When the facts change, I change my mind. What do you do Sir? (Attributed to John Maynard Keynes)

The Saltydog Investor is just coming up to its fifth year anniversary and what a tumultuous five years on the stock markets of the world this period has turned out to be.

Financial problems have continued to plague most countries throughout this time, and to date there has not been any certain evidence of a recovery within the Banking Industry.

The European Union is far from a settled and directed community.

China has risen as an economic power, and is now facing the problems of establishing a stable and balanced economy.

Recent lack of world demand for manufactured products and building materials has produced a slump in commodity prices, resulting in difficulties for those countries supplying these products.

Oil fracking in the USA has created a price battle with the established oil producing nations. This has resulted in prices more than halving to the benefit of the users, but not the suppliers.

Russia has been flexing its military might to impress and keep in line previous satellite Soviet countries. This has resulted in the Western World imposing trading sanctions which, coupled with the falling oil prices, are wrecking the Russian economy.

The above is the stressful environment that the Saltydog Tugboat portfolio has been operating with during its five years of existence. Some days it has seemed that the markets would fall faster than you could do up your shoe-laces, only to see them recover over the following few days. During this time the investment press has enjoyed a field day whilst piling on the pressure and concentrating in rotation from one terminal subject to the next as if it had been riding a financial merry-go-round.

Our original intention with the Tugboat portfolio was to try to achieve a relatively safe rolling return after costs of 10% p.a. It was to be a demonstration for ourselves and our subscribers that it was not necessary to have your money stagnating in cash ISAs and the Banks` coffers earning you nothing. This we have proved beyond any doubt, as the Tugboat portfolio has avoided all the major market drops during this five year period whilst enjoying a steady rolling return of around 9% p.a. Unfortunately not the 10% we were looking to achieve, so that is a disappointment. Still, we must not take life to seriously; as we all know, we will never get out alive!

It was Voltaire who said that “Doubt is an uncomfortable condition, but certainty is a ridiculous one”. This taken along with the opening title said by John Maynard Keynes is surely a true reflection on the difference between a momentum investor and a “one shot wins” all passive investor. At Saltydog we are optimistic momentum investors relying on our own supply of fund performance numbers that we produce in order to lead us from one rising sector trend to the next. Admittedly in these five years these favourable sector trends have not been particularly obvious or long lasting. Nevertheless we have enjoyed life riding the Slow Property Funds, UK Smaller Companies, India, Emerging Markets, Gold Funds, Gilts, Biotech’s and Targeted Absolute Funds as each sector has enjoyed it`s fifteen minutes in the limelight.

The most important thing when looking at your investments is to believe that with care and attention tomorrow can be better than today. The world needs both the optimist and the pessimist. The optimist invented the airplane and the pessimist the parachute.  They act as a counterbalance to each other forcing us to examine whether our glass is half empty or half full. At Saltydog it is half full and we fully intend to claw ourselves back to that target of a 10% p.a. rolling return.

Tugboat 151111

I follow the horses.

I follow the horses; the trouble is, the horses I follow also follow the horses! How many times do you hear people say something along those lines after they have spent a day at the races? Surely, more often than not. They put their money on before the race starts and that is that, the die is cast, and they have to live with that initial choice.

In last month`s Saltydog newsletter there was an article about the timing of the purchase and the subsequent sale of two funds in the Tugboat portfolio. One being AXA Framlington Biotech and the other GLG Technology. These two cases demonstrated very clearly the principle of momentum investing. Unlike in a horse race, these funds were chosen after the race had started when the funds were performing well; whilst the race was still underway we decided to dismount when both funds started to falter and lose ground. Therefore we still retained the gain between the buying and selling prices. There were some people who chose to stay mounted as the race continued hoping that the horse would recover. They are now looking at a situation where the selling price may be less than the purchase price. They are in a loss situation. They are on a horse that is following other horses!

As a Saltydog subscriber, with access to all the fund performance numbers and graphs, why should we get tempted to break the rules? After all, buying and selling Unit Trust/OEICs is quick and virtually free on a supermarket fund platform, and a sale made too early can easily be rectified with a repurchase. You will have simply locked your gain in whilst avoiding a potential loss. This must be a better situation. So why, myself included, do we end up occasionally running loss making situations?

It must be down to built-in facets of human nature.

  • Inactivity. It’s sometimes easier to do nothing and ignore the evidence. You will be able to recall the odd time where doing nothing has perhaps worked and ignore the many times when it did not. It is easier to put the decision off until tomorrow.
  • Loss aversion. Investors are happy to lock-in a profit, but reluctant to lock-in a loss. It must however be more profitable to run your winners and cut your losers.
    Selective thinking. We give more credence to the facts that confirm the beliefs we already hold and sideline those that do not.
  • Positivity. One of the reasons that the human race still exists and goes forward must be its ability to be positive even in the worst conditions. This may not always be the best approach to investing. Overconfidence can lead to poor decision making.

These facets are in my opinion attitudes of mind that I have to take account of when looking at my own investments and decision making. It is only too easy to stray onto the horse at the back of the field.