Emotionally intelligent investing for 2024.

Whether I'm attempting to grab that metaphorical falling knife, assuring myself that my under-performing investments will eventually rebound, or embracing new ventures (hello di-worse-ification); my inclination to act on emotions often results in getting swept away by hype or convincing myself that things will improve when evidence suggests otherwise.

An article that I stumbled across recently which sparked this self-reflection was this one from Sharesight. This is something I'll certainly look to refer to regularly throughout next year as I aim to lean heavily on a revised and more process-driven approach.

I am a firm believer that less is more, if I have 20+ steps/checks to undertake prior to making an investment (or reviewing a held position) then chances are I won't stick to this. Interested to hear what process(es) others have when reviewing a company/stock to ensure they act rationally.

Jumped into this forum post as there are some great points raised a couple of years back on this topic.

Buy and Hold vs "Trading"

Been trying to write this for weeks now but think I got somewhere. Apologies for the waffle but hopefully someone finds it useful.

Been doing a lot of thinking lately about buy & hold vs trading, opportunity cost, when to sell etc. What sparked this thinking was holding stocks through extensive drawdown periods whilst my thesis remained intact, yet the market punished the company for one reason or another.

Most of what I’ve read over the years is that buy and hold is the advantage that retail investors have over the big guys as they don’t have quarterly targets to reach. Throughout the past 6 years I’ve held stocks which have seen 50%+ drawdowns, some of which I’ve added to because my thesis was intact & I thought the company would continue to execute over the long run. Sometimes this pays off where other times I come to the realisation that the company is not executing as I had thought and sell for a loss. Being able to sell for a loss is something I have previously battled with before but I’m much more black and white now than I was 6 years ago. Too often I see people say “I’ll sell when it gets back to my buy price”, the market doesn’t care what you paid.

As I’ve grown as an investor and learn new perspectives, I’ve really started to appreciate the opportunity cost of holding companies through a drawdown or even goes sideways for 12 months. What I also appreciate is that a company can continue to execute and grow but the share price may not reflect this. Maybe valuation is catching up to it’s fundamentals or maybe the market just hasn’t noticed. I think selling out of a company that is continuing to execute well could end in regret as you try to time the market.

If I think back to some of my biggest regrets over my investing journey most of them were from selling my winners early (Selling PME at $40). Yes I made money but I left another 75% upside on the table. I think these hurt more than holding a stock that drops 50%. As the saying goes “The stock market can remain irrational longer than you can remain solvent”.

I know The Motley Fool (David Gardner) are advocates for buy and hold, with the reasoning being that a few stocks which (may) multibag will offset the ones which underperform. Upside is unlimited but downside is capped at 100% and this was my thinking for the last 6 years.

What I seem to be more conscious of lately is that stocks that are trending (up or down) often continue that trend and end up over reacting both to the upside and downside. And thus disconnect from their underlying “Fair Value” allowing me to buy (at a discount) or sell (at a premium).

I think as individual investors we have the benefit of not having to perform quarter on quarter like the fund managers do. So, we can hold onto our winners and even the losers so long as our investment thesis remains intact. We can also allow our best performing positions grow to large percentages in the PF as we don’t have any maximum allocation requirements, so long as you can sleep at night why not let the stock grow. In the past I have found myself “pulling the flowers & watering the weeds” far too often as I lock in profits on some of the winners and average down on the losers. An expensive but valuable investing lesson which I am more aware of now. I used to avoid averaging up in positions as I perceived the stock to be “more expensive”. What I didn’t appreciate was that yes the share price was higher than my initial buy in price but the company could have been “cheaper” than my initial purchase (on a P/S or P/E) due to the outpaced growth in revenue vs the share price.

My biggest issue with buy and hold is that I find it often gets used an excuse to continue to hold onto a losing position. Sometimes you need to bite the bullet and realise you were wrong. Thesis creep is something I’m conscious of which is why I find it increasingly important to write down a thesis on the business so you can reflect on it whenever necessary. I’m all for allowing a business a bit of slack to prove itself, especially in the small cap space but I have fallen in love with a company story before and let it continue to underperform in my portfolio. Again something I am much more aware of now.

As individual investors we can get in and out of companies quickly and without moving the dial on the share price, something that fund managers can’t do. This is where I think it could be wise for retail investors to take advantage of the market undulations and take profits when a company is overextended past its fair value.

I’m also a believer in holding less than 20 positions which I have high conviction in and understand very well. How many companies can I really understand given I work 70 hours a week? If I have any more than 15, I generally find myself slipping come reporting season having to catch up weeks after. Where I’m going with this is if I take profits on one of my high conviction holdings, I then need to reallocate that capital into one of my other top 20 ideas at the time. This isn’t always easy to find.

Given my focus in the smaller end of town many of these companies have a long runway for growth and can be significantly larger in the future (another reason to buy and hold). However, this doesn’t mean valuation goes out the window. I was a fairly early investor in NEA which I bought at $0.50 back in 2017 or so, I held this all the way up to $4 and all the way back to $1 over a few years before eventually selling for $2.20. I didn’t sell at $4 because I was a believer in the company and thought that they were a market leader in a lucrative space. The opportunity cost on this position is one of the reasons I battle with buy & hold vs trading in and out of positions.

I don’t think it has to be as black and white as buy and hold or “trader”. Why not take a percentage of profits when you think your company is overvalued. That way you can sit on the fence and be happy when the price drops and rises. That’s ultimately where I end up after writing all this out…..

Lastly, I don’t think anyone should make tax implications the reason to sell a company but I do think it is an important consideration prior to selling. I’ve put a table below that compares buy and hold vs having a percentage of turnover in your portfolio each year (assumed 40% tax rate). This doesn’t allow for the 50% CGT discount if held for more than 12 months but it does show the result of having to pay tax on your profits and partially interrupt the power of compounding.

I know I’ve rambled on for a few minutes and I really haven’t come to any great conclusion but I don’t think there is a right or wrong answer in my opinion. Every investor will have a different method to deal with their portfolio and so long as they are outperforming the market (over the long term) and can sleep at night then why not do whatever works for them. Ultimately, I will continue to buy and hold but I will be more conscious of stretched valuations and be more prepared to take partial profits along the way despite my belief in the long term opportunity. There will likely be a chance for me to add to my holding at a cheaper price in the future anyway and if not, at least I still have a horse in the race (even if it wasn’t as big as it was).

This is to document what I have learned about myself in relation to investing.

DISC: This an entry from my investing journal that I thought some of you might find useful, probably not so much the content itself but as an example of the process that went into creating it.

Note: it was written for myself and it is kinda stream of consciousness - I have edited it a little bit to help but It's probably not a well structured post.

I wrote this after reading The Little Book of Behavioral Investing by James Montier (recommended by Scotty P of MF and our own Andrew Ram-Page)

Everyone's emotions have an affect on the way they invest - probably even more so for the ones that think they don't - so it's important to understand and be honest with yourself about what triggers you have.

After reviewing the common pitfalls of investors outlined in the book I'm going to point out the major pros and cons to my personality and how it affects my investing.

Then will discuss other points and bit and pieces. The Cons are more the things I need to address now, the Other are things perhaps to look at later.

The main fix I am implementing is to further develop and clearly define my investing process (which, it seems, is most often the way to fix a lot of things).

?Cons

I FOMO buy - I let an increasing price trigger me to buy in a hurry

I ADHD buy - I easily fall for the sales pitch and just buy. Can be bad in combination with the above. This is because I'm overly optimistic - I hear the story and build a winning scenario in my head quickly.

I average down - I tend to want to buy when a stock drops. This is not necessarily a bad thing, but is bad if it is the only reason I'm buying more.

I don't sell overvalued stocks - this is largely because I wasn't creating my own valuations so I had no sense of the value of the stock.

I trade too much - I'm too busy with my portfolio. I feel I can let myself off of this one (somewhat) as I have been learning as I go (which is the only way I do anything). But this something I don't want to become a habit.

Pros

I don't panic sell. I can wear (and even appreciate) volatile stocks - at least I have been able to so far. Most of my sells are well considered.

I can sell losers. While I don't panic sell I'm also not overly attached to my stocks (see ADHD above) and I am getting better at selling for the right reasons. i.e lack of conviction, not in my wheel house of interest (I need to be careful here, but I believe I am honing in on companies/sectors I like), broken thesis.

Other

I can be lazy - But I can make this work for me. If I make it I have to jump through hoops I will tend to buy slow and sell slower.

I keep an open mind - While I don't relish opposing views I am able to listen and consider them. I'm not immune to confirmation bias, however I can use my ADHD to consider the opposing viewpoint. I consider this a kinda neutral-towards-being-positive trait.

I procrastinate (probably the same as lazy) - Not the worst thing when it comes to investing, but is something I need to combat in any case.

I am influenced by other people, but I think I'm good (or at least getting better at) at selecting the right people to be influenced by.

I can get overconfident when things are going well - however I am usually aware as it is happening.

I make predictions, however I tend to think more about creating a portfolio and preparing myself for a range of outcomes rather than assuming my prediction will come to pass.

I am getting better at filtering the noise - I still pay attention to the macro - but becoming more aware that no-one really knows what is going to happen. So the time is better spent on understanding companies than the economy.

I could be more contentious about assessing the bear case and looking for red flags