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Wednesday, March 29, 2017

Feedback

Posted by Robert on May 21, 2012

B. F. Skinner was a behaviourist who, in the 1960s, experimented with pigeons to learned about behaviour and conditioned responses. In one of my favourite experiments, he put the pigeons in a cage where they received food at random intervals. Over time, the pigeons developed complex routines in anticipation of receiving the food. Skinner compared these behaviours to superstitions. He said: “The experiment might be said to demonstrate a sort of superstition. The bird behaves as if there were a causal relation between its behavior and the presentation of food, although such a relation is lacking. There are many analogies in human behavior. Rituals for changing one’s fortune at cards are good examples. A few accidental connections between a ritual and favorable consequences suffice to set up and maintain the behavior in spite of many unreinforced instances.”

Could the same thing happen with the stock market? I think it does. An individual stock sometimes seems to have a personality. For example, it may go up and down in a specific range, and it might move at a steady rhythm. An investor could then buy low and sell high repeatedly… until the stock suddenly moves outside its range. Or the market as a whole may appear to move in cycles. In fact, there’s a market saying: “sell in May and go away.” It implies that the best market returns are between November and May, while the summer months are usually dull and September and October are often the worst months in the market. Is that true? Research has been done that finds it sometimes holds true; not often enough to make much money, so it’s a gamble.

“Past performance is no guarantee of future returns.” Unfortunately, past performance is all we have available. It’s possible to look at historical returns long enough to find a pattern in any market or stock. But the question remains whether the pattern is an indicator of a predictable future outcome, or whether it’s just the result of random returns. Andrew Lo famously said: “If one tortures a data set long enough, it will confess to anything.” Is that another form of superstition?

As I invest in the market, I get some right and I get some wrong. Recently, I’ve gotten EnerPlus very wrong. At least, that’s how it feels. At the same time, the entire TSX (and many other markets) are falling. So maybe it’s not a bad choice, maybe it’s just a bad time. My point is that the “feedback” that I receive from the market is unsteady and unclear. It’s almost impossible to evaluate my judgement based on whether or not my stock increases in value over the short-term. And over the longer term, it’s easy to forget how I made my decision in the first place, so the feedback really doesn’t reinforce my decision-making.

How can you tell whether your investment choices were right or wrong? How will you know if you need to change your investment strategy?

Comments

8 Responses to “Feedback”
  1. Rob says:

    I think a good test of whether or not your investment choices were good, is whether or not you reach your goals. If you want to get 6% total return, and you get 5%, you were wrong. And, if after a a couple or three years you are consistently below your goals, your strategy needs to change.

    I personally don’t have a specific goal, except to make money. I judge my right or wrong investments/strategy against a benchmark. I choose the TSX Comp, but that may be different depending on where you like to invest. Last year I beat it by 15%, this year so far I am ahead of it by 3%, albeit still losing money. If I consistently perform below the benchmark, I look at my investment strategy and revise it.

    My strategy is different, because it is not important for me to increase capital, as long as the dividends keep coming in, I am content. But I am already retired, so no longer trying to reach a goal.

    To my mind, the largest risk an investor who is trying to build a nest egg, can make. Is to opt for so called “safe investments”, and not ever actually reach their goals, and that’s the biggest fail of all.

  2. Jacq says:

    Rob, can you explain a bit more about how you invest?

  3. Robert says:

    Jacq, here is a short description of my investment strategy: http://www.roberthurdman.com/investment-strategy/

    If you want to know more, I invite you to contact me.

  4. Rob says:

    Too Jacq;

    I suppose. I have a list of companies that are good strong blue chips that pay good dividends. All Canadian right now, but that has more to do with where I am and tax advantages. There are never many in the list, maybe as much as 30, and I am normally invested in about 18 of those, give or take.

    So pretty safe. What the key is, for me, is to watch which sectors are in favor, and which ones aren’t. Sell the over-performers, and buy the under performers. Then wait until that changes. Quite simple really. In the last year, REITS, pipelines, utilities, telecom, etc… have done well. I have sold out of those, and moved all my money into oil, gas, banks, insurance, etc… When those go up, I’ll move the money into whatever is the under dog at the time.

    I made a killing in banks when they tanked in Nov/Dec last year, and sold in January when they came back. I knew that a sharp drop like they took at that time was just investor panic, so I borrowed a bunch of money and bought into Royal Bank, which was the biggest underdog of the banks, and sold when I felt It was getting closer to is normal trading range. Bought at $43, sold at $54. The trick with leverage is to be comfortable carrying the debt for a long time, just in case.

    I am not a rocket scientist though. When I buy a stock, it usually goes down, and when I sell, it usually goes up. But I make money in the range, and usually I set my targets at about 10%, or somewhere around a previous high. I never get too greedy, because there is always money to be made somewhere.

    My list changes from now and then depending on whether a particular company is showing signs of either recovering or getting too expensive.

    Example:

    CPG – Crescent Point Energy. It was up around $49 last spring, and according to previous numbers, it was getting a little over bought, so I sold it. When it dropped down to $42, I bought back in. Now I am looking to get out of it because it is starting to take on debt that I am uncomfortable with, but oil companies are in the tank, so I hold and wait for the opportunity.

    RCI.B – Rogers was getting overbought at $40, my personal target, so when it hit that level a few weeks ago, I sold it. I had bought it around $35 a short time ago. It is now back down to that level, and I would buy back in, but I have sold everything that I have that is high, so it will have to wait. Trading range for me, $35 – $40. Besides, when a company falls, it usually takes a few quarters to bounce back, so I have a little time.

    MFC – Manulife has been on and off my list probably more than any other company, but it has been pounded up so bad over the last 5 years, that there is no where left to fall. The company has huge potential, but is up and down like a yo-yo. I buy whenever it drops below $12, and look to sell when it gets over about $15, but I actually think I am going to hold this one for a few years now, and wait. This stock has the potential to hit $40 – $50 if interest rates ever recover, and it pays me over 4% to wait for that to happen.

    AQN – Algonquin Power Corp – I always maintain a couple thousand shares of this, because I love the company. But every once in a while it bounces up, and then pulls back. So I try and catch those bounces, while collecting their juicy dividend.

    I have emotional money too. I am slowly getting away from it. Big gains also have the potential of big loses. I am currently holding YLO – Yellow Media, and RIM – Research in Motion. I will take a loss on these no doubt, but there has to be a little fun money in there somewhere, sometimes. Nobody gets it right all of the time, however, these purchase were outside of my normal investing strategy.

    I am currently getting about 4.25% in dividends, and these are all that I count on. Sometimes I will take a position in a big company that doesn’t have a huge dividend, just for the bounce back potential. But I only allow a certain amount, and try to keep the dividends up there. Right now I have a pile of shares in SU – Suncor. Not normally a company that an income investor, like me, would invest in. However, when I can buy into this company under $30 and know that it should be worth about $45 at hundred dollar oil, then I see the potential to make some nice coin. Incidentally, my target is $40, well below most analysts. And when I sell, I’ll put that money into the blue chip, dividend paying, under dog of the day. And of note, I sold a pile of REI.UN – RIOCAN to buy the Suncor. It was high, and Suncor was in the crapper.

    I don’t know if this helps. Obviously the whole process is much more involved. My research entails looking at the company data, (when it goes on my list), listening to analysts (not just their recommendations), and just getting a good feel for the company. If I like it, and think there is little potential for a loss, then I put it on the list, and wait for an opportunity to buy it.

    My core holdings always pay a decent dividend, and are usually good, strong, large caps. And I make it a point, mostly, of staying away from companies that don’t provide anything that people need; Apple, Facebook, Microsoft, Rim (I know)….

    Current holdings:

    AQN – Algonquin Power Corp; core holding, unless they start taking on way too much debt. They have been expanding big time, but I watch it.

    TRP – Transcanada Pipeline; under performed all its peers, but if/when the XL goes through, this stock will catch up. I would hold other pipelines, but they are over bought.

    CPG – Crescent Point Energy; looking for an out, somewhere around $46, and watch it for a while to see if it is managing its debt well. I get nervous when I company borrows money to pay its dividend.

    ECA – Encana; Long term hold. I am hold a lot of it though, and will sell off some when it gets over $30 again. Otherwise, collect the dividend.

    RY – Royal Bank; Small holding. Banks are boring right now. Wait until something interesting happens to drive there value up or down.

    COS – Canadian Oil Sands; Core holding. This one is volatile, but is a cash supplier, and my choice for a long term hold on the oil sands. I have too much right now though, and will sell some when it climbs back over $30

    BNS – Bank of Nova Scotia; same as royal.

    GWO – Great West Life; This was one of those emotional ones. Good company, share price in the crapper. I owned POW, the parent company, but was a little concerned about their exposure to Europe, so sold it and bought into Great west.

    RIM – Research in Motion; What can I say, we all make mistakes. I will ride this one until the end, just for giggles.

    BXE – Bellatrix; Another emotional play. I was looking for something with a low share price, in the oil patch, just to chew up some cash that was laying around. I thought maybe this had the potential to do well, and maybe even bring back the dividend. Oops… But its not over yet. Sell target $6

    SU – Suncor; as mentioned above

    YLO – Yellow Media; nobodies perfect

    MFC – Manulife; Huge company, not going anywhere. Managing to streamline its processes in a big way, making way for huge potential.

    And that’s all. This is the smallest number of stocks I have held in a long time. But the market is really weird right now.

    My watch list includes:

    BMO; my second favorite bank, but boring right now;
    POW; worried about the Europe thing, watching;
    HSE; Husky Energy – Boring oil play, maybe later;
    REI.UN; RIOCAN – way over-bought. Actually looking at other REITs now for when they drop back;
    BCE; Bell – Currently over-bought;
    RCI.B; Rogers – Don’t have the cash to buy just yet, but this one is in the target zone;
    PPL; Pembine – over-bought;
    IPL.UN; Inter-pipeline – over-bought;
    FTS; Fortis – over-bought;

    There are others too, but I am not in a position to do much moving around, so my lists are currently smaller. When I sell the house next year, then I will have another $160,000 or so to put into the market, and the list will likely grow.

    I sold out of bonds completely last year. With interest rates this low, bonds have nowhere to go but down, and they aren’t paying very well right now either. Better to have some money in cash. High yield, good quality corporate bonds are not really available to the average do-it-youselfer.

    Hope this isn’t too much info, I am not sure what you where looking for, so I just spilled everything. I you have any other questions, please feel free to ask. I’ll try and keep the responses a little shorter.

    Cheers.

  5. Retiredat44 says:

    Rob, thanks for sharing these! I like your comment on RIM, sounds familiar – I almost did the same on NT! :-)

    You make investing sounds so simple, good for you! I used the old school buy-and-hold strategy until 2007, and since then everything is like a yo-yo and I start to get lost. I now use a similar approach as you – having a watch list and trying to buy low/sell high, but I find it easier said then done under this crazy market.

  6. Jacq says:

    Thanks Rob! I’ll have to print this out – we own a lot of the same stocks for much of the same reasons. I even bought $2500 of RIM recently just for fun. I seem to want to get a “mad money” stock every once in awhile – hopefully can offset the potential loss with this lucky UNG gain. But I’d be happier if it went up too. :-)

    I invest like a grandma in my (65+) RRSP account but not so much in the “early retirement” account. It’s not a good strategy though for tax purposes – should be doing the opposite.

    Thanks again.

  7. Jacq says:

    Thanks too Robert! (All these Rob’s confuse me) ;-) – I don’t think I’ve ever seen you link your site on here before – I have some reading ahead of me… I’m trying to develop a good strategy of my own but I seem to lose or just break even whenever I go outside of the industry I understand / work in (O&G). All the women I know are Bogle fan-girls or aren’t interested or are afraid of investing. I just hate the idea of not even trying to maximize the productivity of my money.

  8. Rob says:

    Thanks folks. My philosophy changes depending on the markets. I once had all my money in mutual funds. But I got tired of paying someone else to lose my money for me. Since I took control, I have beaten the TSX Comp every year, even if I didn’t actually make any money, like ’08. Doesn’t mean it will keep happening, but if I don’t beat it, then I look at changing the way I invest. Even started investing in real estate, but that’s a whole other game.

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