Are You Trapped?

(Found this interesting article I wrote many years ago whilst cleaning up old hard disks.)

Worry  the market has been too good?  Not sure economic growth is really turning round … but do not want to miss the ride?  With so many indices towering towards the sky,  surely the sky will not fall……  Are there not many faithful riding the upstream together ….. to the  precipice of a waterfall?

Emboldened by fellow believers, market pilgrims bravely battle pessimism and disbeliefs, holding onto the winning faith, encouraged by every victorious rise, even a blip.  But the markets are treacherous waters, and sharks are circling round.  They know how we think.  They smell that drip of fear, that nuance of uncertainty.  They like us this way – the fatten sacrificial calf for juicy bits of pleasure.  Indeed when the feasting begins, there will be no reprieve.

The staunch investors and gamblers alike are cornered,  the stakes have been played, ….. and our emotions  are now stringed to the market puppeteers’ whims.

Long term investors are you?  Well longsuffering has its weakness too.  Long  term commitment and  long term  memory failure are often bosom friends.  We hate to be reminded of the many funds which failed and the esteemed institutions which needed to be bailed out in 2008 and 2011.  Many blue chips have not since recovered their initial glory and many crown jewels  have  turned into less worthy gems .   Many seniors have lost their savings and pensions, and even countries have gone bankrupt or are tethering on the brink.  Yet the indices continue to goad us on.     

Have we not learnt?  Hugging an asset over a long duration does not safeguard it from value decay.   A wise man asked this revealing question, “how many top 50 Asian companies in the last 30 years, are still at the top today”.  For me that settled the issue.

Warren Buffet?  My grandmother?  Sure they are success stories.   Value investing is well advised but difficult to practice.  Buy during a crisis, when emotions strain against every ounce of logic?  Do incremental purchases over a long period of time?  Buy into a fund managed by a reliable bank … ha ha, …. that is a good one.  How do you judge whether the company is indeed undervalued, or over valued?  Follow industry valuation …  at that point in time?  Follow a guru that has made great calls in the past?  Follow the advice of analysts – never mind many readily reverse their target calls, even though they should have known better  – just look in the month of February for incriminating examples pretending to be intelligent diligence.  What to do?  Who to believe?  Know your candidates well, and buy only what you know, and if you know enough of Warren Buffet’s style, you will also know he is first and foremost a businessman … that is why he is a good investor.  So pretend to be Buffet all you like, and some of you will succeed, and I hope it is you.  But what if you get it wrong?    

Be your strategy one of resigning  from cradle to grave, or zealously swinging from treetops to treetops,  honest, competent  financial advisors will always tell you to actively manage your portfolio and watch it like a hawk – they are not going to be responsible for it – remember it is always “at your own risks”.

You are disciplined?  You mean that infamous stop loss or the rather clever trailing stop?  Often used, always to great effect – for relief or depression.  They are not  always practical or often not intelligently implemented.  I shall not go at length dissecting the merits and grievances of a stop.  But consider these questions –   How does a long term investor reconcile a stop loss?  Should not he simply weather the ups and downs, with the forbearance of a God ?   Where is the right place for a stop loss/trailing stop?  At 2% from support/resistance?  Too little?  10%?  Or when price corrects in a “wave”  rebounce?  Wait, perhaps it should be at the point our investor can preserve his capital, rescue leftover profits, or  at his final or stepped tolerance point for losses?  Ah, what if the stop loss is hit, but the price pattern shows conflicting signals… what to do? Here is another good one … “place a stop loss where it is unlikely to be hit, and if it is unfortunately crossed, then you know you were lucky to put it there..”  Yes, we get the picture, so we do whatever works best for us, if we actually muster ourselves to do it, ….   but we are disciplined are we not?  

A stop loss can be as fickle as when “ I have enough!”, or as sophisticatedly tied to the markets via probability studies, moving averages, Elliot Wave theories, price action, and so forth.  Notice the market itself does not generate a stop loss or take profit exit.  A stop is designed by us, according to our tolerance ability.  It is imposed to create order in an otherwise haphazard market.   It was a tool totally of our own creation – to manage ourselves.  Surely we can do better if it is to manage ourselves.

Equities remain one of the more efficient assets  for the general populace to increase capital wealth and protect against inflation.  Many social economists and financial advisors have asked for governments to help citizens set aside investment accounts just for investing, not for subsidizing housing, education or health, to achieve the dual purposes of inflation hedge and committed wealth creation.

How can the ordinary investor make the game more palatable?   As always, there is a simple answer.

 

Follow up article.

Change A Rule (Part 2).