Buy and hold vs. active portfolio management

[systematic]

So finally you long term holders are advocates for
Averaging Down even if below your buy price?
Believe you haven’t made a loss until you sell an
investment at a price lower than you bought it.

I'm probably what you would call a long-term holder (and what some would call a short-term holder.
I don't know...should we establish some definitions around this, for the benefit of the forum (lol - I jest...this has been tried on many a stock forum over the years; everyone has their own opinion)
But I never average down. My model (and it's only one model these days)...says, 'buy, hold or sell' and that's it. No averaging in or averaging out. I found that too complex, for no reward.

 

[systematic]

It really did all start from delivering News papers as a kid, those first CBA shares I purchased 25 years ago when I was 14 were bought for 1 reason only, which was to generate dividend income so that could one day give up delivering newspapers, hahaha.

My mindset has never changed, for me it’s all about owning enough income generating assets so that I don’t have to spend my days folding and delivering papers, it took me 22 years, but I was able to give up all paid work and retire at 36, simply by working and saving hard, and ploughing my savings into buying great businesses for less than they were worth and holding them for as long as they remain great businesses.

I split my time between learning about business valuation rather than trading, and working to earn the capital to invest.

The question I pose in this post...ought to be the start of another thread (Joe, feel free - depending on VC's reply)...

Value Collector:

I know you will appreciate the meaning behind what I'm asking here (especially in light of my lengthy post, several comments above)...

VC: 'Can what you did...be taught?'

Philosophically (and this should be obvious from my earlier comment) I would expect (and appreciate) you saying, something like, 'no. It was a unique set of factors (your experience, discretionary nouse about certain industries...or whatever)...that put you on that path.

But, before I assumed that as your answer (as, I'm always willing to challenge myself and change my mind)...I wanted to ask what you think.

If someone wants to replicate my results (of modestly beating the market)...I just (a) give them this stack to read (a 'how markets work' framework) + (b) this amount of basic statistical mathematics + (c) this 'course' in behavioural finance psychology (the most important bit) and you can have my results...beat the market (and therefore, most investors out there - retail investors & fund managers)...but only modestly (in my opinion).

I want / need you to say, 'no'...but I have to ask: can what you did, be taught...and replicated?

Finally...and more importantly - do you have the newspaper delivered, these days?

 

[tech/a]

It really did all start from delivering News papers as a kid, those first CBA shares I purchased 25 years ago when I was 14 were bought for 1 reason only, which was to generate dividend income so that could one day give up delivering newspapers, hahaha.

My mindset has never changed, for me it’s all about owning enough income generating assets so that I don’t have to spend my days folding and delivering papers, it took me 22 years, but I was able to give up all paid work and retire at 36, simply by working and saving hard, and ploughing my savings into buying great businesses for less than they were worth and holding them for as long as they remain great businesses.

I split my time between learning about business valuation rather than trading, and working to earn the capital to invest.

What a great insight.I remember CBA floating for $2.50 I had enough for 5000 but never bought them!
I was a lawnie failed Leaving and now own a serious company. Could have retired at 50 but enjoy the challenge of business far too much.I get bored very easily.

yes i am ( but not trading as a professional would ) , but that wasn't what i planned starting out in 2011

i originally planned to buy and hold ( and add as i had spare cash ) but then sensible opportunities came along ( now and then )

now obviously if you have a stable salary and surplus income , standard buy/hold ( and add ) strategies probably suit you better

however here i am on a disability pension and plenty of gaps between medical appointments , i can dabble and learn instead of Facebook or watching old movies ( i hadn't watched because i was working back then )

the DOWNSIDE is it is hard for me , now , to recover from capital losses , so i would rather not blow up the entire nest egg ... sure i am going to lose some , but i also hope to save a golden goose egg or two for my later years

Another great insight you‘re governed much by circumstance and necessity.

Firstly, hope you feel better!
Secondly, thank you for getting back. This is fun, and educational (for me, anyway)

Thirdly...
Running a stop (5%, 10%, 50%, volatility based, market regime based...name it)...it doesn't work with my systems. Maybe I'm missing something that others get. I cannot get the data to justify a stop of any kind, based on the model I run.
So, why wouldn't I let an individual stock run 50% from it's high. History shows that I'm better off holding (as long as the system calls it a hold), because - on average (which is what systems trading is all about - it will rebound more as a genuine, original signal vs selling and buying a new signal.

Thanks for your best wishes. Feel terrible had COVID now isolating and have antibiotics.

The 20% isn’t a stop it’s both a buy and sell signal in a systematic method discussed in Radge’s book.

 

[systematic]

What a great insight.I remember CBA floating for $2.50 I had enough for 5000 but never bought them!
I was a lawnie failed Leaving and now own a serious company. Could have retired at 50 but enjoy the challenge of business far too much.I get bored very easily.


Another great insight you‘re governed much by circumstance and necessity.


Thanks for your best wishes. Feel terrible had COVID now isolating and have antibiotics.

The 20% isn’t a stop it’s both a buy and sell signal in a systematic method discussed in Radge’s book.

1( I didn't know you had COVID. Wow; that's full on. I work in health and know waaay too many people that've been through the wars.
I pray that you recover: completely, and fully. Better than ever.

2) Yeah, but tech/a, you gotta know I'm familiar with that book. I've tested those old ideas each way and that (without writing a book). I actually think (in the topic we've discussing), even Radge's back testing (for his book; I'm sure he does more advanced stuff for his private membership) shows that a stop does anything?
I'm happy to revisit, though!! I really am, truly(!) happy to learn!!! Is there any other way?

 

[tech/a]

My bad meant Covid test!! If COVID is 20 x worse then I certainly don’t want it —- double backed but that hasn’t helped with this!

A stop is a risk mitigation tool
Like you I don’t agree with a hard fast stop
I ratchet mine —- UP
Lots of very small losses and more than a fair share of bigger wins
Once moved to Break even it’s not needed

 

[So_Cynical]

So finally you long term holders are advocates for
Averaging Down even if below your buy price?

So Cynicals win rate is the highest I’ve ever seen
80% long term winning trades is world class.
30% is common
50% is unheard of!

I have always been a fan of averaging down - however analysing my results over 15 years (as posted above) the best hindsight result is achieved by NOT averaging into anything, fixed entry size, one entry, and never selling at all.

As for 80% long term winning trades, i put that down to time in the market, 15 years is a lot of time, plus my habit of buying low points in the price cycle and putting some effort into not buying rubbish, never ever bought hype or breakouts.

I remember the very first stock i bought was Santos after watching the evening news report that their plant blew up...looking over my trade history i was thinking that any idiot should be able to get similar results over the same time frame, its close to impossible not to.

 

[divs4ever]

*** My bad meant Covid test!! If COVID is 20 x worse then I certainly don’t want it —- double backed but that hasn’t helped with this! ***

first of all it will depend on your health before catching it , i think i caught it December 2019 ( but no tests available then )

now i was already on a cocktail of dangerous drugs but lucky for me some were the right ones , an industrial strength blood thinner , an inhaled steroid and a ripper of a beta blocker ( lowers pressure ) now the time wasn't pleasant , but i have had worse ( say a really nasty flu that hung on for more than a month , but not bad enough to visit the GP )

needless to say when i was finally tested ( 7 months later ) it was all clear

i certainly hope you you get better soon

** Another great insight you‘re governed much by circumstance and necessity. **

the art is realizing WHEN you need to change the plan , and that varies from investor to investor


*** The 20% isn’t a stop it’s both a buy and sell signal in a systematic method discussed in Radge’s book. ***

wow i didn't realize that was a formal tactic

when a share is down 20% on MY average price i ask the question IF i should buy more ( i don't always buy , but i do research and calculate ) not so quick to take the cash off the table though somewhere in the 120% to 150% before i ask that question

 

[So_Cynical]

The real opportunity, in my opinion, is someone who can spot a business that should be worth $600M one day, and is currently being sold off by the idiot at $200M or whatever. The person who can do that as a thing, and not just a one off, is a very rare gem.

Exactly, this is what I'm always looking for, and one of the reasons I've had some success due to the fact that i tend to buy into stocks that later get taken over because someone else saw some value as well, something i like to ask myself when considering entry is - what's the chance i can sell this stock at x point in the future for more than i paid for it.

 

[divs4ever]

** I have always been a fan of averaging down - however analysing my results over 15 years (as posted above) the best hindsight result is achieved by NOT averaging into anything, fixed entry size, one entry, and never selling at all. **

i still prefer averaging down ( but CAREFULLY ) one error i made in the early days was buying the same number of shares ( on the same stock ) every time , when buying the same dollar amount each buy ( when possible ) would have been the better tactic ( at least for me )

now you might say that lacks conviction and you would be correct , i need to be careful with those cash reserves , and 'never selling' not for me i have made some BAD picks ( SGH , and BLY come straight to mind ) but have also made some timely escapes ( ISX , IPL , AMP to name a few )

i have a nasty habit of 'picking bottoms' but ending up with a part-filled order .. $20 or $40 worth of shares plus brokerage does not make the buying cheap , so prefer to buy on the downtrend ( let the trend catch me ) while there is still momentum

 

[So_Cynical]

Cynical is not claiming a high win rate but revealing an observation, if he had held all stocks for up to 15 years his win rate would be very high.

Not knowing Clinicals numbers, I'm guessing if he left his money in, his number of trades would be much much lower, so the outcome profit would be much less. He may easily have missed some or all of the 5 big winners he mentioned.

Yep just an observation and bit of a revelation for me. 95 stocks but maybe 200 trades and another 250 or so dividend reinvestments.

Hindsight, my conclusion was that in order to get the 5 big winners i also needed to buy the 6 total losers, with no averaging and fixed position sizes the 5 big 1000%+ winners easily cover the six 100% losers ~ interesting that the losers kind of become irrelevant, there could be 20 losers but the 5 winners are so big it doesn't matter.

 

[sptrawler]

I have always been a fan of averaging down - however analysing my results over 15 years (as posted above) the best hindsight result is achieved by NOT averaging into anything, fixed entry size, one entry, and never selling at all.

As for 80% long term winning trades, i put that down to time in the market, 15 years is a lot of time, plus my habit of buying low points in the price cycle and putting some effort into not buying rubbish, never ever bought hype or breakouts.

I remember the very first stock i bought was Santos after watching the evening news report that their plant blew up...looking over my trade history i was thinking that any idiot should be able to get similar results over the same time frame, its close to impossible not to.

That IMO opinion, is priceless Cynical, the problem I've found is the good stocks keep going up, getting out and trying to get back in, is like selling a great property overlooking Sydney Harbour on the hope prices will fall and a lower re entry price will present.
If you love watching the market every day and love charting and data collecting etc, well active management is probably for you.
If you have other things happening in your life and you can't follow the market every day, @ So_Cynical's advice is worth pondering.

I have a buy and hold and a managed portfolio mindset, the wife who commandeered my shares outside super, because they were in her name has a sit and hold mentality.

Hers are doing well ( better than mine), but mine (which is the SMSF), is still in front and we have been living off it for 10 years, hers have dividend re investment. ?
I've got to get back into the "think about why you bought it, before you sell it mentality", I've missed a lot of money this year.

 

[Value Collector]

What a great insight.I remember CBA floating for $2.50 I had enough for 5000 but never bought them!

CBA floated at $5.40, not $2.50 so you would have only got 2,314 shares for your $12,500.

But this is the shocking part, If you had of put that $12,500 into CBA when they floated, and done absolutely nothing except enabled the dividend reinvestment, your initial 2,314 shares worth $5.40 each ($12,500 in total), would have compounded into 12,760 shares worth $104.45 each, totalling $1,332,782 and paying $51,040 in dividends per year.

Think about that for a second, that initial $12,500 you had in 1992, would today be worth $1,332,782 and be paying you $51,040 per year in tax free income (30% franking), and all you had to do was sit there with the dividend reinvestment plan running, and never saving any further funds or worrying about trading etc, with that one investment and maybe owning your own home too you would have set your self up for a very comfortable retirement.

-------------------

Now imagine if instead of focusing on charting / trading strategies, you just focussed on identifying quality businesses and putting together savings to invest, and each year you repeated the same $12,500 initial investment and dividend reinvestment strategy, so that you invested-

1992 - $12,500 in CBA
1993 - $12,500 in Woolworths
1994- $12, 500 in BHP

etc etc etc over the years, the compounding effects would have been huge, and today you would have an enormous portfolio, sure you might have ended up investing in a couple of Dogs, but the compounded effects of the winners far out weigh the $12,500 you put on any dogs that went to zero.

Not to mention that, simply finding and holding quality businesses over the years would be a lot less work than trying to trade in and out all the time.

 

[So_Cynical]

Now imagine if instead of focusing on charting / trading strategies, you just focussed on identifying quality businesses and putting together savings to invest, and each year you repeated the same $12,500 initial investment and dividend reinvestment strategy, so that you invested-

1992 - $12,500 in CBA
1993 - $12,500 in Woolworths
1994- $12, 500 in BHP

etc etc etc over the years, the compounding effects would have been huge, and today you would have an enormous portfolio, sure you might have ended up investing in a couple of Dogs, but the compounded effects of the winners far out weigh the $12,500 you put on any dogs that went to zero.

Now throw in HIH and Onetel as total losers and, instead of 999000 you would have 15K less 998958 the losers are irrelevant, double the losers adding ABC learning and AMP another 14K down and its nothing. 30 stocks over 30 years with 4 complete losers and you're laughing.

 

[Value Collector]

VC: 'Can what you did...be taught?'

Philosophically (and this should be obvious from my earlier comment) I would expect (and appreciate) you saying, something like, 'no. It was a unique set of factors (your experience, discretionary nouse about certain industries...or whatever)...that put you on that path.

But, before I assumed that as your answer (as, I'm always willing to challenge myself and change my mind)...I wanted to ask what you think.

If someone wants to replicate my results (of modestly beating the market)...I just (a) give them this stack to read (a 'how markets work' framework) + (b) this amount of basic statistical mathematics + (c) this 'course' in behavioural finance psychology (the most important bit) and you can have my results...beat the market (and therefore, most investors out there - retail investors & fund managers)...but only modestly (in my opinion).

I want / need you to say, 'no'...but I have to ask: can what you did, be taught...and replicated?

Finally...and more importantly - do you have the newspaper delivered, these days?

Great question, the short answer is yes I do believe a sound long term value investing approach can be taught, after all I believe it was taught to me through reading and listening to the greats such as Warren Buffett, Ben Graham, Phil fisher etc, but not just though superficial sound bites, I literally read every Annual letter Warren wrote since 1977 and his buffet partnership letters before that, and when he said he was influenced by Ben Graham and Phil fisher I purchased every book those two had written, and I watched every Berkshire annual meeting available online, and listened to every Buffet interview, I went hard at it for years.

But it is a complicated question, I mean to do exactly as I did, the way I did it, from the young age that I started definitely involved some unique factors that influenced me, eg

1, it helped having parents that were "spend less than you earn" type people, that encouraged me to save and invest from a young age, and who as long as I was investing all the money I earned delivering papers and other jobs then they would give me cash here and there to go to the movies/ice skating/bowling etc with friends, So I got to invest 100% of my earnings and start the learning process young, while still enjoying my teenage years.

2, I was exposed to some Paul Clitheroe and Noel Whittaker books that explained investing and compound interest etc, the concepts made sense to me straight away and stuck in my head, it also got me interested in reading more and more about investing from other authors and helped me adopt the "delayed gratification" concept, and lead me down the path of saving a large portion of my wage, and I progressed in my career, I never really ramped up my consumption, I just ramped up savings to the point I got to saving 50% of my wage.

3, Being invested through the 2000 internet bubble, and later the GFC definitely pointed me in the direction of value investing, and sticking to things I can understand.

If I had to summarise the factors that lead me to where I am it was the early adoption of a good savings ethic, a willingness to read and learn about investing and being exposed to the right authors/reading material that helped me figure out how it all works (if I had read different books based on different ideas I would be in a different place), meeting and having the support of a girl that jumped on board with my delayed gratification process from the start and was happy to live below our means, being fit and healthy enough to earn a decent wage from which to save.

 

[tech/a]

CBA floated at $5.40, not $2.50 so you would have only got 2,314 shares for your $12,500.

Yes it did but as a customer I remember being given the opportunity to buy pre-listing and I'm sure it was $2.50

I remember thinking it would be a wise decision but as I was no where near the position I am today re directed the funds into my at the time wage generating business. Which I've done for a great many years. Today that investment is paying off in spades.
The shocking part would have been if I did nothing with the money at all.

Not to mention that, simply finding and holding quality businesses over the years would be a lot less work than trying to trade in and out all the time.

Yes that is true----but my situation is one of liquidity where I can take advantage of quick opportunities. EG Im fortunate enough to live on the Esplanade on a magnificent beach in SA. The house behind me came up for sale 3 days before I left for 10 weeks in Italy. I was able to arrange a cash contract before I left and join it street to street with a development demolishing the old and building the new to join street to street.
Another example is what I thought was over buying Hot Dipped galvanized steel beam in March---300 tonne I can double my investment now on current sales and demand is crazy---my price will move up with that demand. So Different strokes--my DNA.

1, it helped having parents that were "spend less than you earn" type people, that encouraged me to save and invest from a young age, and who as long as I was investing all the money I earned delivering papers and other jobs then they would give me cash here and there to go to the movies/ice skating/bowling etc with friends, So I got to invest 100% of my earnings and start the learning process young, while still enjoying my teenage years.

This really hit an accord with me. Dad Owned a chain of Butcher shops --- back before Coles and Woolies got into meat. Eventually pushed him to early retirement--and misery--but another story.
Dad was frugal but hated spending money --- I later learnt that was because he didn't have an over abundance of spare cash and in business needed liquidity. He only said one thing to me which made sense---"Son you have no respect for money"---Dead Right.

If I had to summarise the factors that lead me to where I am it was the early adoption of a good savings ethic, a willingness to read and learn about investing and being exposed to the right authors/reading material that helped me figure out how it all works (if I had read different books based on different ideas I would be in a different place), meeting and having the support of a girl that jumped on board with my delayed gratification process from the start and was happy to live below our means, being fit and healthy enough to earn a decent wage from which to save.

Its really interesting looking at others experience and mine couldn't be more at 180 degrees to yours.
My summary.
Recognizing opportunity and pacing myself in a position to be able to take advantage of it.--Doing Just that!

Missed a lot but got my fair share and still do. Was never really frugal only by necessity on rare times through life. I guess being close to bankruptcy twice in 1987 and 1991 is testimony to my at times and THEN caviler approach. Mind you Economics in both instances bought me to the brink ---holding Millions in Commercial Property and businesses going broke not helping my cash flow 18 % interest and 6% penalty interest lead to foreclosure.
Right Idea crapp timing. Met My Number 2---- 26 years ago. A kindred spirit with Collateral but not the cash flow.I had the cashflow. That combined and 10 years later =====The rest as they say is history.

Im not the sort of retirement guy. I particularly love the challenge of business and helping those around me reach their life goals.
Explains ASF to a degree for me.

So BOTH work and we are testimony to that.

 

[tech/a]

when a share is down 20% on MY average price i ask the question IF i should buy more ( i don't always buy , but i do research and calculate ) not so quick to take the cash off the table though somewhere in the 120% to 150% before i ask that question

Its 20% down from the last highest high
Then 20% up from the last lowest low.
Not 20% of your average price. Big difference.

That IMO opinion, is priceless Cynical, the problem I've found is the good stocks keep going up, getting out and trying to get back in, is like selling a great property overlooking Sydney Harbour on the hope prices will fall and a lower re entry price will present.

I really dont think you'd have property investment as we do if prices of Harbor waterfront properties could fall 80%
Its not a good analogy as you dont have the liquidity you have with stock.Your NOT selling in the HOPE prices will fall your selling when its CLEAR they are falling and have PROVEN they have by falling 20%. I dont think Harbor property has EVER fallen 20% in a year let alone 2 weeks or even a week!---or even a day!

never ever bought hype or breakouts.

If you look back EVERY share that continues to rise will BREAKOUT of an area----
Hype---- well there are opportunities all over the place.--BitCoin , CPH made me $80K in a few weeks with $20K
Tech-Boom ,Trump elected ---on the opposite end COVID GFC. Dont underestimate the opportunities enveloped in Hype.

90% of the population are the Tortoise and 89% remain in their shell.
10% are the Hare and fortunately for the Tortoise enough succeed.

 

[againsthegrain]

Having good and influential parents is a common theme, mine taught me nothing - 0. I had no idea about money or investing at 17 lived in a bubble. My net is close to 1m now should surpass it by the time im 40 but I don't own property in aus, still feel act and look like the poorest man on the street. The fear of being a **** kicker and respect for money is something that stays with you for life. This is a line in the sand I need to draw for my kids so they don't start the game on extra hard difficulty

 

[Value Collector]

Its 20% down from the last highest high
Then 20% up from the last lowest low.
Not 20% of your average price. Big difference.



I really dont think you'd have property investment as we do if prices of Harbor waterfront properties could fall 80%
Its not a good analogy as you dont have the liquidity you have with stock.Your NOT selling in the HOPE prices will fall your selling when its CLEAR they are falling and have PROVEN they have by falling 20%. I dont think Harbor property has EVER fallen 20% in a year let alone 2 weeks or even a week!---or even a day!


If you look back EVERY share that continues to rise will BREAKOUT of an area----
Hype---- well there are opportunities all over the place.--BitCoin , CPH made me $80K in a few weeks with $20K
Tech-Boom ,Trump elected ---on the opposite end COVID GFC. Dont underestimate the opportunities enveloped in Hype.

90% of the population are the Tortoise and 89% remain in their shell.
10% are the Hare and fortunately for the Tortoise enough succeed.

There certainly is people that have lost 80% of their money (equity) investing in Sydney harbour water front property, just because the total value of the property doesn’t drop by 80% doesn’t mean the persons equity component doesn’t drop to $0 or perhaps even negative, if the the property market drops by say 10%.

When you buy shares, you are buying Equity in a business, hence why another name for shares is literally “equities”.

So when a share price drops by say 50%, it’s the equivalent of a person that has an 80% loan on a property having their property price drop by 10%, in both cases their equity position has halved.

————————
for example, (made up numbers)

say you own Woolies shares @ $40 per share, and their market $100 Billion.

That $100 Billion market cap is just the equity position, the Total enterprise value might be $400 Billion when you include the parts of the Business owned by other stake holders such as debt holders (banks, bond holders, finance leasing, suppliers, land lords etc)

The just like Sydney harbour water front property the total value value of Woolworths enterprise is not likely to drop in value by 80% either, but it’s equity value/share price can, just as the water front property owners equity can.

if Woolworths had zero bank debt, zero bonds, zero leases, paid all suppliers upfront with cash, and owned all property, plant and trucks etc outright, their liquidation value would never drop by 80% either, it’s only because of all the other stake holders that have claims on the assets before equity owners that the equity value fluctuates so much compared to total enterprise value.

but return on equity would be lower if to much equity built up in Woolworths, hence why they are currently getting rid of equity by doing a share buy back.

share buybacks are a way company’s reduce equity in the capital structure, by handing back capital to share holders, paying off debt is a way to increase equity.

 

[tech/a]

I’ll go along with the semantics To support your view.
Your missing the ability to react in equities almost instantly
your under valuing that uniqueness.

I have nothing against what your doing/did You have excelled others may not have.
Just as other Hares have failed or been more spectacular .

Just an alternate way of getting to a financial goal

 

[tech/a]

Having good and influential parents is a common theme, mine taught me nothing - 0. I had no idea about money or investing at 17 lived in a bubble. My net is close to 1m now should surpass it by the time im 40 but I don't own property in aus, still feel act and look like the poorest man on the street. The fear of being a **** kicker and respect for money is something that stays with you for life. This is a line in the sand I need to draw for my kids so they don't start the game on extra hard difficulty

I understand that for you V/H and others of similar view.

However the lesson of Money Makes Money is borne out really clearly in the way you
cant make a decision even if it’s clear as glass. You don’t want to get uncomfortable as you’ve
indoctrinated your thinking to hold forever true and to deviate would be impossible to think of.
I don’t think you grasp this important concept other than inside your scope of reference.

For people like me Monday is a vehicle for trade —- if your good at using Money you’ll get more.
Compounding other people’s money is the ultimate.
buying a $500k house for 20% down and selling for $800k 3 years later is astounding.
Or 5 DAX Contracts that move 100 ticks in my direction in 35 min for a $50k Margin
Turtles would NEVER dream of that! or even contemplate it.

Money to me is to be used not hoarded.