Do words of regret ever ring in your ear?
You look back and think to yourself: if only I’d done that differently.
Chances are you’ve done this more than a few times. I doubt there’s a person on the planet that hasn’t. Wishing we could undo a previous choice is a very human thing to do.
I recently read a fascinating piece of research. It was a study on regret by two US universities.
The researchers identified two types of regret — action regrets, based on something you did; and inaction regrets, which occur when you don’t do something, but later wish you had.
It turns out that inaction regrets have a bigger impact. This type of regret lingers the longest — much longer than the regret of doing something that doesn’t work out.
There was another interesting finding from the research. The authors claim that inaction regrets can spur us on to future success. They say these regrets drive us to ensure we don’t miss out again.
The research rings true with me…
You see, when I think about my own trading, it’s the inaction regrets I remember the most. These are the missed opportunities that stick in my mind long into the future.
On the contrary, I rarely dwell on losing trades. My action regrets quickly fade from memory.
Last week, I told you about possibly my greatest inaction regret. It was a trade that got away…a trade that could have been one of the best of my career.
I’m going to share another trade with you in a moment. You’ll see how my inaction regret has led to a better future outcome. I’ll also tell you how I use regret to weigh up a situation.
But first, a quick recap from last week.
Failing to act
This story begins near the end of the GFC sell-off. I’d been patiently watching the market for a buying opportunity. I thought an important low was close at hand.
And I wasn’t far off…
Stocks began to push higher during late 2008. This was the move I was waiting for. You’ll remember that I bought two big parcels of shares in an index fund.
But my timing was wrong. The rally didn’t last, and I sold my position at a small loss.
Here’s one of the charts you saw last week:
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You can see my entry points and my exit. I’d bought into strength and cut my losses when the market began to fall back. But this isn’t my regret — some trades just don’t work out.
My regret is about what happened next.
The market made a final low a few weeks later. A sharp rally then took prices higher for six straight weeks. But I wasn’t on board. By the time I knew I should buy, I balked at paying the higher price.
A highly profitable trade was in my sights, but I didn’t act.
The rest is history. You know what happens next:
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It’s not the trade I took that I regret — it’s the one that I didn’t take.
The funny thing is that I forgot all about the losing trade. I only saw it when I went back over my records for this story. Just as the research says, it’s my inaction that lingers long after the event.
But that’s not where the story ends.
Let me set the scene for a trade with a different outcome…
Now, you may recall 2017 was a difficult trading year. The All Ordinaries did very little for the first nine months. A tight trading range was hardly ideal for trend following strategies.
I wasn’t immune to the tricky conditions. Many of my own trades were either giving back profits or in the red. It was one of those times when few trades were doing well.
So, on 18 April I got a new entry signal…
It was for an obscure stock: Schaffer Corporation Ltd [ASX:SFC]. The company’s interests are in building materials, automotive leather, and property. I’d never heard of it before.
In fact, SFC wasn’t even in the All Ordinaries (the top 500 stocks). At the time I got the entry signal, my system ranked it at 941. This put it well beyond the consideration of most traders.
Check this out:
This is what I saw at the time…
SFC was in a solid upward trend, with gains of 43% over the past year. The shares were also relatively illiquid, and there were often days with no trades.
So what did I do?
Well, after several months of losses, I baulked at buying.
My reasoning was the market was doing nothing, and prices would probably stall. I was also hesitant to buy a stock that would probably be difficult to sell.
Here’s what happened next:
SFC shot up 15.6% from where I should have bought. My concerns that the shares would stall were wide off the mark. I was left sitting on the sidelines at precisely the wrong time.
Despite doing this stuff for years, I still make mistakes. Rather than follow my system, I thought I could get a better outcome by doing something else. Chances are you know the feeling.
One of the best things about system trading is consistency. If you have a bit of discipline, then your errors will hopefully be few and far between. But as you can see, they can still happen!
So the question was: What should I to do next?
Think what you’d do in this situation.
Do you pay up to get in, or do the words ‘I’ve missed it’ creep into your thinking?
Well, I’ll tell you what I did. I weighed up my possible regrets.
On one hand was the regret I’d have if I bought and the shares fell back. I’d end up with a bigger loss than if I’d bought in the first place. This would be frustrating.
My alternative regret was about not buying. I could ignore the signal and stay on the sidelines. But what if this was the start of a big move? How would I feel watching the shares spiral higher?
It was a lopsided comparison.
I knew the disappointment of a loss would quickly fade. My biggest regret — by far — would be missing an outstanding trade because I did nothing. The decision to buy was easy.
Here’s the final chart in the series:
You can see where I got in. It wasn’t the perfect entry — ideally, I would have bought four months earlier on the original signal — but it was an entry.
Here’s the thing. A trade can have many buying points. You don’t need to get in on the ground floor to do well. If an opportunity looks good, the important thing is that you get in somewhere.
Missing the turning point in stocks during 2009 was tough. But it was a valuable lesson. It made me rethink my strategies for buying a runaway stock — I didn’t want to miss out again.
Inaction regrets really can spur us onto future success. SFC is an example of how I handle these situations now. While I was slow to buy, it was still one of my best trades for the year.
So don’t be too hasty to walk away if you miss a buying opportunity. Instead, weigh up your potential regrets — what will bug you more: a relatively small loss or a big missed profit?
As hard as it may be to buy at a higher level, at least be open to the possibility. You could potentially save yourself from a lingering regret.
Until next week,
Editor, Quant Trader
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