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Sentimental SNAFU's

After much churning within different sectors and geographical regions around the world in my early years of investing in the various stock markets here in North America as well as globally with very little in the way of "alpha" in my returns, I decided to take an engineering approach to the problem at hand, namely, making above average returns on the small stake I could afford to invest in the equity markets.

Identify the problem

The first observation was that I was searching out "winners" and subsequently arriving late at the party with my buys; my feelings tended to make me shun the "losers" because their performance numbers would pull down my average return on invested capital.

In the late 80's I became fascinated with the Japanese market and also the volatility in the energy sector and pondered both phenomena of the rapidly rising Nikkei (which in later years was identified as a bubble) as well as the regular swings up and down of crude oil prices which I tried to capture with new money going in as I could afford it.

A strategy is created
Just before the Japanese market crashed in December, 1989; I found myself in the position of seeing an excellent discount price in the Energy mutual fund that I was using with no available cash to seize the opportunity and thus took some profits out of the Japanese stocks to fund these excellent purchases in energy.

Of course after the crash in the Nikkei in the spring of 1990, I noticed that I could replace many of my sells from the previous 10 months at a vastly reduced price even though the energy stocks hadn't increased substantially in value.

At this same time, the monitoring of individual transactions was devised where I would calculate the net dollar value of reversing the J to E from 1989 to an E to J in 1990 and soon realized from hindsight observations that the absolute sell prices of J in 1989 were irrelevant since they could always be restored at much lower pricing in 1990.

Thus, my methodology was born.

The system

By creating a spreadsheet to catalogue all transactions made on an individual basis, I was able to flag individual "reversals" of previous switches and the potential profit that could be realized if I accepted the leap of faith that the share values remained relatively stable even though the price had varied.

In other words, if I had originally sold 100 shares but upon reversal of that sale ended up with 140 shares even after considering the price drop I was still ahead in both dollars and obviously in shares.

This was continued through the early 90's and by 1994 I had brought the "hot" Tech stocks into the flipping mix for a 3 way play.  By 1995 I had exited the Japanese market and brought Precious Metals in to complete the trading trio.

Avoiding GREED

By 1998, I was faced with the emotional impact of greed and had to make a deliberate effort of continuing to sell my Tech positions sporadically even though it appeared they would never stop rising.  That was very difficult but fortunately there were some minor corrections along the way and this "flipping" out of and back into the "dot.coms" occurred 5 times within 1999 with the final out in March, 2000 and then back in slowly from November, 2002 (early !) until August, 2004 (a bit late but I was overly cautious).

Overcoming FEAR

The crash in the NASDAQ was very scary and when the other equity markets followed suit in September, 2000; I shifted into Dividend funds but held onto my energy and precious metals positions.  In April, 2001 I switched my precious metals holdings and some energy stocks into physical gold (a bit late but paying only $11/oz above the low of $254/oz). I had beaten the emotional sentiment of fear and had avoided going into cash which I convinced myself was a cop out.

Conclusions

My method has now evolved into setting a sell target on every buy and a corresponding buyback target on every sell.  This has eliminated the last minute "second guessing" that results from having to decide at the moment of taking action whether the markets could go higher from your sell point or go lower from the buy decision.  This is the sentiment of trying to hit the top because anything less is capitulation or trying to get in at the bottom so you don't appear to be a sucker who just paid too much.

These feelings result in indecision and sitting on your hands until a very clear signal makes taking action seem obvious.  This is more about consistently making money, never having a negative feeling about a falling market, never being panicked into realizing a loss, and never trying to score the big win with that killer move that makes you look like a hero.

Good results make being right or wrong moot points.  Just show me the money; who cares if it's just another SNAFU ?



Disclosure: No specific stocks mentioned.