2019 was a great year for some investors.
Last year, I asked on Twitter what people learned in 2019.
The world has changed hugely. Coronavirus wasn’t in our everyday vocabulary.
But fast forward twelve months and most of the country is in a Tier 4 lockdown yet global equities are pressing all-time highs.
However, I’m sure many of the insights are just as relevant today.
Investing is a long-term game
A bad year does not a bad investment process make. You are not wrong because the price is down. Neither are you right because the price is up.
You are right because you have accurately assessed the data and made a sound judgement.
“In the short term, the market is a voting machine – but over the long term the market becomes a weighting machine”.Benjamin Graham
You can be wrong for a long time before the market agrees with you. Everybody wants to be a contrarian, but nobody likes looking wrong.
One exercise I find helpful is to print off trades and go through them with a highlighter.
Look at big wins and losses. Look at small losses too. Did the price revert after you closed the trade? Are you placing your stops too tight?
More importantly: What are you going to do about it?
Quantitative data will show patterns. These patterns can be looked at and potentially improved. It is difficult to improve unless one knows what they can improve on.
I took a large percentage loss on a stock called 7digital (7DIG) in early 2019. The reasons for this are entirely my own fault.
- I placed too much trust in a board that had put their own cash into the stock
- The business wasn’t profitable
- Receivables were becoming stretched
- I ignored a downtrending chart
There is no real excuse here because there were too many red flags. I ignored them all.
First of all, the directors may put their own cash into a business.
But they still draw a salary from the company (and bonuses, expenses, pension benefits, and the rest..). You as a shareholder do not.
A director’s interests cannot be aligned with yours because they can do things with the company that you cannot.
My second mistake was to buy stock in a business that wasn’t profitable.
I also had no real idea of how cash moved through the business.
This was a gamble on trusting management telling me they didn’t need to do another raise. But no manager is ever going to tell you they’ll need to raise because:
1) it’s inside information unless released in an RNS, and
2) everyone would short the stock and cover in the placing.
The paid-for research house Edison Research had over-optimistic broker forecasts.
Of course it did, because the company paid Edison Research to produce research. Whose bread I eat, his song I sing.
The third red flag was that receivables were becoming stretched compared to cash in the bank, which meant that the company wasn’t collecting its cash effectively.
My biggest mistake of all though was to ignore a falling chart. These three mistakes could’ve been ignored had the chart been in an uptrend.
But it wasn’t. It was a stage 4 downtrend and a one-way street of sellers.
Sometimes a good hole in the wallet can fix bad processes, as there’s nothing like losing money to provide feedback that what you’re doing is wrong and not working.
“Long shots almost always miss the mark “Peter Lynch
From that point, the chart became my priority in all of my decisions. You don’t need to catch the bottom to make money. You don’t need fundamentals for a stock to go up.
I asked what others learned in 2019 and the results were mixed and interesting. It’s also cheaper to learn from others than it is to make the mistakes yourself.
To benefit from their collective knowledge, read on..
I believe any trader or investor will improve their P&L over time by position sizing properly – you can read my article in the Investors Chronicle here or download my free trading handbook at the bottom of this post.
Stick to the plan, Position sizing, cutting losers and be very, very careful who you trust and believe@Smudgedann
This is useful advice from Dan. It’s good to have a small circle to bounce ideas off and get leads from (some great trades have come from others). But nobody cares about your money more than you.
You’re on your own in the market. If you lose – you lose.
There is no manager to lift your spirits. There are no teammates to console you. If you’re down at the end of your reporting period then it’s your fault. Nobody else’s.
There are people whose opinions I value. But those opinions are ideas only, and you shouldn’t follow anybody else blindly.
Jesse Livermore found this out the hard way when he relied on a tip in Reminiscences of a Stock Operator. He would then go on to find the best tipster of all.
At the same time I realise that the best of all tipsters, the most persuasive of all salesmen, is the tape.Edwin Lefèvre, Reminiscences of a Stock Operator
Therefore, the only way to trade is independently. Don’t rely on others’ views. Find your own trades.
Always stick to your strategy and never get over confident , leading to taking bigger positions and losses.@Abrameez123
Rameez makes the point that overconfidence can lead to excessive risk-taking and larger losses.
Large wins spike the dopamine levels in the brain. This is a natural physiological reaction after a big reward. Several big wins can lead to complacency. I experienced this in 2017 and paid the price.
If you haven’t experienced the sickening feeling of a big loss yet – don’t worry. It’s likely you will at some point.
If more private investors and traders decreased their position sizes this would have a direct correlation on both stress and anxiety reduction.
I have had people message me several times a day about every tick up and down in a stock before because they were too large in the stock.
PRO TIP: If a position size makes you uncomfortable, then sell down to the ‘sleeping point’. This is the position size that doesn’t affect you emotionally.
If you give a stock a knife then eventually it will stab you.
Don’t give any stock the opportunity to hurt you, and keep positions well within the sleeping point.
You are in too deep in a stock if you can’t enjoy your life or concentrate on other activities or work.
No stock is ever going to make me rich (unless I hold it for years and years) and no stock can hurt me deeply.
Eventually, I will wake up to a position that was fraudulent and I will lose the lot. In this business it’s inevitable.
This happened with Patisserie Valerie (CAKE) and it will happen again. Do not assume the auditors will protect you. They won’t. If a company can fool the auditors (or the auditors are asleep on the job) – it can certainly fool you and me.
Preparing for the worst on every position will see you breathe a sigh of relief one day.
By luck, I was not holding Conviviality for the bounce trade.
It closed the session and suspended before the open the next day. It never came back. Everybody lost everything.
Cut my losses faster and size positioning@jonnyfroo
Traders should focus on limiting losses.
P&Ls are driven by two things:
- How good you are at minimising losers, and
- How good you are at driving winners
Your success in the stock market will depend on how good you are at doing these.
I don’t average down myself as a trader but I accept that it is a valid investing strategy. I know people that have done very well from it.
It’s not for me but it is explained in detail in The Art of Execution (summarised here).
Taking risky bets on exploration drills or Phase III trials can be a fast-track to the poorhouse.
Here is the chart of Motif Bio in 2019. Many were expecting the company’s asset, iclaprim, to be approved by the FDA due to its assistance on the successful REVIVE-1 and REVIVE-2 phase III trials.
Unfortunately, the FDA couldn’t pass the drug in its current form, which meant more testing and more money. The stock gapped down heavily.
However, those who traded the reaction could have caught a 200% move from the day’s low into the morning session of the day after.
It is better to react rather than predict.
Many believe that the competition in this sport of trading/investing is with others.
The only competition is in your head with yourself.
We are prisoners of our own psychology. Your results will also depend on how objective you can be when new feedback from your trades is received and how successful you are at adapting to them.
Ignore 99% of ‘Chartists’. Understand market structure in terms of liquidity and learn to think like a market maker. Trade price action level to level and compound / build better positions. Read the chart from right to left not visa versa. Constantly analyse your journal.@Trader_EGO
Thinking like a market maker gives one an excellent advantage because many retail traders are just liquidity. They don’t have a strategy and they react predictably. When you have an edge, that liquidity can be used to your advantage.
But be aware of crowded trades too. In 1998, Russia defaulted on its bonds. This triggered margin calls across many money managers.
To cover these calls many decided to close their European interest rate convergence trades.
This trade was based on the assumption of the euro coming into existence. If it did, then European interest rates would need to converge.
Therefore, the trade was to buy the bonds that had low yields and sell the bonds that had high yields. This trade was considered a mathematical certainty (as long as the euro came into being).
But when these leveraged money managers turned sellers they couldn’t find buyers.
Everyone had the trade already.
Ultimately, the convergence trade worked. The euro came into existence, and European interest rates did converge.
But people still lost money on a mathematically certain trade because of the mechanics: there was nobody left to buy.
Never underestimate the crowded trade.
Do your research, make your choices based on the current information and modify and adjust your positions as situations change. 2.0 Be aware of but don’t act on most of what you read on Twitter, LSE and other BB’s and stay true to 1.0@cperkin99
Risk evolves as the trade is ongoing. If you’re up 20% from your entry – the risk/reward ratio has now changed.
I have never heard of a single trader going bust from small positions.
In every case of a blown account that I have heard of it always included oversized positions/leverage, and volatility. Often it was a combination of the two.
Use guaranteed stops to manage your risk, on larger resource cos especially, as can save you a lot if bad news comes – #TLW being the perfect example!@GaryNTrader
Guaranteed stops are brilliant – they provide certainty and can also free up margin. They do charge a premium if triggered but that premium can be worth it – especially if the stock in question has just had a surprise profit warning.
There was also a significant amount of responses detailing doing your own research, investing in quality, and avoiding red flags
Work hard to develop a personal investment style that works, that you are comfortable with and is based on sound investment and risk management principles… then stick to it. Merry Christmas Michael and best wishes for 2020.@shares4sharing
This is helpful from Mike – there are many ways to skin a cat and what works for one person may not be congruent with someone else’s personality.
I have no qualms buying a stock I know nothing about if I think it will make me money based on the chart. Others won’t buy unless they’ve dissected every RNS from the last three years.
There is no right or wrong way – all that matters is if it makes you money.
Wait and wait until the market is offering a free lunch and then eat as much as you possibly can. Avoid 50:50 trades and anything that needs cash. Being short on terrible stocks in a strong market can cost you money, I’ve had several go up on profit warnings.@F15JCM
As John says, every now and again the market throws up situations that aren’t priced in. Being greedy at such situations can lead to outperformance. However, this strategy of potential overexposure carries risk.
I would always encourage people to read the annual report from back to front – the detail which can then hurt the private investor is invariably disclosed in the notes not the PR bullsh#t of the Chairman/Chief Exec’s polemic@Jackson_S_D
Management know that most private investors won’t read the annual reports and so this is where everything management wants to hide can be found.
One classic private investor mistake is to invest in stocks with zero profits. I have been there and done that.
Insanity: doing the same thing over and over again and expecting different results.Albert Einstein
He’s not wrong.
Mike Pearson of Valeant made a lot of noise and the company made several acquisitions.
But whilst everybody was focusing on the acquisitions, nobody was looking elsewhere.
Nobody was looking at Philidor, which was prescribing drugs at an ever-increasing cost to the insurance companies. However, the insurance companies started getting wise and started rejecting these scripts.
To get around this Philidor would buy a suburban pharmacy and issue the script through them to the insurance companies.
But there are only so many suburban pharmacies one can buy.
In the end, pharmacies were created out of thin air.
It took a while for the street to solve the mystery – but that’s because people weren’t looking.
They were looking here at Mike Pearson talking and not there where Philidor was doing the prescribing.
It’s human nature to try to avoid what we don’t want to see, and so our biases lead us to focus on the positives and downplay the negatives.
There are some knowledgeable people on bulletin boards. But these people are drowned out by the deluge of dross. Multi-ID rampers, people who lost money and then haunt the bulletin board for literally years, and paid promoters are all active here.
The reality – like Twitter DM groups on shares – is that only bullish opinions are allowed. Any dissenter is reported and removed. You can ask a perfectly legitimate question, but if someone believes it might cause people to question their holding and sell then it’s likely you will be removed.
My opinion: Never use Twitter DM groups and don’t bother with bulletin boards either. They aren’t moderated because the bulletin board providers use the traffic generated to sell ads and impressions.
After your very own research, stick to your very own strategy regardless of fluctuations because nothing goes up in a straight line. And don’t forget to sell when your exit strategy appears. In short Greed kills, don’t chase@Immortul
That i) IFRS 15 has shown many companies to have ‘overstated’ past earnings; ii) even ‘quality’ companies have accounting ‘quirks’, and; iii) reading annual report small-print can create an advantage over most other investors.@MaynardPaton
Again – reading the annual report is emphasised. Maynard is a fellow writer at ShareScope and runs his own blog here.
For me it’s: 1) Never overlook cash/cashflow 2) Low growth with high ROCE is preferable to higher growth with low ROCE 3) Big money isn’t necessarily smart money@vodkaquickstep
Simon is a successful investor and makes some valid points.
Revenue is vanity, profit is sanity, and cash is reality. Companies that manage their cash effectively have historically done well in the stock market.
ROCE, or Return On Capital Employed, can be thought of like a company’s interest rate. It is the return the company gets when it invests in itself.
The higher the ROCE margin, the more effective the company is at growing its own capital. This then leads to more capital to deploy, and it can become a virtuous cycle.
Stick to your convictions and principles, but keep them under review. As long as you have understood your investee companies, and they’re sound, the share price will come good in the end.@marben100
There was a strong emphasis of doing your own research and Mark emphasises following a process and trusting in that process.
Mark Bentley is a director of ShareSoc, which is a not-for-profit membership organisation, created by and for individual investors.
For the price of a dinner out, your membership goes towards providing information and education, by promoting your rights to companies, and by seeking to influence government and regulatory policy.
Get to know your investments and fellow investors so you feel comfortable and understand what is happening and who to trust when trying to decipher all the news that affects them…..@carmensfella
David Stredder runs the popular Mello conference which brings directors and shareholders together. It’s a very popular event and currently runs online as Mello Monday.
For me it was about asking “do I really have an informational advantage here” & if not then refusing to take a position no matter how strong my opinion was that something was under or overvalued.@DangerCapital
Mark refuses to take a position unless he has an edge. How many of the stocks that you’re currently holding do you feel like you have an edge in? If not – do you have a good reason for holding them?
I had the pleasure of reviewing Mark’s excellent book Excellent Investing – which can be bought here.
Sometimes it’s worth listening to others but remember those who aren’t in a share are always going to be bearish. If they weren’t then they would be in the stock.
Thanks Stephen! Although I’d caveat that with nobody should follow anyone blindly. I get as many wrong as I get right but my edge is in risk/reward and managing capital rather than superior fundamental knowledge.
Ivan’s comment reminds me of that quote from the big short.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.Mark Twain (he didn’t have Twitter)
Only Mark Twain never said that. Nobody said that.
The quote doesn’t not appear in any of Twain’s writing – books, essays, letters, or speeches.
Quote Investigator found that the original phrase “I honestly beleave it iz better tew know nothing than two know what ain’t so” was written by a Josh Billings in 1874.
It also found that in 1899 a religious orator assigned a rephrased version of the comment to Twain.
Perhaps, as Mark Twain observed, it is better not to know so much than to know so many things that aren’t so.1899 February, The Pacific Unitarian, Volume 7, Number 4, Address of Rev. Charles R. Brown, Start Page 118, Quote Page 119, Column 2, San Francisco, California.
However, those who have read Michael Lewis’s book of the same title will recognise this quote:
“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”Leo Tolstoy (also no Twitter)
But unlike Mark Twain’s quote – Leo Tolstoy’s is real.
Why the switch?
Maybe it was a genuine mistake. Or maybe it was to make the point that what you know for sure just ain’t so.
Patience and inactivity had been a learning point for many too. As Peter Lynch said – sometimes the best stock to buy is the one you already own.
I assume Martin means this when one owns quality companies and one is invested in them for the long term.
Big winners pay for lots of losers, especially if your losses are small, and your wins are small or large.
Wise words from Fabio!
Even of you have invested “wisely” after hours, days, months even years of research, it can fail. Do not fall in love with a stock and defend it to the death, because its death will kill you financially@nickpchurch
Patience, patience, patience. If you’ve invested in a company for solid reasons, don’t get bored/second guess yourself based on negative share price movements unless the story has changed.@CalderCapital_
Trusting others was also an important factor for many.
You are responsible for all of your results.
Look at Koovs CFO Robert Pursell. Refused to buy a single share for 3 years. Earned £180k. Company went into admin. They paid analysts for exaggerated reports to dupe shareholders. Not scared of the FCA. Not scared to lie. Beware if Chairman is creditor! They get 1st shout!@Trebuchet_Kid
Unfortunately, this is the dark side of AIM. I wrote about AIM’s traps which was the cover feature for Investors Chronicle here – both Mporium (MPM) and Koovs (KOOV) went into administration, only to be bought for small change by the directors. In both instances, the purchasing company was set up a few weeks earlier. Almost as if they knew it was coming!
The most important thing ive learnt this year has all been down to the poor markets which is a direct result of the failure to either deliver brexit or negate it. That is that unlike most PIs who look for a profit month2month or Y2Y the system needs to make money daily Pt1..
And when the markets are poor the system moves to a darker side to make money and the system takes many with it who then show their true colours. Well known & versed (dogs) of companies flourish whether in spurious post placing ramps or pumps to clear trapped stock Pt2@TheLongerGame
“Investing is not a team sport” – I’ve taken a significant time to properly realise this & my psychology has improved even since. It doesn’t mean you cannot make friends but don’t ever believe you are “in it together”!@GoLeftMassa
Learning to wade through the morass of questionable promoters@GrahameCook
A lifestyle CEO who is a pathological sociopath and delivered nothing for decades except dreaming up new ways to suck cash out of a company isn’t going to change his spots.@elgring89441300
Avoid groups at all costs. They are designed to keep you buying when you should be selling and to keep you holding when you should have already run a mile. Any (justified) critique is almost certainly met with open hostility. Frequently delusional members if not a outright P&D@simonspear
That the vast majority of aim companies BODs care not one jot about its shareholders so long as they claim there exorbitant wages and then refuse to invest anything in their own companies. If it was a great story they would buy stock.@JulianHeap
Stay out of the private groups. They sub consciously tie you in for longer when things aren’t going well and consume way too much of your time. Also stop trying to catch falling knifes@nutsandbolts65
Common theme here……. trust! How sad.@Will_Meredith
There were many great answers from the original thread. Here are the rest!
You don’t have to invest in ‘quality’ companies (‘quality’ is subjective anyway) to make money if you get the timing right.@sholdsworth1963
Short to medium term market dynamics matter more than fundamentals, medium to longer term fundamentals will out. Know your investment time horizon.@JMHDeakin
Eat negativity. Puke positivity@mojomogoz
Set a target@AnEarlofWisdom
Buy shares when they’re going up – not when they’re going down. If you’re not a full-time investor it’s hard to know more than the market and the odds are not in your favour even if investing is your job.@RandomAmbler
Take care after a big win. My complacency cost me a lot!@lobsterinvest
I’d agree with that [with GeordiePhil]. I’ve also learnt that you really only need 1-2 big plays to come off to make your year & how binary / single catalyst plays are more often more damaging than rewarding.@SLowie100
If you go big enough two or three investments can be life changing…..@Trader__007
That multiple profits warnings are a thing but with weighting’s correct it doesn’t have to mean negative returns. This has lead to a change in tactic for 2020 so your never too wise to adapt and learn.@battlebus141
Keep trading the top profits off, pause for breath in between.@deafsinger68
My decisions were best after losing. Worst after I had made good money. Fomo has been my enemy. Watching prices too much makes you lose bigger picture gives more stress. Less Twitter is better. Taking a break from the slow market does not cost you money but may save some.@CaspianAl
Performance is inversely correlated to the amount of time spent viewing and tinkering with the portfolio!@BenSharman
Its not only trash stocks that get pumped and dumped. Plenty of stocks with decent fundamental value and promising outlook get ramped then sold into. They are the dangerous ones@zanmantate
Never buy a stock unless there’s a genuine trigger to do so, in terms of price, volume, breakout, ATH, contract, Director Dealings etc@KevinKathurima
Set a stop loss for all trades. Otherwise sp can keep slipping and your emotion doesn’t allow to sell.@Zedy78Zedy
As much as possible stay clear of AIM shares. It’s a russian roulete and often a recipe for disaster. You can be hit with a profit warning or a fraud scandal out of the blue. Intead play it safe with FTSE250 or FTSE100.@NakedTraitor
Rather than focusing on one approach and trying to improve on it, try out a few different approaches and see which work best@NoiseyDave
Cut your losers quickly and let winners run. Patience@NfsNigel
The things you think you know are important aren’t necessarily the things that undo your investment thesis Happy Christmas Michael@rhomboid1MF
For me it was the extent to which my process had drifted. My chosen process is: 1. To look for companies with significant competitive advantage (which can take many forms) 2. To do enough detailed analysis to confirm this judgement to a reasonable level 3. Buy and hold until the information changes This year: 1. I was swayed by fears around macro / political events jumping in and out of individual shares as my fears / hopes about the market changed 2. I spent much less time on the detailed analysis making (often ill informed) intuitive leaps to decide on the competitive advantage of a business Not surprisingly, my return this year has been poor and much below previous years. A short analysis of my trades during the year (started but not yet complete) has highlighted how much I have lost by over trading and making decisions with insufficient analysis So, what I have learned is the importance of choosing a good process, sticking to it and monitoring to keep improving. Sorry that was quite a long post.@Julianh222