Grindernote#1 – Feb 18 Market Sell off.

Grindernotes will be small rough and ready posts that will be separate from the educational type articles that I hope to type in the future. They are off the cuff opinions, maybe a bit of a ramble. But if I want to get something off my chest then Grindernotes will be the place.

The market sell-off.

So this past week or so we have had all the main indices fall from their all-time highs. In the past month, the Dow Jones has dropped 1.54%, FTSE100 5.8%, NASDAQ 100 1.42%. None of it looks pretty with the biggest falls happening this week. Most of our holdings have been in the red intraday and there have been lively debates on twitter on how to react to these events where I have disagreed with some influential private investors. Here are some of the claims that I have disagreed with.

Trader or Investor and never the twain shall meet.
I shall be revisiting this old chestnut of an argument at some point in a decent article. In summary, though the distinction between the two has become blurred as technology, easy access to information overflow and charts is now standard for most of us. The old-fashioned ‘investor’ type would spend hours, weeks, months researching a particular business, wanting to find out everything about it; convinced of course that this will lead to better investing decisions. They buy in taking a stake, wanting to support the business and have their long-term views. They fall into the danger of loving the stock. Prices movement don’t really matter. If the price rises these investors are superheroes with ‘I told you so’ characteristics. If the price falls.. ‘hey so what.. I’m buying more for cheaper!’ even though they could be plus 50% at paper losses.
Traders – the short term activists on price action. Charts, signals, indicators – all now made easy with today’s live prices technology. They never cared about the story, trading updates, fundamentals. Ah, but they do! I know the best traders check out news statements and company fundamentals because it does affect their trade!

Also back to Investors, many care about the share price movements stretching back a few days for some sort of entry level to a few years to see how the market has taken to historic news. Many of today’s investors use trader tools and charts to determine if the markets agree with the unlimited time they have spent researching and convincing themselves of the wonderful business to which they have bought shares. Shrewd Investors care for share price movements especially when they fall and continue to ask/challenge their own opinions.

Today’s investors only need to pick a few simple rules to make money. Tools like SharePad and Stockopedia allow and have proven that picking a StockRank system, or using powerful SharePad filter criteria to find stocks based on simple rules allow for a good selection of stocks to invest in.

Please don’t tell me that people who use Ed Croft Naps portfolio type rules are not investors because they have not fully researched. Please don’t tell me they are not investors because they improve the chances of filtering out the weaker stocks that have fallen by using stop losses.

In a market, sell-off stops don’t matter because I have invested in a portfolio of wonderful stocks and they are all now cheaper.
Goes along with the overconfidence seen with many investors. They have to be correct! So even on a market sell-off, they don’t take the opportunity to review their holdings and admit that they might be holding onto some duds that the sell-off has hit the stock hard.

Selling out is expensive! You miss the dividends and you have no stocks when the market rebounds!
Another claim for me which is a load of tosh. When I take an initial position I usually start small. I have done some research but always mindful of the danger of overconfidence I’ll place a stop loss. On a market sell-off, these are the first to get hit! That’s fine. I haven’t made that much money from them. I didn’t know the business that well, and I can decide after the sell-off to look again to see if it is worth buying back into. Holdings that had gone up 10% – 30% or so may be stopped out. I look at the length of time I have held onto them and revisit why I originally bought into and consider price action over the term of the holdings to see if my original purchase was the right decision. I’m usually breakeven if stopped out on these stocks. Transaction fees are my biggest costs here. But who cares! I have protected capital and not allowed the losses to happens! The longer-term holdings are far away from breakeven stop losses. They have withstood the market sell-off. I also have probably held onto them over a long period of time. I have become to understand the business better and my confidence in the business may be real. I am still mindful of overconfidence. In this situation, I may add to the holdings. However, I usually add when the price hits highs again.

Here is one of the only claims that I have heard which I agree with.

The market sell-off might turn into a full-blown bear market.
Ah not to worry Investors. I’m sure the huge losses you’re sitting onto with all those stocks you’re in love with will eventually (years maybe) turn profitable for you.

In the meantime, I’ll show you a very simple example of overconfidence… Utilitywise down 80% on this 2-year chart (and currently suspended).

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