How to improve your investing – A candid interview with a 25 year veteran of the stock market

This is the second part of my three part interview with Wayne Collins about his experience of the stock markets over the last 25 years. He shares valuable insight in to how to improve your investing and increase your market knowledge by ‘piggy-backing’ on other people.

If you missed part 1, you can read this here.

Adam: What is a key insight you could give about investing that’s not necessarily about the ‘technical’ aspects of the markets, such as risk management, stock selection or reading balance sheets?

Wayne: This is nothing new, but worth repeating. Markets are made up of people.

People are emotionally driven and they will act with a herd mentality. When markets are dropping there’s a huge amount of fear around.

Money is being lost. No one wants to predict the bottom and get caught out further. So markets continue to drop. But there will always come a point where the prices on offer are just too tempting.

So a few contrarians will start buying.

It’s normally slow at first, but others will start to notice. They’ll think that these people know something they don’t, so won’t want to miss out. Normally around the same time economic conditions start improving, positive media coverage starts filtering through and the mood changes from negative to positive.

This brings out the greed, people believe they will make money and not lose it, and the cycle continues.

Adam: Sounds a bit like the blind leading the blind…

Wayne: I suppose it does, but it doesn’t have to be if you do a little planning. It also helps to give yourself a little history lesson, again using 2008 as the example.

After the sub-prime crisis the UK markets dropped until March 09 to around, I think, 3500. After that it pretty much doubled up to April of this year.

Now since then we’ve seen a drop off, but ask yourself whether you got involved again in 2009, and if you didn’t why not?

I’d take a guess that you were either still licking your wounds, or too scared that there were more falls to come. It’s totally natural as most people around you were likely saying the same thing, warning you how dangerous the markets are.

Yes, market timing is a key part, and there is an element of luck involved at times, but one thing you can’t try to do is pick the bottom or top of a market.

I will always look to sell out prior to the top or bottom. I’m not going to squeeze every last drop out as I’ve found out the hard way in the past that this can backfire spectacularly.

It is something which gets easier with experience, and I like to consider this like a little ‘thank you’ to the market…

Adam: Or perhaps a ‘cost of doing business’?

Wayne: You could call it that too I guess.

Adam: I’m trying to piece together a lot of what you’re saying and I think that what I’m hearing is that even in tough market conditions, every challenge can present an opportunity. Fair summary?

Wayne: Not bad for a layman…

I guess I’m saying that the markets offer numerous metaphors for life in general anyway.

It’s like the saying, ‘you don’t know what you’ve got until it’s gone’.

When it comes to the markets it can be the case that you don’t see the opportunities when it’s in front of you because you’re fearful. By the time you do, it’s gone, you missed it. In fact it’s likely that you didn’t realise you had it in the first place.

The same is true in reverse.

When you’re on a good run, or on the back of nothing but gains, clear signs of potentially damaging events are in front of you, but you’re so delirious on the opportunity, fuelled by greed and self-denial, that you don’t see the car crash coming.

Then it’s too late.

Adam: Can you give an example or a situation that could help put some context to that?

Wayne: Look, I’ll offend a few people here, but as I’ve seen it over and over again I know how important this is to say.

In the financial markets, the investor, 9 times out of 10, is their own worst enemy. Most of the time they don’t even realise it.

What I’ve seen too many times making a negative impact on many a portfolio’s progress, is a failure for the investor to understand that when they have a position which is loss-making, it tends to be for a reason.

It gets worse when they ignore this, or keep holding in hope rather than expectation that it will return. This means they tend to hold onto it for longer than they should. So it goes down by more and more, eventually doing more damage than it would have if they had made an early decision to cut based on what was happening, instead of their own preferred alternative reality.

Yes, sometimes it will come back. Unfortunately in my experience if this has happened to someone before, it makes it even harder to make the decision. But over the long term I have found it will do more harm.

It’s what is known as a ‘recency bias’ I think. When decisions are made based on what happened before, or even the last time a similar decision was taken, rather than what’s actually happening.

The market is always telling you what it thinks of the stock at a particular time. It’s right there in front of you, in the moment.

But you have to be quick and clinical terms of your decision-making process, and it must be based on what’s going on now, not what has happened in the past.

Your decisions should also be based on criteria set out in your plan, which is made outside the emotional arena of the markets, and why I’m so dogmatic on the importance of making that plan in the first place.

Adam: Talking of plans, I’m pretty sure a plan made 25 years ago will have needed a few ‘updates’ due to the huge changes we’ve seen in technology, social behaviour and the world economy. Is there anything you see today that perhaps wasn’t so much of an issue when you first started?

Wayne: I think at the moment the biggest challenges private investors face today that didn’t exist 25 years ago is in the shear amount of information that is now available.

As I said at the beginning, a little knowledge is a dangerous thing, but on the flip side too much leads to uncertainty as you will always find something that contradicts everything.

Nowadays you’ve got numerous websites, numerous tip sheets and numerous newsletters etc.

So it’s now the case that clients are getting bombarded with multiple different views of the markets, it’s no wonder there’s so much confusion! How do you know which ones to follow or even trust to make a decision?

All I would say if you do decide to follow tips, newspapers or investment publications, choose one and stick with it. Stop flittering around as you’ll never get consistency as you open yourself to possible conflict and just end up confused.

Part 3 will be available from Tuesday 22nd December, so make sure you come back to see if there’s a twist in this story…!

And if you did miss part 1, you can go back and read it here

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