Showing posts with label overtrading. Show all posts
Showing posts with label overtrading. Show all posts

Friday 26 June 2015

"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:
  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO
Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic
Regards
Signature

Mark Moreland

Co-Founder



NOTES:
Stock selection
- Read the annual reports
- Read all the analysts reports
- Visit the stores or use their products and services

If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons.

They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision.

These are the 4 behavioural biases, which we refer to them as:

  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.


Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  


FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   



These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 



# Reinvestment risk.

Sunday 18 April 2010

Growth, overtrading and overcapitalization. Controlled and managed growth is critical to the future of a business.

Many businesses strive for growth.  There is a belief that fast growth is the best way to build a successful business.  However, is rapid growth the best option for business with relatively low cash and limited access to new external finance?



Overtrading

'Overtrading' is an imbalance between the work a business receives and its capacity to do it.  Overtrading is a symptom of fast-growing businesses, which chase sales and profitability at the expense of liquidity.

This is common in new businesses, which tend to offer long credit periods to customers in order to establish themselves in a new market.  At the same time many suppliers offer only short credit periods (or insist on cash payments) as the new business has no track record.  This gap between paying suppliers and receiving cash from customers is often financed via overdrafts.  Eventually overtraded businesses enter a negative cycle where banks will not extend their overdraft any further.  Growing interest costs and the associated debt means their financial status eventually reaches insolvency.  

"Yesterday is a cancelled check.  Today is cash on the line.  Tomorrow is a promissory note."



Overcapitalization

On the opposite end of the spectrum of overtrading is overcapitalization.  An overcapitalized business has excess assets, which are not being utilized effectively.  In essence it is not maximising returns in relation to the size of its assets and in particular its cash.  This is not so risky as overtrading but the money should be 

  • used to finance long-term projects or 
  • returned to shareholders.


Overcapitazation is often a symptom of a previously successful, mature businesses with minimal future growth prospects.



Finding the balance

It is difficult for a growing business to turn away sales, but success can kill a business as quickly as failure.

Controlled and managed growth is critical to the future of a business.

  • Growth demands investment and only a certain level of growth can be financed by internally generated cash.  
  • Further growth requires external investment and there's only so much money shareholders will commit and banks will lend in the short term.