Investment Strategies To Manage Uncertainty

It’s a holiday here in Victoria today…and in Tassie. We’re celebrating Labour Day, to commemorate the granting of the eight-hour work day.

This all kicked off in the 1850s apparently. It was during the gold rush, when labour was in increasing demand. But at the time working hours were long and hard…usually around 12 hours a day, six days a week.

According to timeanddate.com:

Many Australians saw the need for better working conditions and in the 1850s there was a strong push for this. On April 21, 1856, stonemasons at the University of Melbourne marched to Parliament House to push for an eight-hour working day. An agreement with employers for a 48-hour week was eventually reached and Australian workers welcomed the new eight-hour day. A victory march was held on May 12 that year and each year after that. In 1856 the new work regulations were recognized in New South Wales, followed by Queensland in 1858 and South Australia in 1873.

In 1879, the Victorian government proclaimed a paid public holiday to commemorate the eight-hour work day. This was granted during the time when the great Australian land boom was just warming up.

Then, like now, the government probably thought it could afford to buy off the masses with some handouts. After all, getting rich was easy. Just buy land. Working was for shmucks.

Note the eight-hour day was for six, not five days a week. I’m not sure when that changed to the 38-hour week and I’m too lazy to look it up, because it’s a holiday and I’m done labouring.

Although I can say I’m not too familiar with the 38-hour week, nor are most of the other editors here at Port Phillip Publishing HQ. Generating useful investment ideas takes time and research, and it’s rare that you can produce good ideas between the hours of 8.30am to 5.30pm…or whatever standard office hours are these days.

Having said that, today the office is closed. I’m going to hang out with my girls, and leave you with an extremely insightful essay by my colleague Jason McIntosh.

It about knowing when to hold ‘em…and when to fold ‘em at the investment table. Sometimes all you need is a little bit of guidance and discipline to vastly improve your investment returns. Jason’s essay below will help you with that.

Jason contributes to my Sound Money. Sound Investments.  report and is also the system designer and brains behind our trading system, Quant Trader. If you’re interested in seeing what early users of Quant Trader are saying about the service, and want to secure a limited time discount on a subscription, click here.

For now, I’ll hand you over to Jason.

It’s an Eagle’s World

By Jason McIntosh

Many people hate uncertainty. It drives them crazy.

And this isn’t something new.

The saying ‘a bird in the hand is worth two in the bush’ has been around for centuries. One variation dates back to the 6th century BC.

The meaning of this age old phrase is simple. A small certain result is better than an uncertain larger one.

I think this says a lot about how humans are ‘wired’. We instinctively look to shut down risk.

And this is sensible.

Risk management is at the core of our physical, financial, and emotional survival. It’s what keeps us safe.

But can we be too safe?

I think risk avoidance can go too far. Being too quick to stamp out risks limits our potential.

People often tell me that ‘you never go broke taking a profit’. They seem to think it’s the frequency of profits that matter…not the size.

This is much the same as a bird in the hand. The two phrases are about locking in the present in case tomorrow is worse.

But what if the future is better?

I want to share some comments from a member of my Quant Trader service. This is something I think you’ll be able to relate with.

‘I read with great interest your recent email regarding trading style, your use of a wider stop, and allowing winners to run. I agree with this “style” but struggle with how to live it.

‘Let me explain:

‘In search of double and triple digit gains over a medium term it is extremely difficult to hold your nerve when a particular stock may have gained say +30% and then starts to retrace.

‘Do I hold on for the ride down or take my profit?

‘How do I live the trading style if I am always protecting my profits?’

I know exactly what he means. Every successful trader must come to terms with this.

Let me show you one of my own trades. It’s this very situation.

 

The trade was in a company called Alumina [ASX:AWC].

Within only a few weeks, I was up 30%. The bird was well and truly in the hand. But I let it go without hesitation. I was ready to ride this trade back to near my entry point.

But an early exit wasn’t necessary. This stock went on to rise by over 100%.

You see, trading — like life — involves risk. That’s really the only way you can stride forward.

Quant Trader is a trend following investment strategy. It works on the basis that there are plenty of birds in the bush. And the statistics say a few of them should come your way.

The key is not to let uncertainty get the better of you.

I’ve got a few suggestions if this is an area you struggle with. These are strategies I use myself.

  1. Trade smaller. You’ll probably worry less when the stakes are lower.
  2. Try not to think in money terms. It’s just numbers…take out the emotion.
  3. Don’t look at your portfolio every day. Set your exit point and walk away.

Let’s go through them.

Trading smaller is a relative thing. There’s no point taking a bigger position if it causes too much stress. You have to be able to live with it.

A 19th century Wall Street saying captures this nicely. It says ‘sell down to the sleeping point’. If your positions are keeping you up at night, then it’s time to trade smaller.

The next point is about how you think.

I remember receiving some excellent advice when I was starting out. A wise older trader told me not to think of my trading stake as everyday money.

Instead, think of trading funds as the score. A rising balance shows you’re playing well.

Lastly, don’t get hung up on the day-to-day fluctuations. Take a step back. You’ll find the bumps a lot easier to handle if you don’t feel them on a daily basis.

I’ll finish this section with a quote from Chicago Bulls coach, Tom Thibodeaux. He says, ‘You gotta learn to be comfortable being uncomfortable.’

I don’t think trading has to be an entirely uncomfortable experience. But Tom makes a good point.

Success is about pushing boundaries. It involves uncertainty and risk.

We need to use strategies to make the unknown more tolerable. I believe this is the key to uncapping our potential.

So let the pigeons go. The sky’s full of eagles!

Greg Canavan,
for Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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