More discipline needed

November was a pretty poor month for my portfolio, with it falling over 5%. This has come on the back of a good year or two, which may have led me to become overly sensitive to a bit of market volatility. I think there are some lessons to be learned, but I’m not sure I’ve been learning all the right ones recently.

This week I sold out of Micro Focus and Lam Research as they hit stop losses. I rebought positions in RWS and Burford, not long after I sold them a few weeks ago. I’ve reviewed them recently, so won’t do so again here.

Last week, I was ruing the fact that a number of shares I sold had bounced back. This week that has been compounded by the fact that the predominantly US tech shares I reinvested the proceeds into have been hit by a bout of weakness. This is being described in the media as a ‘sector rotation’ from tech stocks to financial and retail stocks, prompted by the fact that tax reform in the US would benefit these businesses more. On top of that I’ve faced some currency headwinds, as the Pound has risen against the Dollar on reports of progress in getting to the next stage of Brexit negotiations. Neither of these reasons is really a long term concern, so I’m still fairly comfortable with the US stocks I’m holding. However, some are getting close to my notional stop losses so I’m being forced to consider whether to sell.

I’m not sure I could have really predicted these particular circumstances. Also I shouldn’t really blow this out of proportion – after such an extended period of steady gains even a little bit of volatility is likely to feel more serious than it is. However, I feel some weaknesses of my trading strategy are being exposed as market conditions become a bit more volatile and emotions run a bit higher. These weaknesses are around the self discipline not to over-trade. At the moment, I feel a bit in danger of going ‘on tilt’ as they say in poker – making rash decisions out of determination to make back recent losses. I’m already regretting having decided to buy back into RWS and Burford this week, particularly as I said in my last blog post that I needed to be careful about coming back into the market too quickly. I think I’m seriously in need of some better discipline, especially with my buy decisions!

In my recent portfolio review, I was torn as to whether I should be trading more aggressively with tighter stop losses (and without scaling up) or whether I should ‘slow down’ and be giving share prices more room to oscillate and reveal their long term direction before selling. At the time I decided to try out the former, but on reflection I’m now pretty sure that my strategy, temperament and capability aren’t really suited to this. At the moment I don’t think I have the time or the discipline to really capitalise well on shorter term price fluctuations, and trying to do so is only likely to cause stress and underperformance.

So I think the lessons I should really be taking away are the following:

  • Most importantly, I need much more discipline in my buy decisions. I’m being far too quick to jump back in to a new position after selling. I’ve been telling myself to be more patient, but I’m often finding the temptation to buy something from the watch list is just too great. Without a hard and fast rule this doesn’t really seem to be working. I think this hard and fast rule should be that I only buy into new positions once a month. Only making this decision once a month should make it easier to discipline myself to hold cash when this seems prudent.
  • For my sell decisions, I think I need to be giving the share prices a little bit more room to oscillate. I’ve perhaps started to get too aggressive with stop losses. This seemed to be profitable while most of the shares on my watch list were rising steadily over the last couple of years. However, now the market has started to become more volatile, particularly for quality momentum shares and this has meant that I’m selling on lows and buying on highs too often. I’m still going to use stop losses to cut any initial losses on a new position fairly quickly (around 10%), but once shares get into profit I’ll give them a bit more room if the up trend is still intact.

So with that in mind, no new purchases until 20 December for me (when I update my watchlists and benchmark portfolios).





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