CNBC Asia had a very interesting interview with Vernon L. Smith who won the Nobel Prize for economics in 2002.
I have to admit I am not familiar with Mr. Smith or his work. Among other things now he is on the Board of Advisors for LGT Capital Partners (aka the Bank of Liechtenstein). His interview was about behavioral finance and the mistakes that individual investors make. He said investors often assign emotion to the market as the market is good or bad and that too often people end up chasing the market. He said sometimes the market goes up and sometimes it goes down and that if normal volatility bothers you, you should own index funds.
He is a big believer in diversification and does not think that short term trading makes sense to do because it is too difficult.
As I say I was not familiar with him before I saw the interview but it appears I have stolen all of my material from him except for the ponytail and the bolo tie (humor attempt).
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1 comments:
Roger,
O.K. my last comment. Can individual investors have an investment strategy that makes sense?
And next question, how can we respond to market action without emotionally "chasing" the market?
These are great questions, but I believe that individual investors can do it. I at least try!
One of the mistakes I have made many times is to set a fairly disciplined stop, usually in my mind, on a stock so that I sell it if it declines. That part isn't the mistake. It is the temptation to buy something else after you have sold something when there was something "bad" that happened.
You probably are asking, "what is he talking about?" right about now.
What I am trying to say, is that it is important to avoid compounding of losses within a portfolio when the trading action is causing losses to occur. That is when the market is declining, one needs some sort of automatic investment thermostat that tells an investor to move towards cash and away from equities. If possible, without too much thinking!
Thinking always gets me into trouble :).
At the same time, when market conditions are good, one should be adding to one's exposure to equities, basically shifting from cash into equities if possible.
I am sure you would agree that these "truisms" make sense.
But "how" can one do that?
I remember a great book by Robert Lichello on "How to make $1,000,000 in the stock market - automatically" and it is certainly worth reading. He discussed a "safe" account, and would shift back and forth into equities each month or time interval.
William O'Neill, who is my "mentor" on investing, commented on "listening to your portfolio"...or something to that effect.
When stocks start selling on losses or whatever bad news, the market is talking to you right through your own portfolio!
How do I implement this "portfolio management"?
First of all, one needs to determine the maximum number of issues that will be in your portfolio.
I have arbitrarily chosen 25 stocks. You might think 10 is right or 20. Whatever.
Start at a neutral position. For me that would be 12 positions, if you use 25 positions as your maximum. Allow yourself a minimum number of holdings, that you commit to replacing, even if they hit losses. I would suggest 1/4 invested....6 stocks.
Whenever you sell a stock on bad news "sit on your hands." Don't replace it. It is just that simple.
Whenever you sell a stock on good news, that it hit a sell point in an upward direction (my goals are 30%, 60%, 90%...) and I sell 1/4.
In any case, good news "entitles" you to add a position, until you are at your maximum number. Thereafter, if at the max, keep adding to the cash position. Eventually this will permit you to add positions of greater $ amount.
Anyhow, that is my humble approach to when to buy, when to sell, how to respond to the market, and how to avoid chasing stock prices.
What do you think?
Thanks for the opportunity of sharing my thoughts with you! I really enjoy your blog and respect your professional skills. I am, after all, just an amateur :).
Bob
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