves off perhaps consider a more rules-based system such as using stop losses to make the decision to sell automatic, removing the emotion; take the loss and move on.
Also remember the distinction between price and value; focus on the latter and don’t let price moves lead you into bad decisions – more ‘Price Vs. Value’
Where a high level of patience is a big help
- Selling or Top-Chopping – one of my biggest errors in the past has been selling great stocks too early – although I am getting better at letting my winners run. If the ‘urge to sell’ becomes overwhelming I only allow myself to top-slice and scale out of a position rather than sell the whole lot.
- An exception is how to deal with profit warnings; maybe my performance would improve if I adopted a global policy of ‘sell instantly’ – but I’m torn. Often a stock will put out a profit warning and immediately drop 30% at which point it might actually be better as a buy than a sell. Some of my biggest gains have been after stocks have issued warnings – com (BOO)and Fiberweb (FWEB) made me something daft like 300%. The trick is to buy more as the recovery starts to kick in but you must never average down before this point.
- Don’t sell on a whim – think ahead and plan your exit well in advance; I often help myself by putting a target in a text box on a chart on ShareScope.
- Buying a stock and adding over time– patience also applies to the entry of a position; again something for careful thought and forward planning. I usually buy an initial position, maybe 2% of my portfolio, and then track its progress, adding if it still represents decent value. Sometimes a small ‘pilot’ position keeps a stock I have been attracted to in mind. It is then in my portfolio on the ADVFN app and ShareScope to check every night.
- Never rush; often I investigate the fundamentals of a stock for months before I buy it – watching its chart for a good entry point. Years of experience of UK markets and focusing on a subsection means that I have good knowledge of 90% of the stocks that appear on my radar. I often hold a stock for years so taking a few months over the buying decision is appropriate; investment done well should never be exciting.
- Similarly, adding to a position should never be rushed; I have a clear idea that I want more of a particular share and watch price movements for pullbacks in an uptrend or situations where a share price is looking like it will break out over a horizontal resistance level. Looking for opportunities is a baked-in aspect of my usual way of operating every day.
- When it comes to a stock that is in freefall, there is no need to rush in and buy it; ‘catching a falling knife’ may suit traders, but is arguably appropriate only very rarely for an investor looking for a ‘starter position’ and to buy more once the downtrend is broken. A quality stock in a major downtrend trend will at some point break out and go sideways. The best time to buy is when the share moves up out of the sideways channel and starts on an uptrend; be patient, let the trade come to you.
The critical role of patience in difficult markets
This summer saw very dull markets and low volumes; week after week of a slowly falling portfolio is tedious and that is where patience is essential. Take a step back and think about the big picture.
‘be patient, let the trade come to you’
After twenty years of stock market investing I can cope with pretty much anything it throws my way; stay calm, be patient and just ride it out. I stick to my rules until things come back my way.
Markets go up and down all the time, but I can control how I react; calm and rational trumps emotional and panicky every time.
I often run scenarios in my brain when I am painting the car or digging the garden; what if the stock market fell 10%? How would I react? What would I use to hedge my portfolio and when would I place a trade and in what size? What cash have I got available to buy bargains if we do get a big drop?
Alternatively, forget about the markets, turn off your phone and head out to the garden or local park and immerse yourself in that book by an investing legend you have been meaning to read for years; be patient, stick to your established approach, and wait for the markets to improve – they will.
I hope I have convinced you of the importance of patience; being impatient and always trying to be active does not help – investment should be a relaxed and leisurely business.
‘Stay calm and take your time, there is no need to rush’
Being patient is an under-appreciated ‘skill’ but of all of the attributes an investor needs this is one that anyone should be able to attain; patience can give you that ‘edge’.
Having a diverse and mixed portfolio of quality stocks lends itself to a patient and relaxed approach to investing and interacting with the markets, particularly if you have plenty of other things going on in your life.
Stay calm and take your time, there is no need to rush.
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