Magic of practising behavioural finance- Speculation and Technical Analysis
Watershed moment in my investing career, for twenty years or so I never bothered to venture out to know technical analysis. To me they were abstract of numbers, diagrams which seldom established meaningful relationship with business of company.
As we all know price appreciation is attributed to 1. Earnings growth or fundamental appreciation 2. Market perceptions or speculation growth. I focussed on fundamental growth , to me and millions of value investor investing is about finding a good business at a good valuation.
This is precisely my stand even on March 2016, you can see the note on top when I started this thread . What changed now, am I trying to tell you that I become a trader or even remotely advising you to do so? NO, I still remain a dedicated value investor if I can say so but not the way what is written during 1930 to 1980’s even.
During my quest in last few months I met more than 20-25 speculators, spoke to them for hours. This include my new mentor who is a seasoned speculator apart from being a fundamental investor. I attended couple of classroom sessions, red few dozen books. Why I am telling you all this, to reiterate simple point….nothing is substitute for hard work. Money is unit of account only.
There is much more to venture out in dark world of speculation, fascinating stories of wealth making, high flying life style to clinical depression and suicides. The excitement of short selling, adrenaline rush shoots through your vein when you are leveraged.
Let’s catch some of defining moment of speculation world:
1929- William Durant (Founder of General Motors) and Arthur Cutten (commodity trader) lost everything in a week. Jesse Livermore made the greatest money in quickest time during same week by short selling in history of man kind. Apparently Livermore shorted 500 million dollars in 1929 which is between 2-4 trillion dollars in current terms, higher than GDP of 95% of countries even now.
2007- John Paulson made 20 billion with sub prime mortgage by short selling when every one went bust.
1992- George Soros broke Bank of England by shorting 10 billion pound forcing UK to withdraw from European rate mechanism.
1987- Paul Tudor Jones again short sold during 1987 crash making 3 times money in a week.
Now the odd moment:
- Durant went bankrupt, Livermore committed suicide.
- Wei Dong a known Chinese speculator committed suicide.
- Grandiose life style- can you believe Livermore had a dining table in his long island mansion which can accommodate land of helicopter (46 people can sit together), never waited in a traffic signal (all traffic cops in his route were paid off). Baruch impersonated US President by having his own cavalry! Six-Seven people manipulated whole financial world including US , UK administration which eventually pushed world to a hard depression by 10 years followed by a soft reaction for another ten years.
No wonder fabulous stories of speculators, technically all of them were brilliant, flamboyant. But something gone wrong somewhere which made the end unique.
Nevertheless let us focus the technical brilliance which may help us in our methods. What I can gather so far (still infant!):
- exceptional strong behavioural finance practice (particularly in area of risk management, money management, position management).
- meticulous and unemotional approach towards market. A seasoned speculator works like a machine, honour the code (rules).
- flexibility in adopting different market situations like sitting on cash, no work during some part of the year, change methods when it doesn’t work.
And good news for me was all of these can be blended with value investing and more so it may help in asking questions like:
- how do I protect capital, raise capital and manage capital?
- sizing a position while investing?
- include economics of market psychology during buy and sell decisions?
- expectancy of a portfolio than CAGR.
- exit strategy for different situations
- holding expectation which works well during sideways market.
And at the cost of not sacrificing any of activity we do while assess a stock fundamentally. A disciplined position management can increase substantially your return by proper capital allocation.
Before I move forward, 80% of speculation focus on mass psychology, biases, prejudices and fallacies. What better way to practise behavioural finance? Speculation not necessarily means intra day or commodity trading. It’s the act of intellectual estimation basis rules before you conclude decision making.
Going forward I am planning to share few of the speculation framework which helping me well in managing portfolio. I hope it may serve you well, please educate me further and question me whenever you want to.
