Bad 2018 First Quarter performance

31st Mar '18 by tripuram

45 comments 9992 reads

As you can see, my first quarter performance has been abysmal.

5abff9ab2761ffirstQtr2018_performance.pn

I do look at my portfolio regularly and convinced that the stocks that I own are the right one's based on some of the data points/blue sky thinking , corroborating views from Paul/Graham courtesy SCVR and of course your valuable comments in the forum.

Irrespective of what I think the market says that I am wrong. I can clearly see that I am making the mistakes!!!. Few I can gather,

1. Getting attached to the stocks due to which I am reluctant to get rid of them - Need to emphasise myself that I am running a portfolio for profit and nothing else.

2. Not taking out the profits when the stock are at high e.g. GMD was almost 200% up last year and did not act and saw them tumbling down

3. Avoid chasing big gainers and it is not possible to hunt them easily. May be time to focus on ticking stocks !!!

As you can see from the write-up, I am still a novice investor who does not have a trading strategy and hoping to build one to suit my style.

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Howard Marx

2nd Apr '18

Tony777x, I understand what you say, but I'd like to offer a slightly wider definition of risk.

When investing in shares, there are numerous forms of risk. I'd say that the main four are:

1. Business risk (macro-economic, industry-related, company specific) e.g. buying shares in a UK Housebuilder in 2008
2. Valuation risk e.g. paying a 70x p/e for BooHoo stock in 2017
3. Share price volatility e.g. buying a Biotech stock & expecting the share price to move no more than +/- 1% daily
4. Liquidity risk e.g. in a recession small cap liquidity will evaporate, leading to increased volatility (risk #3)

In light of the non-uniform nature of risk affecting stocks, placing a uniform 15% stop loss on all positions is a questionable strategy. Surely a stop loss needs to acknowledge the underlying business in question & ones investment time horizon?

timarr

Hi tripuram

If that's an equal weighted portfolio then it's down about 9% in the quarter compared to a 7%+ fall in the All Share. It's less a disaster than a blip.

The real issue is here:

Firstly: who gives a stuff what Paul or Graham think or what our views our on the boards? It's not their money you're risking, it's your own. You need to know why you're investing in these stocks.

Secondly: why are you convinced these are the right stocks? Frankly, at first blush this looks like a terrible portfolio - and I hold 5 of the stocks in it. Ed Croft's analysis explains why it's terrible, but you don't really need that quality of analysis to see it.

There are some quality stocks in the portfolio but with the exception of IG Group (LON:IGG) they're horribly overpriced. French Connection (LON:FCCN) also looks like there's some value there, but everything else is betting against the house. If you're going to run a strategy like this then some of the previous posters are right - you need a tight exit strategy. That's hard to do if you're experienced, but if you're just starting out it's a huge issue, especially if you're dealing in relatively small lot sizes where transaction costs will eat your profits.

Stockopedia is a fantastic resource - the easy availability of factor based analysis is one of the best things that has happened to private investors in my (long) investing lifetime. Stockranks are not infallible, but for a beginner they're a better place to start than hearsay and hope. A portfolio constructed around high Stockranks is statistically more likely to outperform the random selection of stocks in your selection.

Believe me, I've made every mistake that you have, a ton of other common ones and some entirely of my own making. As a beginner you're doing OK if you're not losing on every trade. But for most people investing in shares is a get rich slowly game, the important thing is not to risk your capital on blue sky bets and overpriced growth stocks.

I'd suggest reading A Random Walk Down Wall Street by Burton Malkeil. I don't agree with everything he writes but it's a lot better starting point than most of the get rich quickly guides out there.

Good luck, and keep posting.

Blissgull

tripuram,
Congratulations on your performance last year.

I hope you do not mind a couple of comments on your investing style based on " data points, comments and instinct."

Unfortunately, our instincts are usually wrong in trading/investing. It seems evolution has programmed us all to be bad investors. One of the biggest problems most investors face is the psychological battle to overcome their instincts.

As for comments, if you search through the posts here there is a good post by Ed Croft where he shows that the shares most discussed on bulletin boards tend to be low quality shares with losing styles.

tony777x

I personally think that sometimes it is easy to forget that Most stocks do well while the indices are doing well and the opposite is true. In other words you could very well be picking good companies but good companies tend to fall in price in bearish situations like now and prosper in bull situations.
Watch first the overall market then the stock.
75% of stocks go down if indices go down. Not buying at times like this can also be a position of strength.

ricky65

I set the initial stop loss immediately after I buy. It no longer bothers me if my stop is hit. I'm not bothered about being 'right', my goal is to make money. I don't have any control on whether the trade is going to be a winner or a loser! If I'm stopped out and the stock is good, it will almost always provide another entry point (I'll give it up to 3 attempts). If the share moves into profit I manually move the stop up to around break-even, and then incrementally above my buy point.

I decided years ago that I never want to sit and watch a loser ever again. It's not worth the mental energy or loss of capital! Even when I get slippage on a gap down, I don't have the mental torment of seeing a nasty loss every time I login to my portfolio (Worth noting that some can take years to come back or never do). I'm out with a clean head and I can move on to my next best idea.

Lordyjordy

3rd Apr '18

I like the logic here.
I have been reading Leon Boros's e book and he describes how only a quarter of his losses (over many years) were over 20% so was toying with initiating a auto stop loss of 30% in my portfolio. I've had some losses recently!

But reading your comment above makes me question this thinking.

I wonder if there is a mathemematical answer to this question. I would love a bit of software that could record our portfolio from inception and then say add a strict 40% stop loss and analyse the results.
Would be very interesting.

Nick Ray

I wonder if there is a mathemematical answer to this question. I would love a bit of software that could record our portfolio from inception and then say add a strict 40% stop loss and analyse the results.
Would be very interesting.

I wrote a few thoughts about this some time ago if you are interested:

https://www.stockopedia.com/co...

iwright7

"If people are not laughing at your goals, your goals are too small - Azim Premji"

My goal is to achieve super growth - 60% per annum (based on some calculations!!!) but at the same time I cannot risk the principal in its entirety. As I am already down 20% in the first quarter, need to achieve a min of 8% growth per month to get back to the ladder.

I have to say that I think that you need to re-think your goal and strategy. Single digit % average gains are more normal and if you could average 20- 25%/annum over 5 years you would be doing very well indeed.

Mike888

It's good to have a target, and as targets go that is pretty ambitious. I'm afraid however that the likelihood of you achieving such returns annually is very slim indeed. On paper you could, in practice, as you are discovering, it is not that easy and I would actually say impossible with your current approach.

For example, you should never have allowed such losses on four of your holdings, regardless of your perspectives on a company you need to cut your losses quickly. Listen to the market, you are one person against a sea of other investors, the masses always win. You are tying up capital in positions that need to recover rather than investing in positions that are already healthy\have better prospects.

Another risk with such an ambitious target is that it starts to affect your judgement. In your efforts to regain lost ground you are likely to make poor and riskier decisions.

In a bull or flat market opportunities arise that allow big gains, in a bear market such opportunities are rare if not impossible to find. Therefore your only avenue is shorting, a high-risk strategy and not one I would recommend for the inexperienced.

Leverage can be your friend and enemy, again big gains in either bull or bear markets but equally massive losses, again not something I would recommend for the inexperienced.

I feel you would benefit from a mentor, although I recognise finding one will be very difficult.

Mechanical Bull

This is a really interesting thread with some great responses.

I can longer consider myself a novice investor but I am still making mistakes, including the cardinal error of breaking my own rules.

Over the last couple of years I have fully embraced the strategy of running my winners, mostly with good results. However, I have fallen into the trap of becoming attached to previous winners and not bailing out when the market turns against them. These include XL Media, which is down about 30% from its peak in December 2017 and Zytronic which is down 35% from its peak in September 2017.

My rule is to sell when the Stockrank drops below 80, unless the share price is still showing price momentum in which case I hold on to it. Both these stocks have triggered this sell rule within the last couple of months and yet I failed to act. The justification I used to continue holding was that these are good companies with generally positive news flow. Also, I didn't want to be one of those investors who get shaken out during a market correction. However, I think that basically I fell into a psychological loss aversion trap, that is, not wanting to crystallize a paper loss for investment that was recently valued a lot higher.

Reading this thread has spurned me into action and I've sold out today. I've still done pretty well out of these two, including more than doubling returns on XLM. I also did the right thing by taking some profits as part of regular rebalancing. However, if I had followed my sell rules I would have got out when the share price was about 15% higher in both cases.

The lesson I have learnt is to stick to my strategy. I am sure that there are very good reasons for holding on to these two stocks but they are just not my reasons.

Agreed that adhering to rules is very important, perhaps the most difficult part of trading. For me, it's something that gets better with experience.

I think it's easy to fall in love with a share that's provided big gains and selling it can feel a bit like saying goodbye to an old friend. Over the years I've become a somewhat coldhearted and robotic trader; for me, emotions and sentimentality have no place in trading. Minervini has a saying that you should date stocks but never marry them!

Rusty2

Yes Minervini is a short term trader, to give you an idea this is his model I think he runs for his subscribers:

"Our risk model went on a buy signal on 9/8/17 and then a sell signal on 2/2/18. During that time we closed out 45 long trades with an avg. gain of 12.00% The avg. loser was 4.11% with 53% trades profitable. Hold time for winners avg. 37 days.. losers were held for 20 days on avg."

I believe he is more active than this. As you can see from the losers he must be closing many of them well before a stop loss is hit. Trading costs are so much less than in UK.

Surprised at how low Minervini's strike rate is.maybe this is a symptom of the US market

mrosbiston

agreed this wouldn't work in the UK with small cap spreads (300-500+ bps).

i imagine most people have taken the Minervini strategy and adapted it when investing in UK small caps, having a longer holding period. For me at least, spreads form a much larger part of trading costs than explicit commissions (i think you are getting at this anyway).

With a 50% batting average, if your average gain is 9% after costs (assume 3% costs) and loser is 4% + (3%) costs. Then net gain is 2%, Expected value would be 1% (using 10% position sizing per trading would have EV of +0.1% per trade). Some of this does also depend on compounding, position sizing.

If you compound an EV of +0.1% over 45 trades, the net result is a gain of +4.5%, not accounting for any drawdowns.

My point is that for the UK, better to have slightly bigger winners and bigger losers so that trading costs are a smaller part of trading.

I think that tweet is probably an accurate representation of his trading. I'm more long term than Minervini. I tend to hold for months to a year or more (if my stop gets hit then I'm out).

Trading costs are considerably less in the US than UK. I see some US brokers charge $3 a trade whereas I pay £12.50. Rip off!

Yes I was a bit but as his losers were only down 4%, it only needs a down day and he will probably sell. I did look at the Naked Trader's success rate last year and it was over 70%.

As you say you could subdivide risks into many categories. I can only speak from my own personal experience which I can only describe as transformational in results. Let me explain when I started investing I adopted a looser view on stop losses in general as well as looking predominantly as whether the fundamentals had changed before I changed my mind and was getting caught out with good companies going down and never fully recovering. Since I started to take a more tecno fundamental approach and letting the market decide ultimately if I should hold a stock I have had some great spectacular gains and less big losses. I now see the biggest risk is market sentiment itself although I do agree with the points you make. I suppose my style can be summed up with a Jesse Livermore quote
“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”
The problem I see if you allow a long time frame on a good company that is been hit by the market how do we know that while it is down global markets change and that great company from been a star performer becomes a laggard.
A couple of examples I can quote from personal experience is Accrol Group (LON:ACRL) andConviviality (LON:CVR) both companies which I held but got rid off when market sentiment changed towards them yet at the time they still both had great fundamentals. One I got out with a profit the other a manageable loss. Had I waited I would have had catastrophic losses on both.

doug2500

Sorry to digress but can we analyse our own portfolios like Edward's done here?

5th Apr '18

nbeeny
you are right that good dividend stocks that are choppy may continue to deliver solid dividends even if the share price drops. Having said that no stocks are completely safe even if they are dividend stocks. Take for example Laura Ashley Holdings (LON:ALY) who around a couple of years ago were paying close to 10% yield and trading at around 25p. Now they pay no dividend and are trading at around 4p.

You are right Tony, never be seduced by a dividend stock solely for yield, when it goes bust (or decides to drop its dividend with what will be a calamitous fall in share price), that 7-10% you have earned for a while will pale into insignificance when you lose 100% of your capital on that stock (CLLN). or significant erosion (ALY), plenty of examples litter history, once the yield seems too good to be true, it invariably is. Nobody can rest entirely on their laurels.

Bad 2018 First Quarter performance

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Tripuram

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