the know-nothing investor

…money doesn't grow on trees, you know?

Category: Just Common Sense

6.NOT KNOWING

Not knowing is a great source of angst. It can drive you to insanity if it’s a huge “not knowing” problem or it can, at least, cause some anxiety for a couple of day if it’s a minor one – “I wonder what my weird neighbour is doing bagging and digging by the fence!?”.

When mixing “not knowing” with money the results can be quite unpredictable, because we are adding to powerful emotions another layer of complexity. Money has central role in our days life, since enables almost everything that we are suppose to wish for, so losing it can be extremely mentally and even physically painful. More you lose more devastated you will become.

When little fishes, like me, are thrown in the big ocean that markets are we are dealing with a lot of emotions and decisions, thus it’s normal for the average Joe to fail. Then you can try to improve your strategy and market psychology or you can just quit and look elsewhere for returns.

When this happened to me I remember thinking that I would easily trade some uncertainty for less rate of return. For that I needed to know where markets go and if for a single equity is difficult to predict its evolution for an asset class it’s easier and there’s historical data to prove it as we can verify in chart below, courtesy of Ph.D Jeremy Siegel.

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The most suspicious will tell “But that was two hundred years ago, what about now? And in the near future?”.  For sure everything will be pretty the same, after all in the last century the World had two major and global wars and markets still surviver and as you can verify by the upper chart they still prospered.

Of course it’s our call to be angst by our market decisions or instead we can soothe our emotions by choosing asset that no matter what will go up.

This doesn’t mean that investing in a diversified portfolio is a walking in the park, it also takes resilience, patience and time. Sometime lots of time.

My portfolio for instance, in Abril 2015, it hitted its all-time high. I was marvelled how easy was to increase my value account. By the end of August I had had a drawdown of more than 20%, which by my previous simulation, when I was choosing the portfolio assets, had only occurred in 2008 subprime mortgage crisis. This was hard but I knew, because of charts like that one from Professor Siegel, that assets eventually would turn around and follow their normal paths and the true was that I still ended the year positive.

Nevertheless, it took almost 18 months to have a new all-time high and with more money involved.

The greatest difference, now, is that I know how markets and assets behave and knowledge as always the ability to make the angst to go away.  

5.NOTHING MORE TO LEARN

It has been a while since I wrote in the KnowNothingInvestor blog. More than seven months have passed and if I didn’t write it’s because there’s nothing out there worthy to learn. Nahhh, that’s not true, there’s always room for improvement. So why am I not looking for improvement? But I am. Nevertheless I now have a system that have been guaranteeing me a fair share of profit and thus I’ve become more cautious. There is no need to rush or spoil what i have been working on, now I can take time and decide later what will be the next step.

Since I begun back in 2013, I’ve had returns in line with what I have expected. These are the returns after taxes and fees:

  • 2013 – -3.53%
  • 2014 – + 16.81%
  • 2015 – + 4.98 %
  • YTD – + 0.35%

But why should I bother to improve my returns if I’m doing good? I guess we humans want always more and I, not being an alien, I’m not different. One of major faults appointed to a multi-asset portfolio is that we’re aiming for average instead of grandiosity. I can live with the fact of being average, specially if in the long run I’ll beat the majority of those aiming for grandiosity. Living to be average is hard because since childhood we are taught to achieve greatness, so when we assume that we’re investing in markets to get average returns our brains start to question us if shouldn’t we be looking for greatness!?  When I started trading I was aiming for grandiosity and that didn’t go well and I learnt a lesson “I prefer to be average than broke”.

In the end, a diversified portfolio will beat the majority of hedge funds and day-traders returns, so how can this be an average strategy? I think it’s because it takes time. A lot of time and pacient, 30 or 40 years of hard saving and investing. It will be when we are too old to “live deep and suck out all the marrow of life”, as taught by the great Henry David Thoreau. But If I didn’t put my savings in a couch potato strategy I wouldn’t also spend it until my last penny “living la vida loca”. Probably, I would look for a bank deposit and then after 40 years neither “vida loca” memoires or nice retirement account. Once again I turn to Thoreau, trying to appreciate small thing in life over material stuff and realise how much I’ve already own. The plain reality is I wouldn’t spend all my money in the material world, because that isn’t who I am. It would be nice to buy more goodies, but I can perfectly live a comfort life without them.

But if I save I need to invest properly, which I am. So why do I need more? Because I’m still curious and I want to keep tuning my system to improve it. I’ll do this using a very small portion of my total capital, maximum of 4 or 5%, as taught by John C. Boogle. The way I’ll do it is yet to be decided, but value investing or hedging the portfolio assets when their going down could be the answer. I’ll take my time, there is no need to rush. After all I’m already winning the fool’s game. If I fail, I’ll rapidly quit and I’ll look elsewhere for that extra return of my portfolio.

Now it’s time to do some studying.

4.TAKING IT LIKE A MAN

My personal life is in the same point that it was when I wrote “Living by Repetitive Patterns”. I guess I’m at the bottom of a no free time life cycle and soon I’ll be able to write more often about my learning curve as a know-nothing investor.

Back in July, I was so glad that I handled perfectly that market correction, but it it’s funny how markets are so unpredictable and now, in the beginning of October, we still are in the same market correction, or in a bear market or even in crash mode. You can name it whatever you want. It doesn’t matter for multi-asset portfolio strategy. We don’t have to expect anything from markets and always remember they don’t own us nothing. Therefore embrace the pain of watching your rate of return down the drain and take it like a man. Although no harm is done if we shed some tears in the process.

A 20% drawdown isn’t very pleasant to suffer, but when we have a strategy that have been working since last century we can put it in perspective and stay calm.

This means I should stay arms crossed doing nothing? Doing nothing is better then do it wrong. So I’ll wait patiently for markets to calm down and they will, they always do. Even after a major economic crisis or war they always get back on their feet. This time will be no different.

Meanwhile, I’m trying to save more money to buy equities ETFs on a discount. I’m very fond of discounts and because I failed the big one, back in 2009, I’ve been trying to catch these small corrections to do some dollar-cost averaging.

PS – I took so long to write this post that equity markets are showing some upside reversal signs, although back in July I thought the same. But it doesn’t matter my strategy is a broader one, where markets erratic movements in short time periods are meaningless.  Like my investments my blog is aiming for long run.

 

 

 

3. LIVING BY REPETITIVE PATTERNS

Many traders say that markets live by repetitive patterns, but I must say that life itself lives by repetitive patterns. At least mine where cycles of misfortune give place to fortune or where lots to do turn into “dolce fare niente”.

At this time of my life I’m peaking again with lots to do, as you can check by my last date post. For my three accustom readers (I’m kidding they are five) you don’t need to worry about I didn’t go broke. I just haven’t had the time in past couple of month to write about markets, mainly because I’ve been focused in my professional activity, with work hours stretching beyond normal schedule. In my humble opinion, this is a clever decision considering that it’s where my primary income comes from and where through school studies and professional training I’ve acquired good expertise knowledge.

Managing portfolios or trading for a living it sounds good, but my professional career moved in an opposite direction. In the future, who knows? But for now is really just a hobby that I’m very passionate doing it. Specially when making money.

Everyone is a different person, with a different living situation, but I wouldn’t recommend to the majority of people to quit a job and become a professional trader by its own, unless there is some kind of a plan B or C or even a D, wich normally involves income coming from somewhere else.

Another smart conclusion is that this is the best investment strategy I could come across. Although I had almost no time to spend with markets I was able to maintain my strategy intact and these last two to three months weren’t a walk in the park. In fact I had my major drawdown since ever, that hit almost two digits, but I stayed calm and I didn’t lose any sleeping time over it. Now, I understand this kind of markets correction are part of the game. The worst in world markets has apparently passed and my YTD returns have also climbed again above two digit figure. This brings me to the last conclusion, I didn’t suffer a big drawdown but instead my portfolio value was increasing on an unsustainable pace ans some steam throwing was needed.

2.BEST PRACTICES IN TRADING: MAKING TRADING FIT IN YOUR LIFE, by Brett Steenbarger, Ph.D.

It was a great honour that my example was chosen by Brett Steenbarger to be included in best practices series in his blog and in his upcoming Trading Psychology 2.0 book. Nothing better than sit in Brett Steenbarger’s virtual couch to improve our behavior in trading or investing.

It’s about me, but it could also be about anybody that is still figuring out the best way to be involved in markets.

“A common, but poorly recognized, cause of trading failure occurs when traders attempt to engage markets in ways that do not engage their greatest strengths and resources.  Daytrading and investment are two ways of participating in markets that are quite different in their demands.  The talented daytrader–one who can make decisions quickly based upon pattern recognition–can be very different from the talented investor, who often is one who possesses strong research and analytical skills.  The daytraders I have worked with have managed individual positions with a high degree of leverage.  The portfolio managers I have worked with have managed a large number of positions with a high degree of diversification.  It’s like sprinting and distance running:  both are track events, but they require quite different skills.

Today’s best practice comes from reader SMatos from Portugal (@TridionTrader).  He emphasizes the importance of finding an approach to markets that works for your lifestyle as well as your skill sets:

“When I started trading, I tried to be a trend follower because it was the method that suited me the most.  This way, I thought, I would be able to reconcile trading with my professional and family life.

Nevertheless, trading started consuming more time than I initially imagined.  With the pressure of everyday life, I became more anxious when I needed to make decisions, resulting in really poor decisions.  That resulted in losing 10% of my total capital.

In the next few years, I feel my life will not get easier, as I am the father of two small kids.  So I was compelled to adapt my trading method to fit my life and not the other way around.  Therefore I started a long-term investment in a diversified asset allocation portfolio.  Adapting the way I trade instead of the way I live and knowing that time will heal some of my mistakes has been really reassuring.  I’m making decisions fear-free and my results are becoming better and better.”

Note that Saul made two key adjustments to his trading:

1)  He extended his time frame, becoming more of an investor than a trader;

2)  He diversified his holdings, so that any single holding moving against him could not unduly damage his capital base.

The combination of these adjustments enable him to engage markets constructively without interfering with his other commitments.

I know traders who have developed effective methods for trading intraday and several day swings in markets, allowing them to make use of pattern recognition skills but also allowing them significant time away from screens.  Two traders I know limit themselves to trading patterns that set up at specific times of day, which again enables them to exploit their pattern recognition, but keeps them from becoming too caught up in market activity.

It’s necessary that your trading have an edge in your favor, but having an edge won’t help you if that edge is not one you can trade sustainably.  Saul’s insight is that trading has to fit into your life and not the reverse.” –  Best Practices in Trading: Making Trading Fit Into Your Life  – by Brett Steenbarger, Ph.D.

1.FOOLED BY NUMBERS

When you start to understand the game you become more sceptical about people constantly bragging about their methods and rate of returns. Sometimes they don’t even need to show their return numbers to have a lot of followers that don’t question those figures or their incongruencies and if there are better ways to participate in the markets.

This year I decided to honour those “two digit figures” braggers by becoming one of them and saying to you, few fellow followers, that through my magnificient method and outstanding capabilities in 2014 I achieved 48.58% rate of returns.

Wait…wait…that number was achieved because I’m counting with new add money for buying assets purpose. Although it is a true number, because my portfolio value grew that much, it was due to add money from my savings.

This is a fair observation. I’m really bragging, but those number are unrealistic.

So looking for the NAV in my broker account, in 2014, my returns were still impressive with an increase of 17.16% .

Wait…wait…that number is only achieved because my main currency is in EUR and my assets are in USD. This pair’s valuation was great for dollar assets and only because of that I achieved so great returns. For me, that use euros in my daily life it was a great value increase. Nevertheless, I’m a naturally bragging again.

Well I only have two more number left for my 2014’s rate of returns, but those are just ok and they are not to great to brag about. The first one was the total return of my portfolio in USD, which was 4.92% and if I consider new entries over the year I’ll end up with a rate of return of 4.36%, which is still better than the average of active investors.

So don’t let you fool by numbers and braggers. All that rate of returns are true in someway, you can pick your favorite or just ignore my returns and focus on yours.

What I can say is, I’m glad with my 2014‘s results, after all my portfolio’s value more than recovered the losses of short-term madness.