the know-nothing investor

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

Category: Learning Process

14.OWNING THE WORLD

When you don’t know what stock to pick it´s better to have them all. It’s really easy and less time-consuming. Owning the world resembles like this:

Figure 1 – Asset allocation by country

As expected US represents 62% of my portfolio and the rest of the world 48% (7% Japan, 4% UK, 4% China, 2% Australia, 2% Taiwan, 2% India, 2% Switzerland, 2% France, 2% Germany, 1% Brazil to name a few ). Gold and commodities are out of the equation because their origins are from all around the globe and their intrinsic value already work as risk mitigator.

A quick visual analysis make me wonder if shouldn’t I have a Canadian ETF, after all as shown here USA plus Canada have better rate of return than USA alone. I’ll pin this thought for future memory.

The asset allocation by currency is similar, but with common european currency (Euro) surging in third place with a little more than 5%.

ByCurrency

Figure 2 – Asset allocation by currency

Coincidently or not my portfolio allocation doesn’t differ much from today’s world markets capitalization relative size, as shown here (pag. 35).  The higher allocation in US is because I took into account the bond market.

It’s true that I have a big chunk of the portfolio allocated in US, but it only represents what is going on in world markets. So, in future, if I sink with US all world will sink with us. As positive thinker, while we don’t forget subprime crisis, we will be allright.

Owning assets all over world is great. Although I only own a ridiculous small fraction of it I’m sure for now that it’s my best chance to win in the markets having less risk. A true “owning the world for dummies”.

13.MY ETF MARKETPLACE

After I settled each asset allocation I went searching for the equivalent ETF. Because US ETF market is much bigger and offers an enormous variety of funds compared to Europe I decided only to buy US ETFs.

My primary goal was to find ETFs with lowest expense ratio possible, but I also took a peek at market capitalization. Coincident or not, low expense ratios are normally associated with big market caps. In the long run every expense counts.

To define what to buy I used an ETF database and through a simple search of categories I quickly gathered an ETF portfolio, with different asset classes and geographical diversification.

It had passed 7 month since I had quit short-term trading. That was the time I took to learn about ETFs, long-term investing, multi-asset portfolio and how to make one. This was the result:

PortfolioAllocation

 

The expensive ratio is really low with a figure of just 0.17. This means that in a 10 000 usd value portfolio 17 usd will be used in management costs by the ETF issuers. Try to beat this mutual funds!

I was also glad to confirm that the Vanguard ETFs were the ones with lower expense ratios, meaning that Mr. John Bogle’s investing philosophy is still nurtured in his company, which sadly isn’t the mainstream policy in financial business.

The most expensive ETF is the commodity one, DBC – PowerShares DB Commodity Index Tracking Fund, but this was expectable because of contango effect. There were others cheaper, but I wasn’t very fond of their market caps, so I decided to go with the most valued one.

Vanguard also have a cheaper ETF for big american caps instead of SPY, but choosing between them represented less than $0.5 and this allowed me to be exposed to more ETF issuers. It’s also neat to have the benchmark in my portfolio for performance purpose.

Another particularity is that instead of having only one ETF for US stocks, normally it’s choose an ETF for small cap value equities because they have better historical returns, I rather divided it three small, medium and big caps. I like the a idea of following a company’s growth, from small to big cap.

This time it would be different I would make money. I would use my short term knowledge and market-timing for perfect entries. Knowing that if I failed, time would ill mistakes. Although this time I wouldn’t do that kind of mistakes.

I had the money, I knew what ETFs to buy, I was a fresh customer of an US based broker. I had it all. Once again I was so full of myself that I forgot passed lessons and bought all the ETFs in one week and then the market went for a correction.

Oops I did it again…

a

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iShares –  iShares 20+ Year Treasury Bond ETF – TLT

iShares  – iShares TIPS Bond ETF – TIP

SPDRButon– SPDR Barclays Intermediate Term Treasury ETF – ITE

VanguardButon– Vanguard REIT ETF – VNQ

iShares – iShares Gold Trust – IAU

Invesco– PowerShares DB Commodity Index Tracking Fund – DBC

VanguardButon– Vanguard FTSE Emerging Markets ETF – VWO

SPDRButon– SPDR S&P 500 ETF – SPY

VanguardButon– Vanguard Mid-Cap Value ETF – VOE

VanguardButon– Vanguard Small-Cap Value ETF – VBR

VanguardButon– Vanguard FTSE Pacific ETF – VPL

VanguardButon– Vanguard FTSE Europe ETF – VGK

12.EENY, MEENY, MINY, MOE

At this point I had identified what type of assets to have, but I didn’t know how much of this or of that should I allocate in my portfolio. Instead of eeny, meeny, miny and moe the assets I started profiling myself as an investor. How much risk could I take, could I handle 30% drawdown pain or what should be my goal about rates of return, were some of the questions.

I must admit that a 30% drawdown is scary but I consider myself mentally strong to bear a 20% drawdown for one or two year. On the other hand, I would like to have an annualized rate of return of more than 10% for at least 30 years. If you become greedier you’ll have bigger drawdowns and you’ll never know if you’ll be hit by a black swan event when your portfolio is down by 40% and you need your money back. Stay humble.

As I showed in the last two chapters I like to divide the asset classes in two major group, where equity ETFs represent higher returns and non-equity ETFs are smoothers of drawdowns when economy is going down the drain. To determine what percentage of which to allocate I wrote down a checklist of important aspects to consider about me as an investor and my futures perspectives about investment, saving and contracting new debt. To make it clear saving and investing for me are different, saving is money for short-term purpose that I predict that I’ll will be needing it shortly or for some eventuality and investing money is to allocate for a long period to make it grow and to be used in retirement, for instance.

The checklist would give me a clue of my risk tolerance acceptance. It was designed to give  the percentage of much to allocate in equity ETFs and this was the result:

Risk Tolerance Chart

Curious or not it gave me almost a typical 60/40 portfolio allocation. Of course if the checklist would turn out with a 80/20 allocation, I would had go with a traditional 60/40 approach, mainly because I’m aiming for long term, trying not to sell for rebalancing and with a slightly conservative approach I feel more comfortable.

If you don’t want to bothered with checklists just decide the allocation based in your age, if you are 35 years old put 65% in stock. This approach is commonly accepted.

It was time to do some backtest to finally establish individual asset allocation. For this I thought I would need historical data going back at least 30/40 years, mainly because US long-term bonds are in a bull run for the last 30 years and I would like to test my portfolio with US bond behaving differently. That would have represent a ton of work and time consuming, but because of modern times I always google it everything first and for someone searching for a spreadsheet for backtesting, with 40 years of historical asset data with all functions and charts needed to analyse a portfolio for free, that would be the place to look it for. And thanks for all the altruistic people out there sharing knowledge on the internet, because I found it.

So I started playing with different percentages allocations based on my risk tolerance and where main groups should have an allocation around of 55/45.

This was the result that best met my parametres:

Alocação da Carteira

And this was portfolio growth between 1972 and 2012:

Crescimento da Carteira

In 2008 was when major drawdown happened. Go figure!

DrawDown

Finally I had a close idea of what my geographical diversified portfolio should be. With a compound annual growth return (CAGR) of 12.17% over 40 year and a maximum drawdown of 22.60%, where 55% were allocate in equities and 45% in other asset classes, I was very satisfied to have established a portfolio that met my initial requisites.

Tabela

Of course those 12.17% aren’t taking inflation into account, because with inflation your real CAGR would drop to 7.56%, which is still a great number. Turning $10 000 into almost $200 000 inflation free is really good numbers. It takes 40 years, but those numbers are accessible to everyone, especially for the know-nothing investors with no trading skills, whom through a normal saving account would never achieved those results.

Without rebalancing, the returns would increase, but so drawdowns and in 2008 instead of 23% it would be 44%, which is an enormous figure and not suitable for me..

There is more than one way to skin a cat in the markets and the most important thing is to be comfortable with the way you choose to skin it. Past performances aren’t future performances, but they give an idea of what to expect. Back in 2013 I thought I had found a good balance between risk/return/personal life, almost two years later I’m more convinced of that.  Is possible to do better? Sure, much better. Could I do better? Probably, not.  At least for now, I’m still eager to learn and to improve. This system is simple and unpretentious, but allows time for my personal life and to study more while having decent returns.

It was time to go shopping some ETFs.

11.MUST-HAVE ASSETS – PART II

Equities shares

This group is simpler, it’s all about stocks. Equities shares from around the world to be precise. But what to buy? As I said before I wasn’t a great stock picker so I decided to buy them all.  Equities ETFs from different parts of the world were the answer. This allowed me to be diversified by region, sector, market cap and currency, in a way I never imagined that I would have enough funds to do it so.

Those ETFs reply global indexes and therefore through one ETF you can have the best 500 companies of Europe, for example. It’s easy to decide what ETFs to have because you can divide the world in regions and buy ETFs that have companies from those regions. This means you can have ETFs from North America, South America, Europe, Oceania, Asia and Africa.

World regions also can be divided into developed and emerging economies, where in first group you have North America, Europe and Asia Pacific (Oceania plus Japan, Hong-Kong, Singapore, South Korea). Countries with emerging economies are normally found in the rest of Asia, South America and Africa. Developed countries tend to give smaller return than emerging economies, because it’s more difficult to have big growth in mature economies but they also represent less volatility to your portfolio.

Of what I’ve read and learnt the majority of portfolios have separate allocations for North America, Europe and Asia Pacific, but normally choose only one ETF for emerging countries. Which makes senses, because some regions doesn’t have enough countries with minimum conditions to have proper stock exchanges. Therefore I also opted for one ETF that includes the most important companies of emerging countries.  

North America

The ETFs of this region represent two of the biggest economies in the world, USA and Canada. The ETF should track a free float-adjusted market capitalization weighted index which is designed to measure the equity market performance of the North America. It is possible to choose an equal weighted ETF, which will give same value to all the companies in the index, but I prefer a weighted one because is closer to reality and that for me is reassuring (although it’s possible that equal weighted ETFs have better performance). Many portfolios prefer only to have stocks from US without Canadian ones.

USA

NorthAmerica

Europe

The Old Continent is not doing so well in recent years, but it is home of inumerous development economies such as Germany, United Kingdom and France. The european ETF should also track a free float-adjusted market capitalization weighted index that represents the equity market performance of the developed markets in Europe. Besides those countries, a european ETF normally also have stocks from these markets: Austria, Belgium, Denmark, Finland,, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

EUROPE

Asia-Pacific

Japan has major role in this region and this means that last three decade Asia-Pacific indexes have been going sideways. Nevertheless, if you are really aiming for long term it is interesting to verify that the annualized rate of return of this region in the last 45 years is still greater than US or European ones. The Asia-Pacific ETF should be similar to the previous ones and it should track the performance of developed markets of that region. Australia, Hong Kong, Japan, New Zealand and Singapore are normally the covered countries

Pacific

EMERGING MARKETS

Great rate of returns come with high volatility. Although these countries have great potential for economic growth is also true that what would be a small problem in developed countries can be a major crises in emerging markets. Once more it’s important to choose a passive ETF that seeks to replicate an emerging market index. The index will represents the equity market performance of emerging markets. Emerging indexes normally follow these countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

EMERMarkets

These are the regions that through ETFs it’s easy to be exposed to. Equities shares with geographic diversification should have the biggest chunk in your portfolio. They will give a boost to your account’s value when world economy is doing good. The rates of return mentioned in the charts don’t include rebalancing, so adding new money over years will for sure improve those returns and for my taste they are quite interesting.

10.MUST-HAVE ASSETS – PART I

It was on the first days of 2013 when I started to think what kind of assets should be in the portfolio and in what percentage. Because I wanted to delay paying profit taxes for how much I could, I knew that what I decided it would be for all the investment period. I tried to be cautious.

If I gathered 100 years of market data and I assume only mean reversion, probably I would not end up with all type of asset classes. But no one know what the future will bring, so for the long run I thought it would be extremely important to cover all asset classes.

I like to divide asset classes in two major groups:

  • Non-equities shares
  • Equities shares

Those two groups have different correlations and therefore a well structured portfolio must have both. Because of negative correlation between groups, normally when stock markets are going up the other group tend to go in opposite direction and vice-versa. Of course this doesn’t work all the time and there are always exceptions that we must be aware, for instance because 2008 markets crash was due to the sub-prime, real estate was also severed hit.

First group can be subdivide as described below.

Non-equities shares

Bonds

In first group we have government and corporate bonds and normally they represent a fixed income to our portfolio.  Their yield depends on the investment period and the risk of getting payed. So government bond pay less than corporate, because countries are less likely to go bankrupt. Between countries there are also differences, countries with economic and political stability will pay less because they represent minor risk to your money (although at this moment Spain and Italy are paying less than US, which is odd). Long-term maturities bonds (15 to 30 years) pay more than intermediate (3 to 10 years) and short-term ones (less than 3 years).

There is also another type of government bond that is an inflation-protected security aka TIPs. This security is very interesting because your fixed income will be inflation free and we should be aware of what inflation could do to our rate of return.

Bonds also represent a negative correlation with shares. If shares are in a turmoil investors will look for safety instead of returns and that means going for bonds. In uncertain times you need to have bonds from countries which are reliable and dictate external police (this means being the world’s biggest military superpower) and that is USA…USA…USA.

Bonds are a must have in any portfolio. They are ice when things start to heat.

Gold

My precious…the shining metal has intrinsic value since ever and will have in future, because it’s rare, is used in the industry and some say that countries can go back again to gold standard (China and Russia are among those, be careful USA). Pundits also say owning it is good way to have protection against inflation, especially in these times of central bank planning, where burning currency is the main agenda. Nevertheless, Barry Ritholtz point out that “In real, inflation-adjusted terms, gold is unchanged since the early 1980s — the last peak in gold.”  and it doesn’t give any kind of dividend, which might discourage some investor of having it.

But in uncertain times is where investors also put their money as it seen after 2008 markets collapse. Adding to this all the speculation around reintroducing gold standard by some of the world strongest economies, makes gold a must have in any future proof portfolio.

Commodities

In this category it fits a world of raw materials and essential commodities for everyday life, such as crude, oil, gas, gold, copper, zinc, wheat, corn, timber to name a few. When inflation is high, commodities are a good hedge to protect your money, because commodities prices also tend to rise and there are few assets that can handle high inflation. But we haven’t seen inflation in recent year and as Cullen Roche affirms commodities are not an investment, it’s basically short-term speculation, in fact he arguments that commodities at real prices are in bear market for at least 130 years and it is probably best to own commodities equities producers (CEP) instead. So why should I include commodities? Simply because I real can predict the future and as LTCM (portuguese multi-asset expert nickname not the fund) said to me once “Isn’t because you have commodities that your portfolio will underperform”. And why not to choose a CEP ETF instead? Because as we will see later I will be exposed to that equities in shares assets.

In my humble opinion commodities must be in multi-asset portfolio, with time I will have enough data to understand if commodities are being my weakest link but for now it makes sense to have it. No one know really how commodities will perform in the future, where earth’s population is still growing and the need for food and raw materials will for sure increase.

REIT

Real Estate Investment Trust (REIT) is an asset that trades like a stock in the exchanges and invest in real estate. Who has never dream of owning an hotel or a condominium, through reit you can and revenues will come from renting or interests of lending money for mortgages to real estate owners.

In Portugal investing in real estate is everyone dream, but dealing with tenants must be a nightmare. I would rather put 150k in a REIT, but probably no bank would give me a loan for that.

If this is no-brainer investment for sure that it has its place in multi-assets portfolio. At least in mine has.

 


 

Although these assets are different from stocks, most of them are extreme volatile and shouldn’t be purchase if money will be needed in short time. These type of assets should be considered for an intermediate to long-term investment period.

Negative correlation with stocks is quite different of low volatility and therefore is important to understand that depending of the assets you choose you can still have real big drawdowns. The difference lies in the fact if you had only stocks it would be a massacre.

At this time I knew that an important part of my portfolio’s allocation would go to bonds, gold, commodities and REIT.

9.GOING FOR LONG TERM

My days as a trend follower were over. Even if I tried to make money out of the markets as a trader, probably trend following would not be the best way to do it, specially in the post-crisis of 2008.

It was time to have statistical data on my side and this meant to have a geographic diversified multi asset portfolio with periodic rebalancing for a very long time. The truth is that long-term investor in the long run will beat the majority of short-term traders (here and here). But how long is it to invest in a long term basis? For me I thought about my retirement so I decided to invest for a period never less than 30 years.

I had quit trying to get rich in two or three years, instead it would take me 30 years but at least I wouldn’t get broke in the process.

Nevertheless, 2012 had taught me two lessons that needed to be quickly addressed to achieve good performance in the markets:

  • Brokerage costs were a substantial part of my losses.
  • Every Time I had a profitable trade I would pay 28% of it in profit taxes.

In 2013 I changed to an international broker, based in US, which guarantees minimum fees and on profit taxes I decided that my portfolio would only buy and for rebalance purpose I would only use fresh money instead of selling winners to buy loosers. At first it will be easy, after my portfolio gets bigger in value it will get more complicated, but I’ll use dividends money and if needed I will sell. But is like that old saying “dying and paying taxes later the better” and with this simple tax planning it will allowed me to legally escape paying taxes for a long time.

The last thing to decide was what kind of financial instruments I would use to make my long term portfolio and here I quickly restrain my option to two: exchange tradable funds (ETF) or mutual funds.

Based on my conviction on having a portfolio with lower expense ratio as I could, I opted for ETFs.  Although ETFs don’t seek alpha their associated costs are cheaper than those in mutual funds. ETFs only purpose is to track an index, a commodity or a bundle of assets, so they don’t have active management like mutual funds. Besides all cost associated with buying, selling and owning shares, in mutual funds you also need to pay the people that actually run the fund. They can be quite good and excel the performance of whatever benchmark they are following but then you also need to excel and choose the right ones. If you don’t choose a correct amount of right ones probably you will end annihilating any alpha possibility. On the other hand, if I failed as a stock picker why I should I be good at picking mutual funds?  Past performance are not a good indicator of future returns and If you don’t choose the right ones or the management teams start to have worst performances you will need to turnover your portfolio and that will erode your portfolio’s value in taxes and other fees associated.

But how are the performance of those management professionals, that year after year try to beat the market, creating in your portfolio an extra-value? Not great, especially in the long run as you can read here in this great article of Rick Ferri. To resume it, I just want to mention this paragraph: “Maintaining consistently high performance is so difficult for fund managers that less than half (10% to 20%) of the top quartile funds were even able to stay in the top half over the next five years. Approximately 30% to 40% of funds in each category finished in the top half after accounting for funds that go out of business, merged with another fund or changed style categories.”. Of course this tend to get worse as time passes by.

So I realized I could done the same amount of harm to my money as professional and I decided for ETFs.

8.NEW PARADIGM

 

“In the investing world, a new paradigm is totally new way of doing things that has a huge effect  on business.”  – in  Investopedia    

 

After I stopped trading I started wrote in a financial forum about my trading disadventures, as part of my healing process. I needed to understand my mistakes and feelings, but I also wanted to learn from other traders with similar experiences. Everyone was really nice telling me stories with great resemblance to mine.

Nevertheless, there was a user with the nickname of LTCM (curious name) that started to post in my topic some charts of trend following funds performances in recent years and the results were almost as bad as mine. This made me thinking how could professionals had so lousy performances? And how could I, as trader wannabe, to achieve great performances if pros couldn’t?

Featured image

A Comparison of CTA Indexes with trend following strategies – RED ROCK

For sure that I had responsibilities in my trading, but were there any edge to my system? Probably not, specially for a person who is only starting and hasn’t mastered trading psychology yet. But what kind of system would fit me was the following question that popped out.

LTCM was a mysterious user, as if he knew something that the rest of us didn’t, that allowed him to make clever remarks to all who wanted to be traders. Normally he would say that is extremely hard for micro-investor to succeed in trading and great majority of us should abandoned short-term trading for the good sake of our money. So I remember to read again his topic about “How to get rich slowly”.  Reading that completely changed the way I thought about investing/trading. Was such a good reading, that I can compare it to Barry Ritholtz writings. But to read it in portuguese were financial illiteracy is so big was really a treat. It was so good that it was severed copied and exposed in other financial forums. Nowadays, being copied is a kind of success recognition I guess.

There are two ways of learning faster, through books or mentorship. LTCM was a kind of virtual mentor. Because he posted some charts and articles in my topic, made me start to wonder if I was in the correct path. But for learning quick you also must embrace what are being teached to you. The true is that LTCM started is topic two years before and I didn’t pay much attention because I thought I would succeed in short-term trading and I wanted to get rich quickly not slowly. Now because I was sore of lost money I was really paying attention.

Reading LTCM’s topic, Barry Ritholz in his blog, John Bogle’s “The Little Book of Common Sense Investing” and a lot of other articles and blogs on the web did the rest.

I had discovered a new paradigm for the average investor like me to take his fare share of market’s profit. A multi-asset portfolio with geographic diversification would be it.

7.REALITY CHECK

I must say, after two years, I had mastered a trading system but I was not mentally mastered. After my wife told me that I didn’t have a great system, because I had letted profits turn to losses, I made real poor decisions and this happened because I was not sure what I was doing. The inception in my mind of a poor trading system and my lack of confidence led to fear and fear isn’t certainly a good decision counselor.

But there were other mistakes, such as I didn’t real understand time-frame of negotiation. When I was learning everything was static. Although I was analyzing shares based on their past performances I never realised how much time it real took for a price to evolve. This made me buy when a stock was high, sell it when I was losing and shortly after it would rebound. I just didn’t get the cycle of a stock and this mainly happened because I was aiming for the long run but trading based on short-term thrills.

Commissions, spreads and cost of borrowing money (because of leverage) were 30% of my total losses. This meant I didn’t keep my fees to a minimum and probably made too many trades taking in account my total capital. When I traded I would immediately lost 1.5% in fees, which is a lot. This was my third mistake.

When I made two consecutive winning trades I felt king of the hill and then I would make a new trade without proper study, like if I was so good that I didn’t need technical analysis anymore. As if my predictions were enough. This really went bad and here was where I lost more capital with this mood trades with no preparation.

Not everything was bad, I respected my hard limit and I stopped trading when it was hit, which shows some level of mental commitment and discipline. I understood that kind of trading behavior would end badly so I stopped to protect my capital and to rethink the way I was in the markets and that was clever.

I had 45% of winning trades, which is ok and if I had kept my profitable trade for more six months I would turn positive. This means that you only need few real good trades to bear many negative ones.

Translating this into a list would be like this:

  • Choose a trading system that suits you and not the other way around – don’t change your life because you think you need to follow real time quotes or to spend a lot of time scanning for the next big mover. Adapting trade to your life will reduce stress and you will have some level of detachment, which is good to make poderate decisions. Emotions aren’t compatible with trading;
  • Be consistent, don’t give up and remember that everything takes time – Write down what you need to see in a chart to open a new position. Read this before you open a new position and only if all ticks are checked you can click to purchase a stock. In the  beginning when we open a new position we are so thrilled that we forget our rules, writing them down help our brain to understand what are we doing and if we are doing it right. This will be a continuous learning process and you probably will fail a lot but stay in course and don’t give up. After some time you will trade without emotion or fear and return will start to appear, but this takes time. In the beginning I thought that I could get ritch or quit my job in medium term, which is silly because only few can achieve this. Is almost like winning lottery;
  • Reduce your trading cost to a minimum choose a broker with low commissions and don’t overtrade. In the long run this will make a huge difference in your performance;

  • Stay humble – When you are losing is real easy to be humble because it hurts, but if you are winning you think that you’re special and everything you touch will turn in pure gold. That silly pride will make you vulnerable in markets, because everyone involved don’t care about if you are a golden boy. What they want is your money, simple as that. So stay focus because out there there always be someone smarter, quicker and (probably) best looking than you.

Those were the lessons that I had learnt after almost a year trading. I understood how hard is to take money of the markets and I was not mentally ready to do it.

With no positions opened I had all time in the world to think without pressures and how it would be more suitable to be in the markets. I knew by then that trading system was not working for me, I was taking too many risks and paying a lot of fees. Because of my wishful thinking I was eager to make good money and that pressure didn’t give time for my position to settler higher. I sold profits to quick and let losses accumulate.

But I also knew that I had a lost battle not the war.  I wanted to continue involved in the game but this time would be nice to be part of the minority that takes profits. I just had to figure it out what was the best way for me to achieve it. So I started to study…

6.10%

After I wondered if my strategy was the right approach to win in the markets, I held on to my backtesting and first months of trading. Certainly, I would in a frame of time go positive again, I just thought that I need to have more strength in my convictions and be more sharpened focus in my trading. What did this really mean? Going crazy and forget all about I had learnt. I started risking more capital per trade, about 3%, and during the trade I would change my stops influenced by market micro-swings. I was opening positions because I want a certain price action not because I had identified that price action. Believe in what you see not in what you want to see.

I started to feel anxious and having bad night’s sleep. I was going fast in stupidity lane. What happened to me? I was so good with paper trade account. The problem was real money. I had started to put money where my mouth was. That pressure was immense and I could handle it. All that wishful thinking, about making tons of money and quit my job, were being torn apart. I was having a reality shock. I was learning that trade is really difficult and learning it the hard way, with losses. With that kind of scares you read about ten thousand times, but we quite don’t understand it because we never feel it. Probably this kind of pain is necessary to avoid future mistakes and at some point grand majority of traders have or will experiment this.

When we trade with our real money, some of our worst human feelings start popping out, greed, euphoria, panic, despair, self pity. These feelings cocktail  are so powerful that if you don’t have mastered your mind you’ll make real bad decision. You will act by impulse like if you are under attack and your rationality will be underpinned by your survival mode. The market is fighting me or market is controlled by big corporations to doomed the little guy were excuses that I used when I was losing.

But markets don’t care about your feelings. You’re not especial. You’re simple one more going with the crowd. If you lose it’s your responsibility.

I was immersed in overthink when I was saved by my hard limit. I was rational enough to hold on to my first and most important rule.

In ten months I had lost 10% of my total capital. It was time to stop…

 

5.TRADING DAYS

I had almost everything to start and the last step was to find a broker. In Portugal there is not much to choose from and commissions are almost the same between brokers. So I chosed an international broker with confirmed credits that was operating in Portugal for a few year

I also must say that, subliminar or not, I went for the one with the most appealing presentation. Is incredible how much decision we make everyday based on what matters the less.

After I opened the account I was really glad with myself. I was taking risks like an entrepreneur does when he starts his business. That made me feel very grown-up.

When I saw 10000 USD deposit in the account I was so eager to start I forgot a lot of my strategy. Of course I looked at some charts for identifying some trends, but I didn’t use the same setups that I had used in backtesting or even looked at screeners to find stocks based in my predefined parameters.

In fact I bought 9 different equity shares, 7 longs and 2 shorts, in the same day and I didn’t even care if they were near a new higher high and probably heading for a market correction.

I thought as long term trader it would not matter, but this was an excuse to be immediately part of the game. I could not control myself and I was not able to make a good market-entry timing. At that time I didn’t even notice.

Even stock picking was so bias, I chose basically blue chips that I am used to. Is incredible how I didn’t see it. I bought Visa, Mcdonald’s, Ebay, Starbucks, Unilever, Royal Dutch Shell, etc., companies that make part of my daily live. Why I didn’t I buy shares of a company that I’ve never heard before? I guess we tend to choose what we know best, it represents comfort and reliability. But what have these two adjectives to do with buying or selling shares? Nothing, I must say…

I was starting to accumulate really big mistakes, but I was still convinced that I was at the top of my game. Basically because in the two first month of trading I had a possible profit of 5% of my total account. I remembered thinking how could be that easy? Silly me…

Then Mr. Market when for a correction and I saw my virtual profit come down to 0% again. I tried to convince myself  “this is just a phase, as it went down will go up again”. At this time I was starting to doubt my trading system. I was accusing some pressure and I decided to talk to my wife about my wonderings.

Even though my wife was very supportive from the beginning, she is a bit sceptical about the risk involved in trading which is good to keep my feet in solid ground and it makes me more cautious avoiding failure – failure is always present you can only try to fail less.  So when I approached her to share my feelings I started telling her that my account had had an increase in its value of  500 USD in just two months, but now we were in a corrective phase and the account was back to square one. I still can remember her words “It doesn’t look a great deal of a system! Why didn’t you sell when you were making money?”

Those words really affected me. Now, I know why but by then I thought she had a point and I was starting to wonder if I was doing it right.