SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Part 3 – Elephants Can’t Juggle Eggs
“An investor needs to do very few things as long as he or she avoids big mistakes” – Warren Buffet, Berkshire Hathaway Annual Meeting, 2000
In the first post in this mini series I talked briefly about the inability of public super funds to act quickly, followed by a post which discussed control, and last but by no means least I will cover managing and protecting. Together these three areas are the key reasons why we started our own SMSF.
I will not be talking about the “how to” aspects of hedging or protecting investments, rather I would like to talk about need to protect investments. In late 2007 a person that I worked with had sold their house and put the money into the stock market, her husband had quit his job to buy and sell shares full time on the stock market. They had done so well in the previous years, they bought shares and they went up and up and up. They thought that it would go on. The rest is history. In 2008 her stress levels were through the roof and the thought of closing her positions was not acceptable the realized losses would cement the fact that they would be unable to buy the house they had sold. There are a number of other people we know who rode the down wave, with a hope that it would recover, how bad could it really be? I am sure that you know others in this situation and I must say that my heart really goes out to these people. Another friend asked what she should do when her investment had declined significantly and she had lost money she could not afford to loose. Our suggestion was to stop the hemorrhage, accept her loss and close her position, she did so a number of months later after the market had dropped even further.
“Hope” is not a method for managing your money. Whether you plan to buy and hold, invest medium term, for a month or even for 20 minutes (as I did when I traded futures), you should NEVER enter a trade without knowing two key things 1) your primary exit point (i.e. your profit target) and 2) your secondary exit point (i.e your loss target). Your trading plan should have define the level of tolerance that you are willing to accept and you MUST adhere to this. If you have a secondary exit of 10% loss and your shares have gone from $100 to $90 close your position, do not (and I guilty of this) second guess yourself and hope that it will turn in the direction you want. Murphy’s law will work against you.
The aim is to evaluate your risk, pain tolerance & profit potential before you have ever placed a trade. These should be documented and only then should you take a position. You should know why you are placing a trade, and where you plan to exit the trade. Even if you are a buy and hold investor such as Warren Buffet, you still need to evaluate the circumstances of a company. If there is a significant change in management or investing into new areas away from the core business, you should consider your ongoing investment within such a company.
Essentially you are planning and executing to your strategy. You manage your risk in this manner and control your portfolio and your emotions. I have watched Christina’s trading grow to a point where she is quite mechanical about her trades, everything is documented, a position is taken and either her analysis was right or it was wrong. This is not about being correct all the time, it is about have more winning trades than losing trades.
In essence, Christina can be mechanical because she has already predetermined her maximum loss position so that she avoids big mistakes. You need to control the outcome and not let the outcome control you. If you are losing sleep at night because of a position going in the wrong direction, then you are possibly taking on too much risk and you are not in control.
Before you consider making a profit, you should be ensuring that you are protecting your capital. Manage and protect your fund but putting in all the necessary controls and document these in your trading plan to remove any guess work.
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