Feedback from email with some key lessons

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  • #51046
    Michael Swanson
    Keymaster

    I wanted to share with everyone an email I got last week from a reader and my response to it. At the start he said he started getting into the market around 2017 and when looking at this account saw that only really made money in 2020-2021. He started out trying to do fast trading at first and it didn’t work for him and started to make money on holding stocks he thought would benefit from the lockdowns and reopenings. It worked until this year. Then he got cautious and tried to fast trading again in August and didn’t work. I don’t want to get into the specific stocks or returns, so not quoting that. But he then goes on to write this:

    “Getting back to where you have helped over the years and where you could be helpful in the future.

    “First, talk about reasonable returns and time frame. Most people that start investing/ trading think 50% a yr is doable. It might be for someone with a job and $5000. But, when you are closer to retirement, little to no income and have a decent amount of money to invest things get dicey. A 20% draw down is stomach turning. If the markets grow 9%/ yr. One could probably think in terms of 15% compounded returns. By knowing when to avoid big draw downs one can probably add 2-4% to the long term averages, then focusing on the strongest sectors , especially coming out of corrections, one could add another 2-4%. This requires a little work but not that much.”

    “Second is diversification . I find a 15- 20 stock position is right for me ( including ETF’s). Why? No one name glares at me on a given day. Ex. If I had a 20% position in GDX and bought it as it broke out above the 150d ma, and it lifted just a bit then had a hard -4% day , I de be inclined to sell all or part of it b/c it was not acting right. Fear is the overriding emotion most of us have. If it were 6% of the portfolio I might not even notice it, especially if my stop was 15% away.”

    “Portfolio construction, position sizing, and risk per idea ( to total equity, like 1- to 2% risk to total equity if a stop is hit) , then a longer term strategy to implement are the step-by-step things most investors need.”

    “I ve backtested a number of different strategies. A simple one , partially based on Stan Weinstein’s book, is to buy above the 10 and 30 week ma, especially from some consolidation below the MA’s, set the initial stop at the weeks low, then trail the stop a few % below the 30wk ma , or even easier– exit some when the MACD turns negative. Both work pretty well at keeping you in for a long time. Also, you look at stocks closer to the end of the week vs daily, and ignore the squiggles because you have stops in place.”

    “15 positions built over time . Focus on stronger sectors. Building a portfolio over time means you are only adding to positions as you make money, not as you are losing it.”

    “Lastly, the need for patience when the markets are negative. I find that looking for names that buck the trend is hard, until the markets have corrected mightily—like now. A lot of growth names are starting to emerge by breaking out above the 10 and 30 wk ma’s. Many are up 15-20% so setting stops near B/E ensures you wont lose much. Slowly putting money to work keeps bets small until the markets show some constant strength ( not there yet).”

    “Anyway, I wanted to thank you for your helpfulness over the years, and to explain how your thoughts have eventually worked their way into my strategies——patience, themes, ETF’s and stocks, thinking longer term, avoiding big draw downs.”

    My reply:

    A couple of points I’d like to make.

    I started out basically daytrading internet stocks. Then in the Fall of 2000 shorted stocks. I made a huge return in 1999/2000, but I started with only $15,000. I think it’s possible to make a big return with a small amount of money if you are lucky, but with any decent amount of money it is unrealistic. There was a study done around that time by Terrance Odean looking at hundreds of thousands of individual investor accounts in the 1990’s and he found that 50% of the people lost money, 1/3 roughly matched the performance of the market, and only about 10% really beat the market and made good money – and this was in the 1990’s. I think beating the market is the best thing to try to focus on and not huge returns. If you beat the market big money will come over time as it compounds.

    It too me a long time to learn that, as it is human nature to want to win big and there is a gambling element that attracts people into trading. After the internet bust I moved into trading mining stocks in 2002 until 2008 with 100% of my account. I’d get 100% invested and then at times sell and go to mostly cash when it looked like there were pullacks coming. In the end I beat the market those years, but I would have made more, without any stress, if I just put in 20% into that sector and held.

    I also ran a hedge fund from 2003-2006 during this time. That’s another big story, but in one year we made around 33% and that was in the top 50 of 5,000 hedge funds tracked. Which shows, that thinking of 100-500% returns is fantasy.

    Back then I remember reading that a statistical analysis showed that once a hedge fund got to around $50 million performance was impacting by the size of the fund. The whole world of hedge funds is different than it was back in those years.

    The past few years of social media ads (especially showing big crypto coin moves) made people think that is realistic to make massive fast returns in the markets, but it is not. This is the same thing you see if you go in a casino – pictures of slot winners on the wall. And the slot addict thinks they can be one of those people. That is how millions of people have been trained to now think of the markets in the past few years by the posts and ads on social media streams and design of apps such as Robinhood.

    I lost 50% of my money around 2014 as I was 100% in gold stocks. I made the money back faster than I expected, but I learned from that to diversify into multiple sectors, asset classes. That is when I went and read what I could find on money management and that led me to rebalancing strategies.

    I am thinking of doing like an educational course for website members – or maybe an education lesson/video/discussion every week.

    Thanks for the feedback…

    Everyone is always learning from the markets and looking to improve.

    #51052
    Ed Nuhfer
    Participant

    Great discussion thread. I hope it continues like this. Thank you for setting up these discussion sites!

    #51053
    Michael Swanson
    Keymaster

    Thanks, today I’m kinda just making sure it works. So far haven’t had anyone say they have any problems. Will be awhile before more people try it out.

    #51068
    Mike Rennekamp
    Participant

    Glad to be Back.
    I had a similar situation as Mike described in his post back in 2014. I was only invested in Gold and Gold minor stocks.
    I have previously invested in energy and agricultural stocks along with gold and gold minors. I need to continue to look at multiple sector/asset classes when the market finally rebounds.

    Mike Rennekamp

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