Learning from one's own mistakes ...

[BlackPeter]

They say people learn from mistakes, but I am not sure, whether this is the whole truth. It is not enough to make them (to learn from them), you need as well to recognise them as mistakes to be able to learn from them.

I did some analysis based on my trades ... and thought that the outcome might be as well a worthwhile reminder (or surprise) for others. If you like we could turn this into a thread - feel free to add some more lessons for new investors ...

OK - So I used the seasonal bad weather to go through this a bit more tedious exercise. I took my spreadsheet with all my buys and sales over the last 4 years and added some more columns: "losses incl lost gains" and a number of typical mistakes (buy in downtrend, hold below MA200, sell in uptrend).

I than looked at each of my buys to check whether I bought in an uptrend (and if not, what losses I took) ... and I looked at any sell and checked with the benefit of hindsight whether the sell decision was a good one ... and if not - whether l had at sell time the information to make a better decision. I noted as well how much gains I missed for selling too early (i.e. before the SP fall through the MA200)

Very worthwhile exercise for me ... and probably a good idea to do this for yourself (since you might make different mistakes to me).

Looking at my results in a nutshell:

I learned that I lost over the last 4 years roughly 25% of my annual investment income by buying into downtrends (i.e. SP at buy time below MA200). Ouch.

I was however much more surprised to find out, that the impact of selling investments in my good book too early (i.e. still in an uptrend) had a much larger impact than my wrong buy decisions above. I normally (well, until now) sell if I think an investment is from a fundamental perspective overvalued. Found out that if I would have waited with every sell until the uptrend stopped (i.e. fall back through MA200), I would have augmented my current investment income by more than 50%. Double Ouch.

Obviously - I got it from time to time as well absolutely "right" - selling at the peak or buying at rock bottom is better than the standard investment rules can give you. However - while I am obviously fond off these deals - they didn't made much more money than selling according to the rules would have made.

And just to clarify - if I take my current investment income as 100, than I would have earned instead 175 if I would have avoided the two mistakes above.

Lessons learned:

1) It is a great idea to track all your buys and sells in a spreadsheet, to note for each action the reason (why do you think it is a great idea to sell or buy) and review these decisions with the benefit of hindsight. What can you learn from this review?

2) Never buy into a downtrend (old rule - Thanks KW, but often ignored)

3) Allow gains to run until the uptrend is over (another old rule, more often ignored and, as I found, at least for me much more expensive to ignore than rule 2.

Happy investing - and would be interested to learn what your findings are just in case you do the same exercise ...

And myself - if my plan works I am looking forward to celebrate New Year 2018 with Champagne (instead of Lindauer this year), or at least - to make exciting new mistakes in 2017 ...

[gmatt]

Great post .......... just what novices such as myself need to take note of and learn from ..... thks

[winner69]

They say people learn from mistakes, but I am not sure, whether this is the whole truth. It is not enough to make them (to learn from them), you need as well to recognise them as mistakes to be able to learn from them.

I did some analysis based on my trades ... and thought that the outcome might be as well a worthwhile reminder (or surprise) for others. If you like we could turn this into a thread - feel free to add some more lessons for new investors ...

OK - So I used the seasonal bad weather to go through this a bit more tedious exercise. I took my spreadsheet with all my buys and sales over the last 4 years and added some more columns: "losses incl lost gains" and a number of typical mistakes (buy in downtrend, hold below MA200, sell in uptrend).

I than looked at each of my buys to check whether I bought in an uptrend (and if not, what losses I took) ... and I looked at any sell and checked with the benefit of hindsight whether the sell decision was a good one ... and if not - whether l had at sell time the information to make a better decision. I noted as well how much gains I missed for selling too early (i.e. before the SP fall through the MA200)

Very worthwhile exercise for me ... and probably a good idea to do this for yourself (since you might make different mistakes to me).

Looking at my results in a nutshell:

I learned that I lost over the last 4 years roughly 25% of my annual investment income by buying into downtrends (i.e. SP at buy time below MA200). Ouch.

I was however much more surprised to find out, that the impact of selling investments in my good book too early (i.e. still in an uptrend) had a much larger impact than my wrong buy decisions above. I normally (well, until now) sell if I think an investment is from a fundamental perspective overvalued. Found out that if I would have waited with every sell until the uptrend stopped (i.e. fall back through MA200), I would have augmented my current investment income by more than 50%. Double Ouch.

Obviously - I got it from time to time as well absolutely "right" - selling at the peak or buying at rock bottom is better than the standard investment rules can give you. However - while I am obviously fond off these deals - they didn't made much more money than selling according to the rules would have made.

And just to clarify - if I take my current investment income as 100, than I would have earned instead 175 if I would have avoided the two mistakes above.

Lessons learned:

1) It is a great idea to track all your buys and sells in a spreadsheet, to note for each action the reason (why do you think it is a great idea to sell or buy) and review these decisions with the benefit of hindsight. What can you learn from this review?

2) Never buy into a downtrend (old rule - Thanks KW, but often ignored)

3) Allow gains to run until the uptrend is over (another old rule, more often ignored and, as I found, at least for me much more expensive to ignore than rule 2.

Happy investing - and would be interested to learn what your findings are just in case you do the same exercise ...

And myself - if my plan works I am looking forward to celebrate New Year 2018 with Champagne (instead of Lindauer this year), or at least - to make exciting new mistakes in 2017 ...

Good one BP

Not surprising that letting the winners run until the uptrend is over gives a good result

One question - how did you account for 'free shares'

[BlackPeter]

Good one BP

Not surprising that letting the winners run until the uptrend is over gives a good result

One question - how did you account for 'free shares'

There are no free shares in my book. Every share is accounted at its buy in price and the result (gain or loss) is the sell price minus the average buy in price. If I sell some (and make a gain), than this just means I made some gain, not that the remaining shares got magically cheaper or "free".

[Joshuatree]

Excellent sharing BP; thanks. Some sell on the 100DMA or other M/A /data so keep more gains. Regrets i have a few ;but then again too many to mention.Lack of Discipline ,right up there but getting better at not averaging down ,for one.

[Snoopy]

I did some analysis based on my trades ...
<snip>
Happy investing -

I have removed most of the content of your post BP, just to show that you have presented your argument in a way that doesn't differentiate 'trading' (based on share price movements) to 'investing' (based on an analysis of company performance). No doubt your rules are very useful for traders. But you seem to have left investment out of the picture entirely.

Your measuring stick assumes that you could have got in and out of the market at some historic level, based on an historic share price chart. But if you had tried to get in or out, that would have changed the market by changing the historic buy and sell balance. So actually you can't say that you would have done better by buying or selling later, because you are imposing your own theoretical trades on an historic real market that did not include your trades. I am using 'you' here, not in a personal sense, but in an all encompassing way of including all of those traders who should have done what the 'actual you' should have done. IOW while the 'actual you' may not have had enough market buying/selling power to move the market, all the trend followers who should have followed your rules, would have had the power to move the market. These are the people that some market investors would claim causes the market to 'behave irrationally', in both and exuberant and depressive sense. If it is indeed all the trend followers that decide where the market goes, then that means you should not have to consider the investment fundamentals of any share at all. Now that is fine if you are a declared 'pure trader'. But I don't consider that makes you an investor.

The other point you don't mention is how you account for dividends. Historically around 50% of NZX returns have come from dividends. If you don't consider dividends, you are typically leaving 50% of actual returns out of your equation. Generally if you are using a predictive dataset of numbers that leaves out 50% of your base information, then the buy/sell decision making will not go well.....

SNOOPY

[BlackPeter]

I have removed most of the content of your post BP, just to show that you have presented your argument in a way that doesn't differentiate 'trading' (based on share price movements) to 'investing' (based on an analysis of company performance). No doubt your rules are very useful for traders. But you seem to have left investment out of the picture entirely.
SNOOPY

Please accept my apologies that I managed to formulate my post in a way that you managed to miss my main point. I take full responsibility for that and will try to improve in future posts. Your satisfaction and full understanding is very important to me .

I thought that the main message out of my post is that it is a useful habit to record not just BUY's and (for the evil traders under us) SELL's, but as well to record the reasons for doing so. I noted as well that I found it a useful exercise to revisit these records and assess with the benefit of hindsight whether one's reasons for buying or selling did stand the test of time - and learn from any emerging patterns.

I didn't intend to write a comprehensive guide to investing in one post (and I wouldn't know how to do that, unless you allow a very long post). So - yes, you are right - this is not a comprehensive list .. and I do apologize that I forgot to mention all the FA rules I typically follow. Reason that they didn't feature in my post is that none of them did stand out in my review as major contributors to any losses (or missed gains). Obviously - if you have the discipline to follow them, it is hard to find in a review any problems of not following them?

Maybe I would need to run a second portfolio ignoring my FA rules and than publish any learnings from this portfolio for your benefit?

You might find it interesting, that my reasons for buying are normally of a fundamental nature (like a combination of low / high P/E, growth, leverage, (market-) environmental reasons, management quality (or lack thereof) and many more resulting in my assessment of the stock being over or undervalued). However - I couldn't find a pattern in my trades which would point (in my particular case) to a systematic issue in fundamental analysis. What I did found (but this might be true just for my particular investment pattern) is that more discipline in the observance of some TA rules (I suppose in combination with appropriate fundamental analysis) would have helped me to faster grow my portfolio.

I am a bit disappointed that you try to make a point out of the distinction between trading and investing. Has nothing to do with my post - and is in my view pure semantics without adding value. However - if you insist: Any investment activity requires trading (you can't invest without at least one buy) and any trading activity is an investment (though maybe sometimes a short term investment). The boundaries are flowing ... and yes, there are people with a short time investment horizon (and some like to call them traders) and others with a long term investment horizon (and some like to call them investors), but at the end - nobody can make money if their investment (capital loss plus dividends) is at the end of their preferred investment period below the initial costs. If you desire to engage in the never-ending strive between "traders" and "investors" I propose you use an appropriate thread.

Your measuring stick assumes that you could have got in and out of the market at some historic level, based on an historic share price chart. But if you had tried to get in or out, that would have changed the market by changing the historic buy and sell balance. So actually you can't say that you would have done better by buying or selling later, because you are imposing your own theoretical trades on an historic real market that did not include your trades. I am using 'you' here, not in a personal sense, but in an all encompassing way of including all of those traders who should have done what the 'actual you' should have done. IOW while the 'actual you' may not have had enough market buying/selling power to move the market, all the trend followers who should have followed your rules, would have had the power to move the market. These are the people that some market investors would claim causes the market to 'behave irrationally', in both and exuberant and depressive sense. If it is indeed all the trend followers that decide where the market goes, then that means you should not have to consider the investment fundamentals of any share at all. Now that is fine if you are a declared 'pure trader'. But I don't consider that makes you an investor.
SNOOPY

As indicated - I don't think that the discrimination between trader and investor adds any value (not even from a NZ tax perspective ). If you like to call me a trader (according to Snoopy's secret definition) without knowing me, than so be it.

Just to clarify - I never said that you should not consider any fundamentals at all (and I do consider fundamentals, maybe in the past too much). Brings us back to this comprehensive investment guide in one post which I didn't intended to write, but you looked for. So sorry to disappoint you.

You do raise however in this paragraph two interesting (though not material to my message) points:

1) Most reviews (including mine) do not consider the reaction of the market on any changed behaviour. This is correct, and if I would command millions of dollars in the NZ stock market, than this is something I would need to consider (maybe a learning for the 2025 review . I give you as well, that even for me this makes a difference for some stocks with low liquidity (i.e.with them it might be impossible to react to short term trend changes without amplifying them). However - for most stocks is this effect for a small retail investor as material as it is for a cyclist to apply Einstein's relativity theory to compute the time to move with her bicycle from A to B.

2) You say that any (TA-based) investment strategy would create market havoc if it is used by everybody (or a large enough number of investors). This is an interesting point, and (perhaps on a different thread, since this thread is about learning from one's own mistakes) worth to discuss. Maybe the answer is that there is no absolute truth in assessing the value and potential of any stock, no matter whether you use TA or FA. If we all (no matter what method we use) would come to the same conclusions, than there would not be a market, given that there would be only 100% buyers or 100% sellers at any point in time. Note - this problem is not specific to investors considering as well TA when making their investment decisions.

The other point you don't mention is how you account for dividends. Historically around 50% of NZX returns have come from dividends. If you don't consider dividends, you are typically leaving 50% of actual returns out of your equation. Generally if you are using a predictive dataset of numbers that leaves out 50% of your base information, then the buy/sell decision making will not go well.....

SNOOPY

Correct - I didn't mention how I account for dividends (and lets just leave it that way for the purpose of this discussion - shall we?). The remaining numbers are however large enough to would have made a very material impact on my portfolio. When I started this exercise I was not after an exact prediction of what I could have made if I would have behaved differently, but I looked, based on my previous behaviour patterns, for some opportunities to work on and improve my investment behaviour.

I think that this is what I got. If you are after more, than - why don't you run this exercise for your portfolio and tell us about your learnings? You are absolutely allowed to include dividends and share your learnings with us .

[Vaygor1]

.... if I take my current investment income as 100, than I would have earned instead 175 if I would have avoided the two mistakes above.
....

Nice post BP.

I have 3 initial thoughts.

1) In reality you would not achieve 175, but maybe something like 140 to 150. Warren Buffet once quoted something along the lines of "You can't skin all the meat off the bone, and if you try to, it will hurt you".

2) What you have described reinforces my view that the extra 75 you refer to comes from the pockets of the uneducated. On a fundamentally level you have bought and sold correctly, but by not taking into account the trend you have missed out on cheap shares from the unwitting that sell far too low and missed out on getting the money from (probably the same) individuals/instos the buy far too high.

3) Regarding my earlier history of ignoring downtrends when buying, and with the benefit of hindsight I too could have bought the vast majority of my shares at prices well below what I got them for. But ironically I made truckloads more money by buying in 'too early' as it were. This is because, shortly after what eventually proved to be a very sound purchase, the SP would invariably keep dropping compelling me to buy more... a lot more (and leveraging to do so) than would otherwise have been the case. So in %age terms, yeah less, but in real dollars, for me a lot more.

I guess the above forms one potential philosophy that says:
Make your initial buy (i.e. secure your position) usually with your own money at a price you know on a fundamental level to be awesome, ignore all TA. This means you don't miss out (like I did quite recently with MFT), and occasionally (seldom) you will buy at the very very bottom. Then, in the event the share price keeps dropping as it most often does, and with the strength of your convictions and research on the initial purchase, buy more... up to 10 or 20 times more.. and use TA to do so... the price being such a bargain that it warrants borrowing (leveraging) to do so if your cashflow is short.

Food for thought anyway.

[percy]

I think it is very important to remember the reasons why you brought into a company.If you can't understand the company,don't buy into it.
I try to take a small holding to start with.
If the company's results are as good, or better than I expected, I buy more shares.
If they are not what I expected I sell. Always sell on first bit of bad news.I am gone.!
Let profits run,cut losses.
Always compare results with what a company says they will do.
Be prepared to sell when the PE ratio is over twice the growth rate.

[kiora]

There is a saying
Time in the market
Not timing the market