How to avoid picking up bad habits | Fin24
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How to avoid picking up bad habits

Feb 20 2019 09:57
Simon Brown

Winston Churchill perhaps said it best: “Don’t let a good crisis go to waste”.

Falling markets test us, but it is also an opportunity for us to learn. 

Yes, a rampaging bull market is nice. Very nice. 

You get richer and feel clever. The emphasis here is on the bull making you feel clever. 

A booming market, in fact, teaches investors nothing. 

Pretty much anything you buy goes up, regardless of your skill and, often, anything you do learn is a bad habit. 

The bad habit of paying any price regardless of valuations. 

The bad habit of buying poor quality. 

Or the bad habit of over-exposing yourself to individual stocks or sectors. 

All lessons seem to be forgotten in a bull market, when everything is on the up. 

Those who do stick to their investing rules often feel left out because that poor-quality, overpriced stock keeps producing outrageous returns, while the carefully selected shares are doing great, but not as great. But the bad habits will eventually come back to haunt investors when the bull market fades and they find themselves in a falling market.

Locally, 2019 started off with a green January – not very green, but it feels nice. 

This is on the back of a 2018 sell-off and almost five years of zero returns for the overall index. 

It really has been the clichéd school of hard knocks. 

If you bought a poor-quality stock, the price has likely crashed. 

If you paid too much for a stock, the price has also likely crashed, and some entire sectors have been decimated by the sellers. 

And the word here really is decimated. 

This has not been a market in which stocks have lost 10% or even 25%. 

Darling stocks have dropped as much as 50% from their highs – in some cases even more.So now what? 

Well, one answer is that perhaps a pure passive portfolio is a better option. 

Picking stocks is not only hard, it can also be emotionally draining when your effort is rewarded with yet another sell-off. 

Just over 50% of my portfolio is in passive exchange-traded funds (ETFs) so that if my picks get slaughtered, at least half of my portfolio is matching the market. 

And I am increasing that 50% to reach a target of 65% in the next three to five years.

But the other answer is to buckle down and learn the lessons. 

Last year I wrote about doing an annual portfolio review (Time to take stock in the 20 December edition). 

I asked what you learnt about your investments over the last year. 

Did you jump into stocks without doing solid homework on the company and its sector? 

Did you pay any price without a view on the valuation of the stock? I did my annual review and while some of my holdings are in the group of 50% losers, I’m comfortable with my process. 

It’s been painful, but it’s unlikely that an investor in individual stocks has escaped without some serious knocks. 

That doesn’t mean your process is wrong, it just means markets hurt us at times.

One issue that did come up in my review is new stocks. My list of core long-term stocks has been largely unchanged over the last five or more years and I have to ask myself whether I am missing new trends and sectors. 

I did add ADvTECH* in the last few years as a new sector within my portfolio. 

But I plan to spend more time this year reviewing more sectors and stocks for my long-term portfolio. 

The good news is that eventually the new bull market arrives. 

In the meantime, we must knuckle down, review our processes and stick to them. 

Then, of course, the challenge is not to let the bad habits creep in.

*The writer owns shares in ADvTECH.

This article originally appeared in the 21 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

portfolio  |  markets