How Sport Mimics the Investing World

Today is a public holiday in Victoria.

Why?

Football. A few years ago, the Victorian state government decided to give us punters a day off to prepare for the AFL Grand Final.

It’s a modern form of bread and circuses — completely inappropriate and unnecessary. But, when you’re rolling around in the proceeds of a massive property boom, you can get away with doing stupid things. Like giving the state the day off to prepare for a game of footy.

Not that I’m complaining. As a Swans fan, I hope to take my daughter into the Grand Final parade tomorrow and get her to soak up the atmosphere. You never know when you’re going to be back. Bulldogs fans know this truth only too well.

Luckily for Sydney, we’ve been there a few times in recent years. But the last time, in 2014, was a disaster.

I was in France for a work conference, a few hours outside of Paris. I was with, among others, Phil Anderson and Callum Newman, who work together on the Cycles, Trends, and Forecasts and Time Trader advisory services.

Both of them are Hawks fans. We got up at around 5.30am to watch the game. Phil has an AFL pass, so we streamed it through his laptop, watching it on the TV at the place where we were staying.

The only other Sydney fan at the conference was Jake Richards, brother of Ted. But he left 24 hours before the game started with the aim of going straight from the airport to the ground to see his brother play.

As it turned out, Ted, a defender, saw quite a bit of action. It was one of the most comprehensive sporting defeats I have ever seen. The Hawks completely dominated the Swans.

My only hope is that Sydney has learnt their lesson from this defeat and won’t make the same mistakes as 2014. The Bulldogs are on a roll. They have confidence and momentum and are a good chance of causing an upset.

But I’m backing the Swans. As long as they can keep their composure, they should get up. It should be a cracking game.

The issue of having to taste defeat to learn how to win is a common one in sport. It’s often said that you’ve got to lose one to win one. That plays to the psychology or mindset of teams when they get into a situation for the first time. This week, I’ve heard some Swans players explain how they didn’t handle the week very well in 2014. They weren’t mentally prepared when they took the field.

There are parallels with investing, too. If you don’t mentally prepare yourself for certain situations, you won’t make the right decisions.

For example, when people first get involved in buying stocks, they think in terms of how much the share they buy is going to go up. They don’t even consider what could go wrong.

That’s because they are emotionally invested in the stock price rising. Say you’re bullish on gold. You buy a gold stock in the expectation that it will go up. But it doesn’t. It starts to fall, despite the gold price remaining strong and other stocks in the sector rising.

It must be getting cheaper, you think, and so you buy more. The stock continues to drift lower. Soon, the company makes an announcement about problems at the mine. The share price falls again.

At this point, you don’t know what to do, because you have no game plan. Do you hold on and risk further falls, or get out and risk seeing the stock bounce back. At this point, the market has beaten you soundly. And it exacts a hefty fee to impose this defeat.

But after such a loss, and no doubt a few more like it, you will start to learn how to win. I wrote about this to subscribers of Crisis & Opportunity earlier this week.

I included a quote from WD Gann, and it’s well worth reproducing that here:

But you must remember you can be wrong and that the way to protect yourself against wrong judgement is to place a stop loss order at the time you make the trade. Then you do not have to hope it will go your way or fear that it will go against you, for you know that your loss is limited, and if the loss comes, you will be in a position to make another trade later which will probably prove profitable.

You’ll always get things wrong in the market. The aim is to limit your losses and not let your ego take over the trade.

No doubt the correction in the gold market is taking its toll on some investors’ emotions. But if you have a stop-loss strategy then you should be fine. I recommended a number of gold stocks to subscribers earlier this year; only one stock has hit its stop-loss level.

That stock was Doray Minerals [ASX:DRM]. It got off to a good start, but then started to correct lower. We had the stop-loss exit at 89 cents and, when that hit, we got out. It turned out to be the right call, as you can see in the chart below. Following the stop-loss ensured we got out roughly where we bought in a few months earlier. If we didn’t have this discipline, we’d be down around 30%.


Source: Optuma
[Click to enlarge]

Subsequent to our exit, DRM announced it was having some production issues at its new mine. Nothing major, but a setback nonetheless. If you had waited to hear this news from the company, it would’ve been too late. That’s why a stop-loss strategy is so important.

And, given that I think gold is just going through a bull market correction, you don’t want to get stuck in an underperforming company while the rest of the sector is setting up for the next move higher. So you’re better off getting out of the losers and sticking with the winners.

On the topic of gold, Australia’s largest gold investor seminar gets underway in Sydney in a few weeks. Markets and Money readers have the opportunity to receive an early bird discount…but only if you book by midnight tonight.

Our good friend Kerry Stevenson runs the Precious Metals Symposium. We’ve attended the last few. She always puts on a good show. If you’re interested in getting a few ideas on how to play the next leg up in the gold bull market, click here to claim your early bird discount. Simply click on ‘enter promotional code’ and type in ‘portphillip’.

Keep in mind we are not running this conference. I am just letting you know, as I think it’s worth your consideration, and because Kerry has kindly offered a discount for Markets and Money readers.

Anyway, I’m off to the Grand Final parade. Carn the Swans! (With a nod to Bruce Dawe).

Cheers,

Greg Canavan,
For Markets and Money


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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