Talking your Book

Listening to the latest Twin Pete’s Investing podcast (which can be found here or here for those heathens that aren’t already dedicated followers), I was particularly interested by a segment where they discussed transparency of investors presenting ‘research’ on social media. The reason I was so interested was because of my own management of this website and my activity on Twitter; I don’t tend to publish research on a regular basis regarding individual companies and I very rarely disclose my own holdings.

I do, however, speak about companies I hold – sometimes to discuss RNSs and less frequently share price movements, but in a fairly unstructured and relaxed sort of way. From memory I believe I’ve spoken about my holding of Warehouse REIT (WHR), Anglo-Asian Mining (AAZ), and further back in time Carillion (CLLN), British Land and half a dozen other holdings, either on this site or through Twitter. The way I do this is almost identical to if you met me in real life; it’s a natural part of a conversation rather than a sales pitch. I don’t walk around my office telling everyone to buy what I own – and I’m pretty sure that if I started, I wouldn’t have many friends for very long!

As I never intended to become a tipper and am not a regulated financial advisor, I have always steered clear of making regular announcements about my trades and holdings and instead focus on the psychological and portfolio management side of investing. I’ve never really struggled to generate investment ideas either, and so although I enjoy reading the various updates available on other people’s portfolios, I enjoy them more as easy reading entertainment than out of any real desire to copy other people’s trades or portfolios.

This does, however, bring me onto the very real dangers of consuming financial entertainment. I am, by nature, quite a firm minded individual. I like to listen and learn and absorb as much information as I can, but once my mind is made up it is difficult to get me to change it. As such, I have a pretty high threshold for hearing uninformed opinions and being able to acknowledge them as such. Someone may believe with absolute conviction that they have found the next greatest investment but I still won’t accept it anything more than an opinion.

This brings me to my first point; copying other people’s trades is really not a very bright idea, but more people do it than like to admit it. The allure is obvious; if you believe you’ve found a good investor, then by ‘copying’ them, you can benefit from their insightful and skilled research and share in their outsized returns! What’s not to like?

Actually, there’s quite a lot not to like. To illustrate the point, let’s run through a quick checklist of questions for your new portfolio;

  • Are you investing for capital gains or income?
  • If income, what would happen if the income fell or dried up completely?
  • If capital gains, what would happen if you lost some or all of the original capital?
  • How comfortable are you with paper losses? How would you feel if you woke up and your portfolio had fallen 25%? How about if it fell another 25% after that?
  • How long are you willing to wait to achieve a desired financial outcome?
  • How many ‘mistakes’ do you expect to make with your portfolio and how big do you think they will be?

I can guarantee that for every person that reads this article we will get an entirely different set of responses to the questions. Which nicely illustrates my first point. What is good for one investor can be a disaster (real or imagined) for another.

Now, let us make some enquiries about the nature of the person you are trying to copy;

  • When did this person buy the company they’re talking about and at what price?
  • How big was this position relative to the rest of their portfolio?
  • What qualifies them to understand the product/market/technology so well?
  • When will they sell it and how much of it will they sell (i.e will they top slice or close the entire position?)?

Even if you can answer these questions (and I’ll hazard a guess that most of your struggled), how can you verify any of the answers? The only information you can actually access is provided by the person you’re trying to verify. Fine, they might not seem like a bone fide crook – they might be perfectly charming individuals, but beyond that initial gut feeling how canyou be sure that what they’re telling you is genuine?

The challenges of copying other people’s trades are significant on the way in – at best their research may be genuine and at worst totally fraudulent guesses or misrepresentations – and maintaining your portfolio in an identical manner also becomes impossibly difficult as you have no way of knowing what they’re selling and when until after they’ve done it. Before you know it, and sometimes without ever realising it, you’ll find yourself buying after price troughs have started to rise, selling after peaks have started to decline, and trading in mis-matched volumes so that in the end your portfolio (and corresponding results) will look quite significant different to the portfolio you’re notionally trying to copy.

This doesn’t mean, however, that there is no value at all in speaking to and learning from other investors. Quite on the contrary; I was, for many years, a huge fan of John Kingham, who writes an excellent newsletter to which I used to subscribe – I only cancelled my subscription after I felt the personal learning opportunities had dried up somewhat, but continue to follow and enjoy his work. My long-suffering fiancée knows I am a big fan of Investor’s Chronicle, which publishes both individual company research and broader economic commentary. I am also an avowed and dedicated audience-member of the aforementioned Twin Pete’s Investing podcast, which is run by two friends that are also active on Twitter and fellow bloggers to boot.

So what are the learning opportunities available. Well, firstly, by reading and speaking to fellow investors, we have the opportunity to identify new models of analysis, thoughts about products or technologies, risk management strategies and portfolio construction techniques. We can absorb their thoughts about how to look for opportunities and capitalise on them, as well as how to learn about mistakes to avoid ourselves. And we can do all of this without ever sharing a single jot of information about what is in our portfolios or encouraging others to buy into the same companies.

This brings me onto my next thought, which is that another reason so many people are allured by the idea of copying other people’s trades is that they don’t feel confident enough in generating and executing trades in their own investment ideas. Perhaps they feel that they are not intelligent enough to generate ideas that are as good as someone else, or they have lost confidence after a number of trades went against them, or perhaps they don’t know how to start generating ideas in the first place.

Whatever the reason, these individuals now look to others to provide the ideas and execution strategy that will make them a success; they’re almost buying into an actively managed fund but without the protection of a recognised financial institution to guard against foolish investments or outright fraud.

In writing this blog, I realised I have perhaps missed quite a fundamental part of investing; idea generation. I have begun publishing a watchlist and I’ve written a number of articles about analysing balance sheets but I don’t think I’ve covered idea generation from the absolute starting point of having some money and no idea where to put it. As such, I’m going to dedicate the next article (perhaps the next few) to idea generation from the very earliest stages. How I approached it, what I wish I’d done differently, and how I’d do it today.

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