INVESTING CASE STUDY
Navigating the Noise:
How An Investor Successfully
Turned Around His Investing
And how you can too, by clarifying your investing decision-making process into a skilled, structured, simple set of steps that produces profitable results that repeatedly works to beat the investing pro’s over the long term.
Date: Thursday, 31 December, 2015.
After three years of rocket-propelled growth, the markets had stumbled to a halt over the course of 2015 against a chaotic backdrop that spanned the globe.
Nowhere was this more apparent than the US. After a solid 74% gain over the three years to December 2014, or 20.3% annualised, the S&P500 Total Return index had a topsy turvy 2015, falling 8% to August before recovering to finish up 1.38%.
In Australia, the ASX 200 Accumulation index gained just 2.56% over 2015, saved by dividends to post a positive return.
With the US presidential primaries raging into the start of 2016 and the “anti-establishment” candidates of Donald Trump and Bernie Sanders set to dominate the second half of 2016, the outlook for the next 12 months was clouded with uncertainty. Financial analysts slashed their stock market forecasts, predicting low growth, if any, through 2016.
As 2016 started, stock markets around the world took a steep tumble.
“US stock suffer their worst first week of the year since the records began…”
Standard & Poor’s 500 and Dow Jones Industrial Average fell by 6% and 6.2%, respectively, in the biggest ever fall for the first five days of January.” The Guardian, January 2016
“A collapse in China’s ailing stock market spread like contagion across the globe again Thursday, pummelling nervous investors looking for respite from the week’s rocky trading.
Chinese stocks traded for less than 30 minutes, slumping 7 percent. The action prompted markets in Europe to retreat and then spread to the United States, where stocks tumbled 2 percent.
The Dow Jones industrial average and the Standard & Poor’s 500 both fell about 2.3 percent. They have lost about 5 percent of their value the week so far
The tech-heavy Nasdaq suffered the deepest losses, falling 3 percent on Thursday. It is down about 6 percent this week and on pace to enter what’s known as a correction, meaning the index will have fallen about 10 percent from its most recent high.” Washington Post Jan 7, 2016.
It was during this tumultuous period on the right side of the chart below that Iain* would make the next step of his investing journey.
(* Iain is a fictitious composite customer of Share Wealth Systems who typifies the investing journey of those that join our fold of clients. Iain is the US investor that Gary Stone mentors in his book “Blueprint to Wealth: Financial Freedom in 15 Minutes a Week”. The Australian context Case Study portfolio is also provided below.)
As political and economic turbulence spread throughout the world, the S&P 500 tumbled 11.9% as 2015 closed and 2016 began, as shown on the right side of the chart.
Nearly 2 years earlier Iain had been looking at his retirement nest egg and he was worried.
Iain was in his prime earning years… and yet, he was desperately playing “catch up”. His savings had taken a hammering in the 2008 financial crisis. The active balanced funds he’d been invested with, useless in preserving his capital at the time.
Since then, he’d been far more cautious about who he trusted his money with. And after several years watching his funds slowly crawl back at a much slower pace than the stock market, he took matters into his own hands.
The stock market had been on a roll, and he thought it was a simple matter of just getting into the market. Direct exposure to shares seemed the best way to go, so having read about “10 top stocks” to buy in a popular investing magazine, Iain dived in.
After a couple of “this almost feels too easy” winners, Iain’s luck changed… in a big way. He experienced the ‘large loss trade’ that just keeps falling and falling, causing a nauseating feeling of despair.
Despite the financial setback and ego bruising, Iain wasn’t a quitter. Determined to get to the bottom of what made the markets work, he scoured the Internet; reading books and blogs, listening to podcasts, and doing short courses on investing.
Over the course of 18 months, he spent hundreds & hundreds of hours learning, creating and refining an investment approach. More tellingly, he churned through a few tens of thousands trying out what he’d absorbed.
And while he’d learned a lot about investing, he was still shooting himself in the foot…
- Finding winners but hesitating when it came time to sell, giving up most of his gains (and even losing) with indecision and hoping for more profit• Buying a down-trending bargain sure to rebound… only to see it sink lower and lower
- Spending hours & hours researching companies deeply — to the point of becoming an “expert” — only to find he was too attached when trying to exit the losing position
- Being overly excited about a stock and cashing too much into the ensuing loser
- Investing a tiny bet into a stock that soared after his lengthy analysis created caution
- Being too heavily invested during down markets and hardly invested during strongly rising markets
For all the work he’d put in, his hesitant and uncertain mindset and inability to create an investing advantage that helped him know when to sell at a profit meant any success in the markets was short-lived.
In his last few trades before hitting “pause”, nervousness and self-doubt had gotten the better of him, transforming winning positions (like Fedex and Morgan Stanley) into losing ones.
Fedex (FDX) was just one of the trades Iain mismanaged over 2015, turning a handy profit into a stinging loss
In short, he was frustrated, confused and out of pocket, with not much to show financially except the odd winning trade, which will happen randomly anyway just by being active in the market.
However, he did have the multiple hundreds of hours over a few years of learning to now help him far better discern what he really needed to be skilled and profitable in the stock market.
The Top Two Challenges of Investing
Although Iain had studied the strategies and techniques of sound investing, his efforts were constantly sabotaged by the two biggest challenges investors face when they plunge into the markets.
#1: Building A Consistent & Objective Mindset
Although Iain had studied the strategies and techniques of sound investing, his efforts were constantly sabotaged by the two biggest challenges investors face when they plunge into the markets.
Amidst the volatility, the mindset to manage your positions became a critical component of investing success again.
After a string of setbacks, uncertainty and reservation filled Iain’s mind every time he faced a buy or sell decision during 2015. Hesitation and self-doubt reigned as he bought too late at highs and sold at lows.
His confidence vanished, his account balance sank and the trust in his investing ability plummeted.
He was at wit’s end how he could achieve the perspective required of a successful self-directed investor. To become skilled and competent and know what to do regardless of what the market did.
#2: Creating An Edge
Without a consistent way of finding and exiting profitable trades that far outweighed the sporadic losers, he knew his nest egg would grow too slowly over the long run to be anywhere near enough. That’s why he searched far and wide, trying and discarding many different approaches and systems in his quest.
In short, he was looking for a researched edge: an objective advantage he could use over and over with the expectation of making money over the long-term that beats the investing pro’s.
An advantage that would provide a far better option to the typical, mainstream investments which up to 85% of “mum & dad” investors trusted their money with… for returns that left them a long way short of what was needed for a comfortable, self-sufficient 25-year “second life”.
Being rules-based, he also discovered that an effective and efficient edge plays the major role in neutralising the emotional and psychological hurdles that every investor has to deal with, because its objectivity removes indecision and confusion about when to buy and sell.
Once Iain knew this simple formula, a lot of the mistakes he’d made unwittingly over the past few years seemed obvious:
Mindset + Edge = Consistently Successful Self-Directed Investor.
But he still had to develop a better mindset and find an edge that would deliver him consistent profits.
“Thinking Traps” That Affect Your Investing
While emotions can be the most serious disruptor of our investor mindset, there are psychological “thinking traps” that also lead us into bad calls… even when we feel we’re being rational. And without us even knowing we are doing it.
Recency Bias, or “Recency Effect”, is when you remember events that occurred recently, and put more weight on those events when making decisions. Recency Bias can occur in simple cases like forgetting the last bear market, or more specific instances like believing the next trade will be a loser because the previous one was.
A commonly-known cognitive bias, Confirmation Bias occurs when someone favours information that confirms an already held belief and ignores information contrary to that belief, even if the information is proven true and correct. For example, when deciding to buy a stock an investor may focus on an emotive story about a mining company’s “promising survey” while disregarding a non-existent cash flow that could see the stock delisted.
This refers to the tendency to give stronger weight to payoffs closer to the present than payoffs in the future. It suggests given a choice between a payoff today and a payoff in the future, we will choose to have the payoff now because not getting it now feels like the payoff is being lost. Even though the future payoff will actually be far more after inflation than now.
The Disposition Effect is where you exit winning positions too early but hang on to losers for too long. This is often explained as investors wanting to lock in gains, so they sell positions that have made money (ignoring any momentum the stock has). Investors want to avoid losing trades, so try to avoid them by not selling anything in the red.
Outcome Bias is the inclination to look at decisions based on the outcome, rather than the process behind the decision. For example, if you’d bought Google during the first half of 2015 on a “gut instinct”, you might think it genius on the back of the sudden jump in July. But that view is based on the performance of the stock, not on how you came to decide on buying Google.
A bias that mixes cognition with emotion, Restraint Bias is a tendency to overinflate our ability to restrain temptation. A common investing example is the “sure thing”, where despite self-talk that says we’re rational beings, leads us to be overconfident and dangerously expose ourselves in a position that’s far from a guaranteed win.
A New Approach, A New Attitude
As the curtain rose on 2016, Iain had done his best to bring more clarity, confidence, composure and reliable profits to his investing.
After conceding his unstructured, “scattergun” approach of knee-jerk reacting to “noise” had delivered nothing but frustration, almost two years of “school-of-hard-knocks” time and an ever-dwindling account balance, Iain went to the experts to deploy a more systematic approach.
Over the last few months of 2015, he changed practically everything he knew about investing…
- Learning concepts and knowledge “gaps” he hadn’t come across in his own study
- Investigating a new mechanical, rules-based system with a researched edge to minimise the emotion in his investing
- Developing better mindset skills, which included:
- the hard call to cut a losing position when called to do so by an objective edge
- opening a new position without hesitation or reservation contrary to the ‘noise’
An objective system for entering and exiting positions, and when to exit 100% into cash.
Despite the volatility of 2015, Iain marked down the 1st January, 2016 as his official return to the market. With part of his nest egg of $162,000 committed to his efforts, he was determined to give his investing one more solid push.
But he wasn’t prepared for what happened next.
Despite early enthusiasm, he watched with alarm as the S&P 500 crashed almost 12% over the first six weeks of the new year, while the All Ords fell over 10%.
Although disconcerted with the disturbing drop, Iain was determined to stick with the system that had been researched and developed by the experts. As January came to a close, he got his first opportunity.
Trade 1: Amazon (AMZN)
As both the S&P 500 and ASX 200 dropped throughout January, the system remained quiet with no buys. But on 29 January, 2016, it came to life, giving an entry signal for Amazon.
Though Amazon initially fell in a way that mirrored the markets, the system did not signal an exit.
During the first two weeks of the trade, Iain felt the usual fear, uncertainty and doubt resurfacing as the trade went south.
Stock market’s terrible start to 2016just got worse
(CNN Business News February 10th, 2016)
Fear continues to reign on Wall Street
The stock market’s terrible start to 2016 got even worse on Monday, with the S&P 500 losing 1.4%.
The Nasdaq tumbled 1.8% and got closer to sinking into its first bear market since the one sparked by the financial crisis. The index is now down 14.5% this year.
“It’s just a stampede of selling,” said Art Hogan, chief market strategist at Wunderlich Securities.
“There’s too much fear and too little greed right now,” said David Kelly, chief global strategist at JPMorgan Funds.
Former tech darlings Tesla (TSLA) and Amazon (AMZN) dropped again on Monday, continuing their 2016 plunge that symbolizes investors’ waning appetite for risk.
The Nasdaq is now down more than 18% from its all-time intraday high, putting it near the precipice of a bear market on that basis. A bear market indicates a decline of 20% from previous highs.
“Tech stocks were the ATM machines. That’s where everyone made the most profits. But the bigger they are, the harder they fall,” said Michael Block, chief market strategist at Rhino Trading…
But Iain remained committed to his newly instilled edge and, as the days ticked by, began to realize how objectivity and trust in a researched edge overcomes hesitation, uncertainty, recency bias, doubt and outcome bias.
Amazon’s stock price recovered and moved into a steady up-trend. By the time the signal to sell came on the 31st October, Iain had achieved a 36.6% profit.
The CNN Business News article was the emotion-charged investing landscape and gloomy market sentiment when SPA3 Investor signalled Iain’s second position for his new portfolio!
Trade 2: Freeport-McMoRan (FCX)
Following the swing south in the market, Freeport-McMoRan also plummeted in the first weeks of 2016. But after a brief consolidation, the stock began to rebound. On 17th February, Iain got an alert to buy FCX.
Less than 5 months later, Iain objectively closed out his position when the exit signal came, taking a 59.9% profit.
Trade 3: Qualcomm (QCOM)
As the markets surged through February, Iain got another signal on the 19th to buy Qualcomm.
Although the stock’s promising run petered out, Iain was still able to exit on 14th June, pocketing a 7.1% gain.
As each trade saw his portfolio jump higher, Iain began to realize how he could achieve consistency with his objective buy and sell decision making.
12 Months Later…
Date: Friday, 30 December, 2016.
The S&P 500 slid by the barest margin on the final trading day of what was a positive investing year in 2016. Despite it being a year as equally volatile geopolitically as its predecessor with events like Brexit and Trump’s unexpected win triggering ripples.
But a far bigger positive was that Iain had transitioned to a skilled, structured, competent, composed, coolheaded, objective and profitable investor in the stock market.
With a new mindset and process he could trust, Iain took his $162,000 stake and generated $31,850.37 in profit over the course of the year, making 18 trades and only spending 15 minutes each week to manage his portfolio.
Iain’s plotted daily account balance for his portfolio for all of 2016 (blue) compared to the S&P500 index (red)
Without any extra input or analysis, Iain had come out 19.07% ahead in his first “reset” year of investing, more than double the 9.54% S&P500 gained, and more than 2.5 times the 7% the ASX200 had gained over the year.
Explore Iain’s Journey toSuccessful Self-Directed Investor
While finding a system he could trust and retaking control of his mindset were the two major points in Iain’s transformation from enthusiastic amateur to confident, profitable investor, there was more to his journey.
If you want to learn the rest of Iain’s story – how he was coached and mentored to build up a repeatable, successful strategy prior to returning to the markets – you can read it in Gary Stone’s book “Blueprint to Wealth: Freedom in 15 Minutes A Week”.
The Not-So-Secret System That Changed Iain’s Investing
Anyone using this real, repeatable, rules-based system through early 2016 made those same trades… and took those same profits.
That system is SPA3 Investor.
On January 1, 2016, we launched a new public portfolio in Australia (blue line) trading real money with SPA3 Investor’s rules-based mechanical approach with ASX listed stocks.
The investing landscape in Australia at this time was just as alarming and uncertain as it was in the United States for Iain.
Yet, despite the volatile times in 2016 (and since), the SPA3 Investor ASX rules-based, real-money, live-traded portfolio enjoyed 3.5 years of consistently lucrative investing and far outstripped the modest returns of nearly all managed funds, as well as the ASX200 Accumulation index (red line in chart below).
Being rules-based, every live-executed position opened and closed in this portfolio can be verified and audited against SPA3 Investor-signalled trades, because the historical trades cannot be changed or altered – the rules are locked in and non-discretionary. Or mechanical as we call them.
There are more than a few good reasons we’re confident enough to back SPA3 Investor with our own funds (while helping hundreds of other everyday investors make the most of this edge).
- We’ve spent over 24 years building, testing and refining the system. Which is one of the main reasons it continues to perform and provide a way for investors to accelerate their portfolio growth. Years that you get the benefit of.
- SPA3 Investor focuses on a smaller basket of household-name, large cap, highly liquid stocks and ETFs, which means it isn’t bogged down by thousands of confusing choices. Instead, the system is highly focused and efficient.
- When none of the stocks or ETFs that SPA3 Investor analyses are worth owning, the system takes you into cash, which is preserved for later for the right opportunities, rather than being exposed to a market that is falling.
- SPA3 Investor is naturally geared towards investors who want to make mid-term trades, each lasting several months. Portfolio management is easier and less frequent.
- But the biggest benefit of SPA3 Investor is that it helps you bypass the emotional and psychological pitfalls that plague investment decisions. It does this with a researched and objective edge that lets you overcome emotional push and pull, and navigate through all the noise surrounding the stock market.
With the system, you don’t buy when greed whispers of a “surefire winner” in an email, and you don’t hang on to portfolio-dragging positions because of personal pride. Cognitive fallacies like confirmation or recency bias are taken out of the picture. Opinionated, subjective speculation that emotionally promotes or plays down a stock can be ignored.And ultimately — as you’ve seen — SPA3 Investor delivers returns that you won’t achieve from the big funds or “mainstream” avenues of investing over the long-term.That’s what SPA3 Investor does for investors who want to be successful and self-directed, all at different stages of their journey, every month…“SPA3 Investor has a proven edge in the market. This together with the money management rules offer protection of one’s capital together with the opportunity to self-manage a portfolio.”– Claude Orenstein, SWS Investor since November 1997“It is a mechanical non-discretionary system which is proven to have an edge and is continually being improved with tested research. Also, a high level of education on how to use the systems for maximum success.”– Peter Jumikis, SWS Investor since February 2012
It’s Time To Take Emotion Out Of TheEquation And Get An Edge
SPA3 Investor helps everyone, just like Iain, dodge the damage that the wrong emotions, psychology and decisions can have on your portfolio. Whether you’re a…
- SMSF Trustee
- Mum and Dad Investor
- Financial Planner
- Business Owner
- Stock Broker
- Teacher / Professor
- Industry Expert
…you can turn your investment portfolio into a profitable, simple to follow, long-term strategy to grow your investments and nest egg for the rest of your life.
To find out how hundreds of investors like you are doing this, you can get the details here.