In general, 2017 was a good one. But keep in mind that the market has been kind to investors. It’s not too difficult to make money in a bull market.
As I’ve pointed out, while the broader ASX 200 index didn’t set the world on fire this year, that was largely thanks to underperformance from the banks. Most other sectors did very well indeed.
At the end of each year I like to reflect on areas where I could have done better.
While I’m not sure what the solution is, I want to improve in the area of stop-loss management.
There were a few times last year where we got stopped out of stocks right at the bottom. There is nothing more frustrating than seeing a stock price start to run higher after you get stopped out.
One option is to have wider stop-losses. In a bull market, I suspect this could add some value as prolonged declines in stocks are less likely in a bullish environment.
The other option would be to bring in subjective analysis around the stop-loss point. If you can see why the share price is under short-term pressure, but don’t think there are terminal issues with a company, you can continue to hold.
But this defeats the point of having stop-losses in the first place. That is, it is designed to remove the need for subjective analysis, right at the point where you might be most likely to talk yourself into holding.
While it’s frustrating to get stopped out only to see a stock go on to double, it’s just a part of the investment game. Over the longer term, the ones you get right should make up for the ones you get wrong.
On a related note, I caught up with fund manager Matthew Kidman last month. Among other things, we discussed the nature of stock picking and what constituted a ‘good’ stock-picking ratio.
Matthew said that, in his experience, getting 60% of your calls right was a good result. He reckons that if you’re batting above this average, you’ll likely have a period of underperformance, and vice versa if you’re batting below average.
Following that chat, I went back and tallied up all my winners and losers since launching Crisis & Opportunity in November 2014, including stocks in the current portfolio. The win-loss ratio was right on 60/40, and the average return (from ALL stocks, including the losers) was 19.4%.
That tells me that the investment process is on the mark. It also tells me that I don’t need to radically rethink the stop-loss process.
Here’s one option you might like to consider: Keep an eye on the stocks we get stopped out of. If they give a future buy signal based on the Crisis & Opportunity methodology, buy back in.
This isn’t a trading service. I’m not going to send mid-week alerts telling you to get back in a position. But you can keep track of this yourself.
(As an aside, I am planning on launching a trading service in the second half of next year. That will overcome this hurdle and also give you plenty more trading opportunities.)
Stocks will fluctuate
When asked what stocks will do, John Pierpont Morgan famously said: ‘They will fluctuate.’
He wasn’t being cagey. He was being honest.
No one really knows what’s going to happen in the future. But we can think about the probability of certain events unfolding.
While I was bullish at the start of 2017, I’m not as bullish now based on fundamental factors. But I want to stress that I’m not expecting a market collapse.
I think you’ll see stocks fluctuate a lot more in 2018 than they did in 2017.
Still, the chart of the Aussie market is ending the year looking pretty strong. As you can see below, it’s breaking up through long-term resistance at 6,000 points.
[Click to enlarge]
What you want to see here is continued strength. A reversal would be a concern.
Let’s see how the market reacts to the Trump tax cuts coming into force. That will give us a good idea of just how bullish this market is.
Editor, Crisis & Opportunity
Editor’s note: The above article is an edited extract from Crisis & Opportunity.