Stock picking?
Some cautionary tales…
Share dealing is everywhere. I can’t load up my YouTube without being bombarded with ads from Trading 212 or eToro. Throw in ‘influencers’ pushing Forex trading as a nailed on way to riches, a dash of umbrella money from Uncle Sam and things have gotten a whole lot messier.
Don’t get me wrong I’d sure like to sit here and say I’d gone all-in on Tesla at the start of last year. Or going further back when the first iPod landed in double maths, I should have gone straight home and told my parents to put my college fund in AAPL. Hindsight is a bitch.
There is so much we could dive into on this topic but here let’s focus on why 9/10 of us will lose money picking individual stocks. If you decide to choose the red pill and go there anyway, stick around until the end and there will be some guidelines to follow.
The Payzone
I’m sorry to break it to you but likely you have no investing edge. I’ve worked in the oil and gas industry onshore and offshore for the last decade. Along the way, I was seduced by the siren call of investing in individual oil stocks. By all accounts, I should have had an advantage- attending conferences, following company announcements like a hawk and trawling the bulletin boards (this was pre-Reddit). It was all for naught, I lost money.
The only time I heard of some people getting rich were the rig crews and then only on rare occasions. It was mid-2016 and a highly successful exploration well was being flow tested in the North Sea. Basically, the engineers offshore were seeing how much oil flowed through a choke line and the bigwigs back in town would extrapolate this to guestimate how much oil the field contained.
The onsite production engineer was watching the gauges tick steadily upwards. Offshore is a little like the schoolyard -gossip spreads fast, rather like Coronovirus at the Gold Cup. Soon everyone was firing up their AJBell account and piling in with their holiday fund, the change down the back of the TV room sofa, anything they could lay their hands on. And sure enough when the news washed up onshore the next day the stock price went to the moon!
Are you sitting on a rig? Then I’m sorry but speculating in oil stocks is a sure-fire way to lose money. Fortunately, I was too late to participate in the pump and dump of Gulf Keystone Petroleum but I know several ex-colleagues who lost their shirts.
Double Fault
Next, my friend is good old overconfidence. As a rule, we all believe we are smarter, sexier and better drivers than our peers. We carry this feeling of superiority into our trading.
This next story illustrated why this is a problem.
Researchers have conducted several polls where they ask amateur male tennis players if they felt they could take a point off Serena Williams. She’s won 23 grand slam titles and can smash 100mph serves before breakfast, yet 12% said they could manage to go toe-toe with one of the GOATs.
Playing in the stock market is like trying to rally with Serena AND Venus across the net. As an investor, you have to be alert to who is on the other side of the net/trade. Is it a BSD at Goldman, maybe it’s just a trading algorithm (see Michael Lewis’ Flash Boys) or The Fear Index.
Auto-pilot
The third horseman of the trading apocalypse is not having an exit strategy. Here is my own experience with this little doozy. In 2008 I inherited a few hundred shares in that bluechip of bluechip stocks Rolls Royce Holdings. It was my first taste of stock ownership and it was kind of exciting to see dividends (which I chose to automatically reinvest) come through the post. (yep need to get a life!) As the quarters rolled by I gradually accumulated more shares- so far plain sailing.
Then in late 2015 RR hit some turbulence. It’s Trent 1000 engines were wearing out faster than expected causing hundreds of aircraft to be grounded. This resulted in a big sell-off and the stock fell roughly 30% to 200p. By this time I’d read Ben Graham’s Intelligent Investor, sensed a buying opportunity and I logged into my trusty Computershare account to buy the dip.
RR is unusual, the Government holds a golden share which I think means the engine maker can’t be taken over by a foreign firm. So I figured a safe investment, into the bargain Airtravel was growing almost exponentially. What could possibly go wrong….
I got this part of the trade right. The stock recovered and ticked up all the way to 1000p or £10. My fatal error was having no sell price, no point where I would disembark the aircraft. I’d succumbed to that most powerful of money emotions Greed. Reflecting back sentimentality around the stock also played a part, after all the shares had come from my gran. Probably a third factor was loss aversion. This is well documented in the literature and Israeli psychologist Dan Kahneman even put a number on it. Turns out we feel a financial loss twice as much as a gain. I didn’t want to let go.
Of course, it made no difference to Rolls if I owned the stock, they neither knew nor cared. Fast forward to the post pandemic world and we all know where the share price is now….
Rule 1: Don’t lose money. Rule 2: See rule 1.
Phew, still with me? By now I should have you uninstalling that Freetrade app from your iPhone faster than you can say GameStop.
If not here are some aforementioned guidelines. (Insert Not Advisor Disclaimer here)
- Use 5% of your portfolio for stock picking. This is a strategy that Rick Ferri advocates, the thinking being that having a flutter with this money will scratch the active investing itch. The rest of it should be parked in plain Vanilla Index Funds.
- Don’t get emotional. We discussed this above but really trading volumes are huge. So Elon won’t lose any sleep if you sell.
- Keep learning. If you do have skin in the game, use that as an incentive to power your learning. Even if you lose money you are likely to gain wisdom.
And remember the house always wins….
Thanks for reading and good investing!
