Mentorship for a relative newcomer.

30th Nov '16 by Lord Zion

37 comments 12317 reads

Hello there.

I was wondering if anyone had any experience of mentorship regarding trading? I see / read / hear a lot about it but am always strike by two brick walls. The first being location and the fact that the mentors tend to trade US stocks. The second being the alarm bells that go off as soon as money is required! I don't part with money easily.

A quick background:
Apart from an economics A-Level I did many, many years ago, I have had zero dealings with any aspect of the financial market (beyond having a bank account). For 20 years I was a professional musician so my paths didn't cross with the kind of people that tend to invest. However, since "retiring" from music and moving, I have been looking for a new passion. Quite by surprise, I found it in trading.

I inhereted some money in 2014, more than I have ever had before and was struck with fear. Convinced I would somehow lose it all, I divided it up and stuck it in various bank accounts, transferring cash to meet minimum deposits to gain the greatest interest rates. I also decided to buy some gold, for no other reason that I figured it was safe.

Unbeknownst to me, I had purchased the gold at a really good price. So, when Brexit happened and the price of gold shot up, I did very well out of it. In the meantime, I had been pondering stocks and shares so had opened an account with Hargreaves & Lansdown. Hearing on the news how much the stock price of banks etc had plummeted, I dived in and bought shares in Lloyds, RBS, Easyjet and a couple of building companies.

I spent the next couple of months watching the price of these stocks rise which was very exciting. I then did what I expect a lot of new people do that have had early success and figured I must know it all. So I bought other shares that dropped (following the Warren Buffet style of buying when scared) and waited for riches to come in. Again, some flew on good news, others did not.

I've also spent the last few months watching thousands of hours of YouTube videos, reading many books and digesting as much information…

Unlock with Email

Unlock with Google

Already have an account?
Login here

PJ0077

1st Dec '16

Lord Zion

Howard Mark's memos are priceless.

The archive back to 1990 can be found here:
https://www.oaktreecapital.com/insights/howard-marks-memos

I'd highly recommend the last one he wrote on risk management:
https://www.oaktreecapital.com/docs/default-source/memos/2014-09-03-risk-revisited.pdf?sfvrsn=2

LE4R

I think this is great advice. I still consider myself very new to this game, after a number of years of investing, but I'm very slowly moving money I keep in my diversified IT portfolio (the outsourced IM piece ;) into my 'active account' where I allow myself to invest directly. It has given me piece of mind that any significant shock on a particular share (as I had the other day) should be small within the context of a diversified direct equity bucket which is itself a relatively small part of a much wider portfolio comprising predominantly ITs (60-70%).

And FWIW, as clarea say, I wouldn't be considering spread betting until you're very consistently winning on normal trades. I don't think I'm anywhere near that point yet...

Mark Simpson

Hi Lord Zion

The problem with wanting a mentor or following another's strategy is that it may not suit your personality. I think your time would be best spent reading widely and developing your own investment checklist based on your own strengths and weaknesses. A couple of unique challenges based on your post that you probably need to consider are:

- You talk about trading but being a contrarian. If you being contrarian you are going against the perceived wisdom of the market. What makes you think it will change it's mind in your trading time frame? I think you will be much better off adopting the mindset of an investor. The lines are a bit blurred but typically you want to be think of buying a business and taking part in it's long term success not trading an asset. Buying for less than it's true value is then the key to good returns not second guessing the market's reaction.

- You have to think what your competitive advantage is. Typically as a private investor this will be knowing smaller companies better than the market, thinking longer term than the market or providing liquidity when there are forced sellers e.g. spin-off investing. However you may have specific industry experience too. Whatever it is you have to align your strategy to where your competitive advantage is. You are highly unlikely to have any competitive advantage in spread-betting, forex etc. so just leave those alone. Any significant gearing is also incongruent with being a contrarian investor or thinking longer term than the market.

- You have the benefit of having excess resource to invest now. However as a beginner you will likely make far more mistakes. Most of us who gradually built our portfolio up from earnings made these mistakes early and the losses are a small amount of our eventual portfolio. For this reason you need to be quite conservative when you are starting out with an inheirited sum that is large compared to your income. We are all overconfident so you should err on the side of caution re diversification & position size.

- Re: selling. As a basic strategy then a trailing stop loss is probably a good start. This will protect the downside while leave you exposed to the upside. You have to be strict with implementation though and stick to your rules. You will occasionally be whipsawed though and you have to be able to cope with this. As you develop your analytical skills in valuing businesses then you can think about buying more of shares that are going down but are significantly undervalued. Best to wait until you are pretty good at business valuation though before attempting this.

- re: shorting. Generally shorting things that are significantly overvalued but have no catalyst to precipitate the downside is a losers game. You need to identify a catalyst that will pay-off on the short side. Really the only one that matters is running out of cash due to business turn down in highly indebted companies or fraudulent accounts. Even then you can't even rely on regulators to close down frauds or unethical business models and many last for years. Identify these ahead of time requires very strong understanding of company accounts and business models. Hence why very few people are successful on the short side. My advice - leave this one for the experts.

- don't pay up for courses or investment seminars. Buying books is fine and paying for one or two sources of good market data like Stockopedia is usually worth it. However always ask if this person's approach is so successful why are they charging people to learn from them? If they really had expertise that isn't available in a book then they would be keeping it secret.

You are on a good path but don't be surprised if it takes a long time to be proficient in investing. You are trying to win a game against highly intelligent, highly motivated, experienced and well-informed people so to do well you need experience and ability. Think of the hard-work and deliberate practice it took for you to become a professional musician. You should expect being an investor who consistently beats the market to be a task of similar difficulty requiring the same amount of deliberate practice.

If you find you don't enjoy this level of practice then there is nothing wrong with buying a cheap index tracker or low cost balanced fund. In this game the fee structure means that being average in a low cost fund will make you top quartile in long term returns.

Hope that helps,

Mark

thebuffoon

Hi Ian,

No, it was first said by Ben Hogan, then used frequently by Gary Player.

He used it so much and for so long that people cite him as the originator, but it was his hero Hogan who first aired it in public. He once wanted some advice from Hogan, so phoned him. Hogan, who by then had a golf equipment company, making the finest clubs in the world, asked Player which clubs he used. He replied "Dunlop". Well go ask Mr Dunlop Hogan replied.

I've also found that the harder I work (the more I read and the more I research) the luckier I get.

The first rule for success is to know yourself!

Buffy

Lord Zion

Thank you for the positive feedback; it's nice to know that I am at least roughly on target. I seem pretty good, research-wise and don't follow blindly. Several times stocks have been recommended but, when I have looked at them, have been a bit confused as to why. Backhander, I reckon! ;-)

Thank you Carey - I am certainly learning! Don't think I have crammed so much into my head since I was doing my A-levels...

Thanks for the comment. The books I am reading are about any and all aspects of markets and trading. I figure that the better I understand the whole, the more I can focus in on the aspect of it that works for me both time-wise and, more importantly, personality-wise. I have stuck a large portion in trusts and am holding some of the stocks I have that are doing nicely. Slowly, but surely, I am clearing out the rubbish and replacing it with more quality items.

Thank you for the considered response, Ian. I am encouraged that my natural instinct seems to lean toward the concensus. And you are quite correct, it is a fascinating subject, something that has taken me completely by surprise!

Thank you for taking the time to reply, Gus. I've ticked a several of those boxes mentioned, which is encouraging, but I've not experienced that much ETF-wise. I have tried the 3x FTSE short a couple of times, but did get the impression I wasn't making the most out of these tools, so I will certainly investigate those further.

Thank you Simon, that is very sound advice. I'm typically a very independent person and, in every incarnation prior to this, had always been "the boss". So, for me to want to actively seek advice and help is quite a new experience. I guess the mentorship came about simply because I had read and heard a lot about it, so presumed it might be quite a typical route for people. But investment buddies sound like a very viable option. Differing opinions are always good.

Thank you so much for those, I shall devour this evening!

Many thanks for the response, Mark. I must have used an investing term accidentally when I described myself as being a contrarian - I meant within myself (ie I do enjoy the excitement of volatile stocks, but also the safety of "decent" stocks), rather than being contrary to the market itself. I fully understand that I need to react to it, rather than try to fight it!

So far, I am doing OK. Up a few percent since I started, so at least it is headed in the right direction. The more I learn, the more scared I become, which I guess is probably a good thing!

peter lambert

4th Dec '16

Hello,

I am at a similar point in my learning; constantly reading seeking worthwhile advice. The best advice I have heard is 'Ignore all tips and look for shares yourself' Sorry can't remember where I got this from due to information overload. At the risk of stating the obvious have found the Rank and Screen menus on Stockopedia incredibly helpful

gus 1065

Hi Zion.

Sounds as though you are in good shape. ETFs are a pretty broad church from the plain vanilla to the exotic and complex. Using a leveraged short is certainly at the more exotic end of the spectrum, although I have made use of it myself to hedge part of my wider portfolio (I'm running a fantasy fund called "Gus" using this ETF to hedge a portfolio of UK FTSE 100 stocks which is doing OK over the past 6 weeks or so against its benchmark). The attached link to the iShares platform is quite a useful overview of what range of ETFs are available from this particular provider (Blackrock).

https://www.ishares.com/uk/individual/en/products/etf-product-list#!type=emeaIshares&tab=overview&view=grouped&fr=43520

One additional thought. If you've not been investing for long, do bear in mind that the markets have been pretty benign if a bit volatile over the past few years. While August 2015 and January/February this year seemed quite grim at the time as did the immediate aftermath of the Brexit vote, the markets have so far bounced back very quickly which might give rise to some complacency. History is littered with substantial, more drawn out market set backs (1999/2000 and 2008/9) which saw 30% plus falls over a sustained period of time. Dealing with the daily angst over several months of the attrition of your dwindling pot of capital is something that most investors have to face at some point - learning how to cope with this is a lesson we all have to learn eventually.

Best,

Gus.

5th Dec '16

Hey Peter, thanks for the reply. I tend to use tips just to learn about new companies. Right at the start, I did buy from newspaper tips (and did alright out of it, as it happens) and I found it interesting learning the logic behind the tips. One of the aspects I find most intriguing is the psychological one and how the market behaves beyond the fundamental analysis.

Hey Gus - It is those big draw downs I would really like to learn to hedge against. I am filling my portfolio with more dividend paying stocks and am broadening slowly into the kinds of stocks that do better in bearish markets (as we must get one soon!). One reason why I was drawn to spread betting was the aspect of being able to hedge, but that doesn't feel quite like the right solution yet as it could most certainly spell disaster!

Thank you for that link, I will investigate now.

Z

cafcash49

Hi Zion, so much good advice that I have enjoyed reading it.
I think I have made all of the mistakes but now I invest reasonably well but not brilliantly. We all make mistakes but cut your losses early at 10-15% (Naked Trader and many others) A 10% loss needs 11% to recover a 50% loss needs 100% to recover. Stockopedia is brilliant and I have a graph which shows my performance has improved since I started using it. Beware very small caps as they are often illiquid and difficult to sell, I try to stay above 50M Market Cap. The Stockopedia Ranks are a very good guide. I endorse using the Screens as well.
It is great fun and do join the Share Society and attend some meetings if you can (I don't know where you live but I travel to them from West Oxfordshire) Also remember if you grow your portfolio by 10% per anum you will double your money in just under 8years and if you grow it by 15% you will double it in 5 years. I read Paul Scott every day on Stockopedia, he is great value and a good guy.
I think it is true to say the best investors are very careful what they buy and it is best to buy when they have already started moving up, its difficult to pre empt the market, buy the trend.
Good luck.

Richard Goodwin

There is a well known quote along the lines of the stock market has predicted seven of the last two economic recessions (or similar) ie there have only been two big sustained dips in 20 years or so. The question to ask yourself before you short the market via geared ETFs or any other mechanism is would you have known whether the market is down on a short term dip or a long term bear? fwiw I don't even try. I do find psychologically though that bear markets are easier to cope with than rising markets as I am not continually worrying about when to sell the risers and when a stock goes down I can blame the market rather than my own incompetence - it's not rational I know!

One other investor whose stockopedia posts are well worth following is VegPatch. he writes well crafted thoughtful analyses of potential investments. You don't have to agree with his conclusions just learn from his professional approach. There are several superb writers on Stocko, you will get to them as you check the discussion boards.

6th Dec '16

Hi. Thanks for your reply. Despite my relative inexperience I have, after a couple of years of dabbling, formed an investment style, based on what I've read about disciplined investing, and have decided to adopt this style and stick to it. Its the well known strategy of focusing on quality companies and buying and holding their stock. I agree that the psychology of markets is an interesting subject, but given my adopted style, I now make the assumption that markets operate irrationally, i.e. the heard instinct. The criteria should be the quality of the company you are investing in. This is the factor which will create in value for shareholders in the medium to long term. I am now quite sure that it is impossible for the average punter to predict what markets will do in the short term and would not touch day trading/short selling as I have no interest in gambling. Have tried this in demo accounts and 'lost money' 80% of the time.

Mentorship for a relative newcomer.

Unlock the rest of this article with a 14 day trial

About the Author

Lord Zion

37 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...