Apologies in advance for the length of this article. Millennials might be struggling after the first 5 paragraphs
This is another article by Marcus Padley. I'm a subscriber to his newsletter but hope I don't come across as trying to be a spruiker. I love his no-BS tone and experience. I've edited out a few bits which aren't relevant.
Given that we seem to have quite a few new faces on the thread, I thought that this might be useful. Looks like this is the first instalment of a series of articles on trading. I'll post the rest as they become available.
"HOW TO TRADE FOR BEGINNERS BEING A ROBOT - There is one Achilles heel for all traders and it is called “personality”. Basically a successful trader is a bit of a robot that works a process. That’s it. Anything human, human traits (bravery, courage, risk appetite) really shouldn’t really come into the equation. As a lot of trading books and courses will tell you in the first paragraph “Treat it as a business” and that includes assessing yourself as an employee. If you are a rubbish employee, shut the business. And I would add another trading cliché in the first paragraph “Do not trust yourself” which is really the same thing. It is not about you, it is about how you trade not who is trading. If trading was a business then a good businessman would work out what works and gets on with it. He may not enjoy it, but if the process works you’re in business. The more I do this the more I begin to realise that it is not about “me” and whether I am any good it’s about my process and whether that’s any good. You have to keep “me” out of it. OPEN A TAB ACCOUNT IT'S CHEAPER – A word on gambling. One of the things that everyone seems to enjoy is gambling. Along with prostitution it is said to be the most enduring industry in the world. But it doesn’t work, but people keep doing it. There is no doubt that there is some gambling pleasure to be had out of trading, putting on a bet and leaping out of bed the next morning to find out if Wall Street has delivered, but it doesn’t mean it works and the danger with combining trading and gambling is that the numbers are much bigger and whereas you might blow $50 here and $50 there openly gambling on a TAB account if you take the same approach to trading/investing you can do some meaningful damage not just yourself but to your dependents as well. It is an amazing thing that Australians have had their superannuation money dumped on them as a responsibility. It is a nation of gamblers and the inevitable is inevitable. If the government really wants everyone sucking on the State Pension then they have done the right thing, putting money in the hands of completely unqualified individuals who are fed the adverts that gambling is smart and clever and the winners are heroes. As Archie said to me the other day, "Dad are you going to bet on the horses when you go to the Melbourne Cup, because you know Dad, if you lose you lose and if you win you lose, because you’re a gambler”. But morals and politics aside, it is far better you open a TAB account and lose $10,000 in a year fulfilling your gambling urge (you loser) than you take the same approach to the money that has been painfully collected over decades to buy your groceries and pay your electricity bill when you are a retiree. Your superannuation money is real cash. It will be paying the bills. You will be withdrawing it from an ATM. Money is time in the end. Making it is buying time and losing it is giving away years. If you could live off $50,000 a year in retirement then every $10,000 you lose is 73 days lost. That’s 73 days you will be at work that you don’t need to be. Money needs your acute guardianship and to treat Super as anything less than cash is absurd. Stop gambling. Start trading. That means putting a process in place and taking the pleasure out of it. It is not a fun hobby it is a job. Do it right or don’t do it. DOING IT RIGHT – There is a base level of trading knowledge you can acquire and should acquire to do trading and investing 'right', but it does take time to acquire this base level understanding and behaviour. As one of my tennis colleagues who trades full time and retired at 50 to trade, says, in the beginning keep your mouth shut and your eyes and ears open. It is not about you it is about a process and you need to start with a clean sheet. How do you do that? Here’s an outline for beginners (with thanks to my tennis colleague who has nailed most of this from experience).
Buy yourself a comfortable chair, and make sure it’s comfortable, you might be here a while.
Do not trust yourself.
It is not a matter of intelligence it is a matter of learning and your brain needs practice. Give it the time to learn. Travel at your own pace. Its not a competition.
Treat it as a business.
Include all costs in your results. Minimise costs.
If you can, find a mentor to tell you what you don’t want to hear. Pay for training if you can find it (but not from a CFD provider!)
Interaction is essential to being objective and hearing ideas. Interact with other investors. You can do that online but doing it in person is a good game.
On the way to success expect to fail, fail, fail. Expect failure. Failure is good. Every failure is progress. Whilst you’re starting/failing do it on paper. When you start succeeding start with $10,000, but only when you think you have a process. Then prove the process a few times before trading with more.
Write down your process, the steps you will take from the beginning to end of every individual trade. It can be simple to start with. “Pick a stock at random, buy it and sell it” is a good starting plan – you’ll certainly learn something (but if this is all you’ve got, do it on paper). Analyse your result, make corrections to the process that would have improved the result. Learn. Adapt. Develop the process.
Be brave enough to do unconventional things. Everyone will try and tell you not to but just maybe the Lord has been waiting for centuries for someone as dumb as you to come along and prove it was possible.
Eradicate emotion. You cannot operate the process when you are upset, annoyed, desperate. Be the robot.
You will not end up as an investor you will end up as a risk manager.
You are not alone. Everyone else goes through what you will go through. Everyone else has failed to take an early loss, everyone else sells only to see the price rise immediately, everyone else has sat like a stunned mullet when they are losing money. But you learn and you get better. Expect mistakes. Allow yourself to learn.
Set a target, like you would in a business, but only to make you happy not sad.
So what is the process? Here’s an outline of mine. BEFORE YOU INVEST A DOLLAR Collect your capital. Assess your goal. Calculate the returns necessary to hit your goal and the time period. At 55 for instance I might set a 10 year timeframe. I might target “X”, the amount of money I think I’ll need by then to do what I want to do. Then break that 10 year period down into goals for this year, then next. You are basically working out whether your expectations are realistic and how hard you have to go to hit your target. You’ll soon work out if you are ahead or behind the 8 ball. At this point you might want to see a financial planner to do it properly. No, not one whose modus operandi is to love you up for an hour before dumping you into a big fund manager's platform in managed funds so he can earn his trails for life off your super, but one that will tell you about tax, superannuation structure, and will give you strategic advice for a fee. Through this process you will soon work out a suitable risk tolerance and what style of investor you are going to be. NOW YOU HAVE YOUR GOALS GET READY TO INVEST Investment is made complex by a lot of bullshit theory. But when it comes to an individual investor, understand that all the financial theory (diversification, optimal portfolio theory, relative performance) simply does not work unless someone somewhere has invested the money in something that’s going up in price. That’s it. Your job is to invest in something going up in price. For you, as an individual with one goal, which is to make money, all the rest is bunkum. So you need to DEVELOP A PROCESS that identifies investments more likely to go up than down (improving your odds is the best you can do – there are too many unknowns to allow certainty) and a process that then manages the risk (cutting losses) and allows the investment to have its head (letting profits run). How do you do that? THE WATCHLIST - If equities is your chosen investment universe, your first mission it to develop a watchlist of ‘quality’ companies. What you are trying to do through this process is narrow the probabilities. Improve the chances of buying a stock that goes up not down in price. This is as much a process of weeding out rubbish, volatile, unpredictable, fundamentally foundationless stocks, as it is about picking great stocks. Try and keep the list manageable (no good having 100 companies). You don’t have to capture every stock going up, just some, you will miss many, it doesn’t matter. Using whatever means possible to collect ideas, from the media, newsletters, fund managers, anywhere. Even hot tips from a taxi driver. It doesn’t matter. You are going to do your own analysis not slavishly trust the word of others so just look for ideas. You are going to make yourself responsible for the stock pick and take responsibility for every outcome, so don’t worry about the detail, just find stock codes to take to the next step. The next step is to put a stock idea through a set process of assessment to see if it comes out the other side. On this front there is:
FACTS which you need to know but which are already in the price and add no value. Facts involves you finding out about: The business (what do they do), the balance sheet, the historic earnings numbers, the earnings forecasts, dividend history, dividend policy, the PE, yield, (we give you 3 years of history and 4 years of forecasts in our STOCK BOX), the drivers, the negatives, the positives. All the stuff everyone knows and is in the price. You need to know the facts first.
JUDGEMENTS which is what other analysts think. There is a lot of research about and a lot of online offerings that purport to assess stocks. Broker research is the obvious resource. Find out what brokers are saying. Whether forecasts are going up or down, whether everyone is a seller or buyer. I list broker recommendations, target prices and main reasons. What other people think can be broken down into elements beyond just broker recommendations. Some research highlights “Moat”, others rate management (do they have skin in the games, is their interest aligned with shareholders). Find out what the market currently thinks.
VALUE – I am highly suspicious of something so simple as an intrinsic value calculation. It spits out this wonderfully simple number and is a complex enough calculation to suggest it must be right. But it isn't. There are huge assumptions in intrinsic value calculations and many are fatally flawed, but you still want to know what they say...on their assumptions. Basically you have to have an idea of the value of the company and compare it to the share price, it may be wrong but it’s the anchor point and no matter your assessment of the quality of the business the share price will be one side of the valuation or the other. So collect all the valuations you can. Some are factual and in the company accounts (NTA). Do your own if you have the ability and resources. See what the broker research says about value (as often expressed in a target price). Just get some idea of what the market thinks it's worth. It’s a piece of information, find it. You need it.
INDUSTRY – Now you are trying to predict the future. What industry is the company in. What are the big drivers, what are the positive and the negative drivers, what could go wrong and right? List them. Now, and this is the first bit of fortune telling you are going to do and is the key to long term investment success, try and predict what those industry trends are now and chances are they are going to continue. It’s a bit like assessing the trend of the share price without a chart, or maybe there is a chart relating to the industry drivers and how are they trending. You are trying to find companies that are swimming with the tide not against it. Again, you are simply trying to narrow the odds in favour of the share price going up not down. There is a lot of investment success to be had predicting industry trends and then picking stocks rather than just picking stocks.
SUMMARISE - Now you should have a piece of paper (I have a page a stock on One Note on an iPad pro and I do it all hand written with a stylus and colours - I'm visual and it takes too long to do it in type) that has lots of diagrams and numbers and lists of drivers and a range of valuations and broker recommendations and stuff on it. Now get the big marker pen and across the whole page write something that sums it all up. “Rubbish stock” would be one possibility. “Quality stock” another. “Put on watchlist” maybe, or “Good stock but wrong industry for now”. As I say, I like colour.
Basically this initial process is about weaning out the crap and the risky and the swimming against the tide businesses and putting the rest on a watchlist as stocks you are prepared to buy. Stocks that have made it through to your watchlist. Lots of people called them “Quality Stocks” but that’s too descriptive. Perhaps just a “Watchlist stock” would be label enough. Stocks that you have assessed as having a higher than average probability of going up rather than down. Now this is where fundamental analysis ends and I pity all the fundamental analysts and their victims that think this is what investment is all about. Building a watchlist of stocks is probably 20% of the game, no more than 50% and certainly not 100% as most of the set and forget I can’t be bothered paying attention clients and advisers think. True success lies in the next, somewhat less fundamental steps. They include:
TIMING THE BUYING.
MANAGING YOUR RISK DURING THE TRADE/INVESTMENT.
SELLING.
Then there is one more step.
ATTRIBUTION – Analysing your results and tweaking your process.
