We continue our series of articles written by one of our users, a Singapore-based Portfolio Manager named ATEC who has been sharing thoughts and highlights from their investing research. They cover everything from individual stock names and industries, as well as regulation and the investing landscape.
In this week’s blog, we wanted to showcase a recent article they wrote. You can find further articles and follow ATEC on our Medium Blog.
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ATEC has often been asked in the past by clients and bosses alike: "in which trades lie your greatest conviction?"
It was always an exercise in academia, in that we would have our analysts prepare a spreadsheet ranking the different bets by upside targets (or downside) potential. Then the story-telling ensues.
Truth be told, based on ATEC's recollection, perhaps less than some 30% of those predicted targets ever came through. When we think about it, this happens for a very simple reason - that life (or sh*t) happens.
As an extreme, let us use Gamestop as an example. Every one of us is able to tell (fundamentally) that the retailer is far from the definition of a quality company. Neither did it deserve the more than 2,000% price appreciation at the start of 2021. But yet, it did, and in the process, lay waste to several large professional hedge funds.
The key lesson that ATEC took away as we observed the carnage is that ego is a terrible attribute for any investor, whether individual or professional, to carry into the battlefield that is the stock market. Even if there is a universal truth to the idea that every company has an appropriate intrinsic value, there is nothing to suggest that 'it' will manifest as per your planned timing or as per your painstakingly constructed earnings model. Stock prices WILL meander, and by lots. A whole host of factors such as investors' positioning, a large hedge fund unwinding, macro sentiment and so on can, and will throw spanners in the clockworks.
Just like, well, life, sh*t happens.
Downturns can, and will, depress us and make us lose sight of the bullish thesis, while periods of strong rallies will inevitably cause greed and complacency to creep, in if we are not careful. Hence, in ATEC's view, it is of utmost importance for any investor to be aware of their own emotions towards the stock (or market) at every point of engagement.
Are you bullish because you are already invested, or are you bullish because your investment approach or rules suggest so?
That is why, whether individual or professional, all investors should and must pre-define for ourselves cut loss rules for all positions, whether based on percentages lost or technical levels breached.
The biggest mistake that we as managers can make is to utter the line, "it's ok, the company will do fine longer-term," when the stock keeps tanking against our long position. You might be right about the long-term, but you might be broke by then too. Getting out of a loss-making position is the equivalent of a time-out in say, a basketball game. It gives us the breathing space needed to re-assess our thesis and strategy and decide if we are wrong after all about the stock, without having to bear the emotional burden of having the position go against us in the meantime. It is perhaps the best safeguard against our runaway egos. Most importantly, it allows us to protect our capital.
Hence, as we hone our skills as analysts and at Excel modelling, do not forget to hone your understanding of your own emotions... and yes, learn to curb that ego.
