FOCUS ON YOUR LOSSES, NOT YOUR PROFITS

Everybody wants to make money in the stock market but it’s all too easy to get distracted from how to do that. In fact, over the years the distraction has become so strong that I feel that most investors have actually lost their way entirely. You see, very much like me, my thinking is also quite simple. For example, and whilst I can’t say for sure I would imagine that if you go back far enough to when people first began investing in the stock market, you would probably find that they focussed mostly on the risk element of their portfolio. I’m also sure that the collapse of the equity markets triggered by the Great Depression of the 1930s must have completely destroyed investor confidence and so when investors eventually started to buy back into the stock market, it must have been a very different world to the one that we live in today. Today, investors are diversified and they have property, bonds, cash reserves and so on. The economy is also strong and we have global trade, and people are much better off. We have social care and at least in the Western World, we know that we will always be taken care of, we will get food and shelter and medical help if we need it. We can also make money and with the internet there is more opportunity to replace lost income than ever before. Anybody can do it. And this in turn has lulled investors today into a false sense of security. It’s as if we don’t need to focus on the risks anymore because the risks of losing are not so great. Surely, I can’t be the only person who thinks that isn’t the best default position to assume, can I? To make things worse most investors view the stock market through rose tinted glasses as this type of evergreen manufacturing factory which churns out money for us like a tap spills out water. Yes, the stock market has proven to be one of the best asset classes along with property and the long-term direction is always up it seems, but that doesn’t mean it’s not sensible to be cautious at times. The arguments are now so common place that they have become the norm and the sensible logic and reason that is to protect your portfolio and try to reduce risk now seem to hold no weight. Sayings like “If the stock market goes down it doesn’t matter it will always bounce back” are just one of a number of phrases that for me are akin to nails being scraped on a blackboard. And even when I speak to some of my own clients and despite my protestations, I can hear from the stubborn few the same thing over and over again, “I’m a buy and hold investor. I don’t mind if the market goes down. I’m in it for the long term.” Nonsense is what I say to that. And by the way there is nothing that I write in this article that I have not said or would not say to my clients. The other classic line is “It’s not timing of the market, it’s time in the market.” That’s even more nonsense, I reply. Look, if you knew that the market was definitely going to fall and you were about to wipe out 30% of your portfolio you would take immediate preventative action, wouldn’t you? Of course, you would. Unless you are certified insane then it’s fair to say that you would take action. The truth is that there are only two reasons that investors don’t take action and that is either because 1) they don’t know when the market is going to fall or 2) even if they did know when the market was going to fall they wouldn’t know what to do anyway. In fact, the only thing that 95% of investors know what to do in the face of the market falling is to sell and go into cash and that is actually the WORST thing to do. So, I guess in an ironic way perhaps not taking action is a good thing and not a bad thing if all you are going to do is have a fire sale and cash in your entire your portfolio. It’s like going from the frying pan into the fire. The frying pan is better but only marginally. As you can see I get worked up with this particular topic but that’s only because it’s so frustrating. Either the entire world has gone mad and I haven’t or I have gone mad and the rest of the world hasn’t. It’s a lonely place, whatever the outcome of that particular conundrum. It’s all the more painful because I wasn’t always sat on this side of the fence. For many years I was also sat like so many others on the other side, the blissful ignorance side where the sun never sets and the grass is always green. Then I woke up one day after I got ran over by a market crash, a serious one and I realised it was time to learn. I realised that there had to be a better way to invest in the stock market. Surely, I don’t just sit here and make money with a rising market for 10 years and then lose most of it in the short space of just 6 months. In fact, more fool me I didn’t even learn the first time, and I had to be run over more than once by that great big red bus with CRASH written in its window before I learned my lesson. I learned that there is another way. There is a way in which you can actually move yourself off the road and away from the oncoming traffic. It’s where I and many professional investors like me spend most of my time. On the pavement. It’s safe and we still get to enjoy the view. That’s why it amazes me and frustrates me in equal measure that so many private investors still can’t see us all standing there. It’s time that you joined us. And I don’t make guarantees very easily but I feel the urge. I don’t like guarantees because as the director of an FCA regulated company I have made it my job never to use the ‘G’ word but I feel it necessary just on this one occasion. I guarantee you, yes you heard me correctly, guarantee you, that if you redirect just a fraction of the time that you spend on trying to pick stock winners and use some of that time to preserve and protect what you already have, you will see an almost immediate improvement in the performance of your portfolio. After all that’s what we want, isn’t it? To make more money from our portfolios. So, forget about chasing the next penny share that you think will go to a pound or trying to picking the next Apple. The winners will take care of themselves over time so it’s best just to manage the losers – manage the downside risk. As Alan Titchmarsh once said “Kill the weeds and your flowers will blossom”. (He didn’t really say that by the way, I just made that up). And finally, before I leave you, please remember one last thing – remember that the big red bus is coming even if nobody can see it. It’s just pulled out of the depot and heading your way and if you don’t get out of the road soon it will flatten you (again). So, make your way over to the pavement and my professional trader friends and I look forward to seeing you shortly.