Don’t Let the Market Drive You Crazy…

Friday, 26th June, 2015
Melbourne, Australia
By Kris Sayce

  • Does this beaten down stock deserve the beating?
  • In the mailbag
  • It’s an Eagle’s World

In a moment, I’ll hand over today’s Port Phillip Insider to Jason McIntosh. You’ll read his contribution below today’s mailbag.

But before then, let’s check out the markets…

Does this beaten down stock deserve the beating?

What more do you need to know other than the fact that stocks are taking a beating today?

As I write, BHP Billiton [ASX:BHP] is down 3.4%. Bluescope Steel Ltd [ASX:BSL] is down 3.7%. Fortescue Metals [ASX:FMG] is down 5%. And QBE Insurance [ASX:QBE] is down 3%.

Who’d buy stocks, eh?

Well, this is exactly when investors should buy stocks. When the market has the wobbles. Unfortunately, most investors do the opposite of what they should do.

Rather than buy low and sell high, they tend to buy high and sell low. That’s not just repeating a stale old cliché, you can see it happening every day in the stock market.

Take Woolworths Ltd [ASX:WOW]. First a bit of full disclosure. I own Woolworths shares in my family self-managed super fund. It’s also one of the stocks on the Tactical Wealth buy list.

I recommended that subscribers buy it last November. As of today, investors who followed that advice are down 15.8%. That includes dividends.

It’s not a good result. In fact, you could argue that it’s a case of buying high. And I’ll cop that. The difference here is that I’m not about to recommend that investors sell low.

Far from it. I recommend that investors do as I do — take part in the Woolworths DRP (dividend reinvestment program) and pick up extra shares each year in lieu of receiving the dividend.

But the funny thing about the Woolworths share price is that no one wanted a bar of it for most of this week, as you can see from the chart below…until today:

Source: CMC Markets Stockbroking

What happened today to cause the share price surge? A report that US private equity firm, KKR, could be planning a $33 billion-plus takeover for Woolworths.

Naturally, once the share price spiked, investors couldn’t get enough of the stock. They’ve piled in. Yesterday Woolworths was a ‘dud’ at $26.50, today it’s a ‘star’ at $27.50.

Look, I’m not criticising investors for buying Woolworths today. Even at a one dollar premium to yesterday’s price it’s still a bargain in my book.

My criticism is that the same investors who rush in today, will be the first to rush out again (probably at a loss) when the KKR takeover rumours turn out to be bogus.

As I explained to Tactical Wealth subscribers today, if the takeover rumours turn out to be false, that would actually be good news.

Think of it this way. If KKR buys out the company today, what will that mean to shareholders? Maybe it will add another $2 or $3 to the share price. That’s fine. But at what cost?

The cost is the missed opportunity of cashing in future dividends. Over the past 12 months, Woolworths has paid out $1.39 in dividends. That means in just two-and-a-half years, investors would earn in dividends what they would get as a share price premium from a takeover.

Not to mention the years and decades of dividends you could earn thereafter.

Of course, there is an argument that says there is another opportunity cost. That is, investors could sell their shares at a premium in a takeover, and then reinvest the money elsewhere, and potentially make an even better return.

That’s true. But what if you don’t find anything better? What about the capital gains tax liability? What about the potential for Woolworths to turn the company around and for the share price to soar higher in the years ahead?

After all, as the following chart shows, Woolworths has chronically underperformed the Aussie stock market over the past year:

Source: Google Finance

Over the past year, the S&P/ASX 200 index is up 1.6%. By contrast, the Woolworths share price is down 24%. If that’s not a case of buying high and selling low, I don’t know what is.

I’m biased — I admit that — but I still consider Woolworths to be one of the Aussie market’s best stocks. If the herd of investors and traders want to sell it at these levels, that’s fine with me. I’m a happy buyer.

Now for the mailbag. But remember to keep reading for an insightful essay from Quant Trader, Jason McIntosh…

In the mailbag

Well, other states are fighting back, but the Queensland machine keeps rolling…

Regarding your published letter from Greg.

I think Greg (although a Townsville resident) was declaring that Cairns should be the venue for the conference. He makes mention of this with his reference of cheap prices for conferences in Cairns. He also mentions that you should consider FNQ (Far North Qld), Cairns is in FNQ, Townsville is not.

No that the geography lesson is over, may I also add the Cairns has a fantastic conference centre, (and many smaller venues should your conference not be big enough i.e. The Casino) all located in the CBD. Also in the CBD is a large concentration of accommodation (and restaurants) of all standards at very reasonable prices. There is plenty to do for any spouses (picture pool side bars, reef trips, rain forest, laid back atmosphere, child minding) that may wish to travel with you, but do not wish to attend the conference.

I know it is a 3 hour flight from Sydney or 3.5 from Melbourne, but it is only 15 min from Cairns airport to the Cairns CBD.

Subscriber, Dave (Cairns resident)

Cairns, Townsville, it’s all the same to us southerners! But the idea of Queensland is growing on me.

By the way, I’m certain our marketing people hate it when I just throw these barely thought out ideas into the mix. I know it would be easier if we just held it in Melbourne again…but where’s the fun in that?

So keep the ideas coming to letters@portphillipinsider.com.au.

Meanwhile, here’s an advocate for holding the conference in Australia’s ‘south island’:

Tasmania really is the only place for the conference!

OK Own up… how many of you have actually been here?

Yep I know, too far, too expensive.

But think about this.

You’ve always wanted to come. So…this is your chance to come here for a tax deductable conference, you may never have a better chance to have a Taste of Tasmania. Cheers.

Subscriber, Trix

I’ve actually been to Tasmania three times. And I loved it. Again, the idea has potential. Hobart I liked. Launceston…not so much. But I’m prepared to be convinced.

Or there’s this suggestion, for holding it in Australia’s ‘east islands’:

How about Auckland?

Tax deductible “holiday” overseas.

Multiple flights from many Oz destinations at competitive prices.

Grow your NZ customer base.

Dollar goes further.

Time the conference with a good league or rugby match in Auckland and see your sports orientated customers jump at the opportunity.

Subscriber, Tony

Another good idea. I can start to see a theme — tax deductible holiday spots! Of course, if we do go down the track of a ‘destination conference’, you should check with your accountant about the rules regarding tax deductibility.

Now over to Jason McIntosh…

Cheers,
Kris
[+]

It’s an Eagle’s World
By Jason McIntosh, Editor, Quant Trader

Many people hate uncertainty. It drives them crazy.

And this isn’t something new.

The saying ‘a bird in the hand is worth two in the bush‘ has been around for centuries. One variation dates back to the 6th century BC.

The meaning of this age old phrase is simple. A small certain result is better than an uncertain larger one.

I think this says a lot about how humans are ‘wired’. We instinctively look to shut down risk.

And this is sensible.

Risk management is at the core of our physical, financial, and emotional survival. It’s what keeps us safe.

But can we be too safe?

I think risk avoidance can go too far. Being too quick to stamp out risks limits our potential. Sure, removing risk provides maximum safety. But it also removes the possibility of future benefits.

Take exercise for instance. I run most days of the week. This exposes me to the risk of injury or accident. Staying at home eliminates these risks. But the cost of this is foregoing all the benefits exercise brings.

Trading is similar.

People often tell me that ‘you never go broke taking a profit‘. They seem to think it’s the frequency of profits that matter…not the size.

This is much the same as a bird in the hand. The two phrases are about locking in the present in case tomorrow is worse.

But what if the future is better?

I want to share some comments from a member of my Quant Trader service. This is something I think you’ll be able to relate with.

I read with great interest your recent report regarding trading style, your use of a wider stop, and allowing winners to run. I agree with this “style” but struggle with how to live it.

Let me explain:

In search of double and triple digit gains over a medium term it is extremely difficult to hold your nerve when a particular stock may have gained say +30% and then starts to retrace.

Do I hold on for the ride down or take my profit?

How do I live the trading style if I am always protecting my profits?

I know exactly what he means. Every successful trader must come to terms with this.

You might remember a trade I wrote about recently. It was essentially this exact situation.

Let me show you the chart again.

This is one of my own trades.

Within only a few weeks I was up 30%. The bird was well and truly in the hand. But I let it go without hesitation. I was ready to ride this trade back to near my entry point.

I’m sure you remember what happened next.

My recent exit from this trade was at $1.65. I made 60% on my money in about 15 months.

You see, trading — like life — involves risk. That’s really the only way you can stride forward.

Quant Trader is a trend following strategy. It works on the basis that there are plenty of birds in the bush. And the statistics say a few of them should come your way.

The key is not to let uncertainty get the better of you.

I’ve got a few suggestions if this is an area you struggle with. These are strategies I use myself.

  1. Trade smaller. You’ll probably worry less when the stakes are lower.
  2. Try not to think in money terms. It’s just numbers…take out the emotion.
  3. Don’t look at your portfolio every day. Set your exit point and walk away.

Let’s go through them.

Trading smaller is a relative thing. It will be different for everyone. The idea is to trade a size you can manage. There’s no point taking a bigger position if it causes too much stress. You have to be able to live with it.

A 19th century Wall Street saying captures this nicely. It says ‘sell down to the sleeping point‘. What this means is simple. If your positions are keeping you up at night, then it’s time to trade smaller.

The next point is about how you think.

I remember receiving some excellent advice when I was starting out. A wise older trader told me not to think of my trading stake as everyday money.

He said $1,000 could buy a holiday or a new suit. The trick is not to mentally link a trading profit to something real. It will just increase the pain of giving back that money.

Think of trading funds as the score. A rising balance shows you’re playing well.

Lastly, don’t get hung up on the day-to-day fluctuations. Take a step back. You’ll find the bumps a lot easier to handle if you don’t feel them on a daily basis.

I’ll finish with a quote from Chicago Bulls coach, Tom Thibodeaux. He says, ‘You gotta learn to be comfortable being uncomfortable.’

I don’t think trading has to be an entirely uncomfortable experience. But Tom makes a good point.

Success is about pushing boundaries. It involves uncertainty and risk.

We need to use strategies to make the unknown more tolerable. I believe this is the key to uncapping our potential.

So let the pigeons go. The sky’s full of eagles!

Until next time,

Jason McIntosh
Quant Trader

Ed Note: You can check out Quant Trader here, including details of a special ‘end of financial year’ subscription offer.

PS: Remember to send your comments, feedback, and questions on our services, the stock markets, wordsmithery, or lexicography to letters@portphillipinsider.com.au.