It has been close to 50 minutes, DS and I not only recognized each other, but it also looked like we were back to our old days when we would just go on and on about stock market ideas. In my last post, I stopped at when DS mentioned how he attempted to maintain two different types of portfolio, one for trading and one for long term portfolio. So the conversation continues….
I said, “DS, I have been fascinated, and quietly toyed with the idea of having such different portfolios”, “But wait before you get any ideas”.
You see folks, I wanted to add my disclaimer like we do in all walks of life, so I add, “I have not used it, but I am fascinated by this thought”. Before I say anything else, he jumps in.
“You had to add your disclaimer, you know, when people add that what it really means?” he said.
“what does it mean?” I ask him.
“It means chor ki daddi mai tinka”, he said with a raised eyebrows and smirked smile.
I try to show that I am ignoring this chor ki daddi mai tinka comment, and I continue, “well….”
He retorts again, “Yes or no”, “did you toy with it or did you not’. It looks like DS was not ready to leave this opportunity to pull my leg.
“No man! I have never tried it”, I take a pause. We look at each other, he is still smiling at me thinking, he got me now. But I continue, “and I will tell you why”, “because I just do not have that much time, I have thought about to trade on value opportunities”,
I go on, “But I just do know how to manage time with a full time job and my family”.
He says, “yeah, ok, ok, I get it”.
I ask him, “what was your experience like, of having two portfolios, what are your thoughts, teach me something”.
He says, “there are two big issues with having different types of the portfolios”, “this is all from my own perspective, or you may say for my situation with full time job that as moderate travel and wife”.
I nod and say, “that’s perfect, like me, but I have to travel less”.
He continues, “number one issue is related to personal trading discipline”, “examples are lack of clarity, confusion, focus, etc”.
“can you give some examples”, I ask him.
“when I buy a shares for trading, I follow all the principles, stop loss, yadi yada yada…..right?”. I keep nodding, like I know what he is talking about. He continues, “it is a blind shot, no logic behind it. Right?”
“Right”, I said.
He continues, “So after spending some time, I started focusing of swing, momentum, or moving averages based trading, most of the time, swing based on moving averages”, “and I think I became somewhat good at it”.
I interrupt and ask, “good at it, means?”
“Good means, overall I started getting positive returns, more than 65% of the trades I made gave me positive returns”, he says.
“OK, I would certainly agree, you were becoming good at it”, I tell him.
He adds, “That’s where the second problem starts”, “stock pick alone is not good, you also need to get good at when to take loss, or when to book profits”
“for example, since it is moving average based trading, I take a position in a given stock. But I do not have stop loss points, or take profit sell points”,
I interrupt and ask him, “so when do you decide to sell”
He retorts, “you are very impatient my friend, let me finish”.
“OK, OK sorry, go on”, what else could I have said.
So he continues, “in my case, sell was based on certain profit level or acceptable loss point”.
“my profit range was 2% to 5% and same range was acceptable loss”, he adds and then takes pause. May be he was expected me to say something. But I look at him as if I am telling him to go on, I am listening.
He continues, “in the beginning it was good. It was working, I started to become more confident in my stock picking”.
“At one point, I earned almost half of my yearly salary in one year”; he takes a sigh and then pauses.
That is pretty damm good earnings for someone who does it part time. I said, “wow that is certainly a very good success”,
“And that’s when we exchanged emails, where you mentioned you were planning to go full time” I tell him.
He nods in agreement.
“As I mentioned, the first problem is discipline”, he adds and then continues, “every week I use to take one or two trade positions”, “so yearly it us about 50 to 120ish total trades”.
“Now, week after week, what happens is you start losing discipline”, he adds, “I did not realize, I had starting cashing out or booking profits at 2% and many times even less”, “the scare of losing money, the urge to book whatever profits I could get”,
I nod and say, “Interesting”.
“That’s not it”, he says with a concerned voice, but continues, “two years down the line, I realized, all the failures got accumulated in my so called long term portfolio”.
“I did not have guts to sell my trading positions at loss, thinking it will recover, but quite opposite, it kept sinking”. At this point, I can see a sense of disappointment on his face.
But he goes on, “my long term portfolio became a hodge podge”, “can you guess how many company shares I had in my so called long term portfolio?” he ask me.
“You tell me”, I said.
“61 to be precise, in two years, give and take few more months”, “can you believe that”, and he continues, “the worst part, I only had 12 or 13 good companies that I believed I wanted to hold of many many years”.
He goes on, “somewhere during this, I lost track that I had to maintain two portfolios”, “I had to think from two different perspectives”.
He adds, “I lost track to make sure that picking a stock for long term has different requirements, while stock picking for short term trading needs a different mindset”,
“On few occasions, I sold stocks that I could have held longer; I could not resist and sold pre-maturely”
“I think I made a mess of my investments, if you call them investments”, he says in a dejected voice.
“the only good part is when all said and done, I was still positive by few percentages, may be somewhere around 5% to 8%, may be, I can’t recall exact numbers” he continues, “but it was less than 10%”, he takes a pause.
There is awkward silence. Each of thinking the other person will say something.
I break the silence and said, “let me put this way, if you had discipline, and had more time, would you be able to do a better job at this”
Before answering my questions, he asks me, “by better job you mean?”
I clarify to him and said, “assume you did this full time, that you could focus more, you could think and execute better”, “the key is executing”.
He looks at me somewhat puzzled. It gives me a message that he is trying to understand my question
I continue, “full time….”
He interrupts me, “I understand full time and hence better focus, I am trying to figure out what you mean my better job”.
I again try to clarify, “you do not have to think of anything else, its your full time job to make these buy, sell, hold decisions”, “in that case, you can execute your process better” “you getting what I am saying, I am talking about execute your trading process”.
He is still looking at me baffled, and asks, “executing a trading process?” “that’s online by the website, what have I to do with it”
“No no no, that’s not what I mean”, I show my frustration. I take a pause.
I am thinking, am I such a bad communicator? How to explain him in very simple language?
I tell him, “Ok, you are fan of TIPBlog, right?”.
“Have you read his investment process?” I ask him.
He says nodding, “yeah”.
I think he saw the enthusiasm in me, and I continue my attempt to explain him, “similarly, if you were full time, you can come up with such a process for your swing or momentum trading”,
“Oh that’s what you mean”, he says and continues, “I equate that to discipline, clarity, focus, etc etc, you know”.
He continues, “this TIP Guy calls it a process, I call it discipline, focus, and very much objective”, he takes a pause. And then adds, “now I get it”.
“Yeah, doing it full time, will definitely help to get into discipline” he said.
He continues, “And I believe I was going that path, that was the point in time, I thought of going full time”.
I ask him, “so why didn’t you, you were becoming good at stock picking, 65% of your picks were getting positive returns, all you needed was discipline?”
He looks at me with a smile on his face, “my friend, its simple”, “I did not have guts”, “I did not have guts to leave my well-paid job, established job, good growth prospects, and other stuff that comes with full time job”.
He continues, “that’s one thing, and second thing it was during those days we came to know, we are having a baby in eight months time”.
“you combine these two, and odds tilt against leaving an established full time job”. he adds.
He says, “let me clarify, I did not expect to become really great at stock picking, I would still continue to have only 65% success, its only that, full time would have helped me reduce my losses”,
He continues, “you know what I mean”, “that would automatically increase my total returns”, “but again I would be fool to expect my total return of more than 20 or 30”.
I give him a smiley face look.
He adds, “that level of total returns is just unrealistic”,
“what would be a realistic returns with the risk an individual like us can take”, I ask him.
He says, “in swing or positional or MA based trading, with 65% success rates, I would expect to do around 15% give or take few”.
“with transactions and tax considerations?” I ask him.
“yeah including that, 15% should be net expectation, and I will tell even this, you could do anywhere between 30 to 40 trades for that” he adds his disclaimer, I suppose?.
He continues, “this TIP Guy has a great chart that shows returns from trading when you have different timescales, swing and momentum fits nicely into weekly or monthly time scale”, “have you seen that?”, he ask me with an inquisitive voice.
I tell him, “yeah I have seen it”,
At this point, I am trying to hide my happiness and joy, I am telling myself, “DS is using this as a reference in our discussion”. Somebody using your article as a reference is true appreciation.
I had to say something, so I said, “but that chart is for index, how can you use that for individual stock picks”
He retorts immediately, “it is not an exact science, you would be [expletive] idiot to dream of something with direct correlation”, “its just a guideline to get an overall perspective, nothing more”.
I nod in agreement, “you have to [expletive] swear on every damn small thing, don’t you?”
We both start laughing.
I look at DS and continue the conversation, “so, to sum up, your experience as a trader was good, because you were getting good at it with pretty good success level”,
He nods in agreement.
“But for some reason, you could not execute with discipline”,
He continues to nod saying “yeah, yeah”.
I keep adding, “may be if you had time, you could better focus”, “because of lack of discipline, overall your portfolio became hodge podge, you started transferring losing positions to long term portfolio, never to recover back”.
He is still nodding and saying “yeah yeah”.
I continue, “Your experience of maintaining two portfolios is that, it is very difficult for an individual to have two distinctly different focus and still do good”.
He says in between, “not good, I want to do great, what’s the point of being good, I can do good without any effort”, “I strive to be above average”.
“OK OK, great, above average”, I tell him with a sarcastic tone.
He got that, and says “what the [expletive] do you mean”?
I retort, “yeah, we all [expletive] want to be great like Buffett, in 2 years, right?”, I continue, “we do not understand that Buffett’s greatness was established on the back of consistency over 40 years, and not just few years”.
I am still continuing, “by the time we will 65+ years, we realize we were not even good enough, forget greatness”, “In our quest for greatness, we will realize we were not even good”, “and by that time, we would have lost enthusiasm”.
We start laughing, he says, “[expletives], you are already talking like [expletive] old man”
I tell him, “[expletive] you think its old thinking, but isn’t that the reality?”
He jumps in and says, “I get it, I get it”, “lets not go there”.
“Ok getting back to your experience”, I am trying to get back to our line of conversation.
“so you think maintaining two portfolios is not a good idea”, I ask him.
He gives me curious look and say, “hmmmm, not a good idea for a person like me who cannot devote time”, “I wasted few years, to realize it does not fit my situation”.
He takes a pause, and adds, “after about 14 years of trying my hand at every damn thing, I realized, I need to stick to one approach”, “this hodge podge does not work”.
As usual, I keep nodding in agreement.
He says to me, “you cannot ask Shewag to bat like Gavaskar, all he knows is slam bang, let him do that”, “you can’t ask Dravid to slam bang, he is just too logical”, he is still not stopping and goes on, “don’t we say let them play to their strength”.
‘Stock market trading or investing is the same”, “work around your strength and know your weakness”, he stops with an awkward pause like he expects me to say something.
“But by the time we know our strength, we are already in our mid to late 30s”, I add to his thoughts.
He says, “yeah, I guess, that’s the learning curve all of us go through”, “Let me also tell you, if not all, then most of us normal people like you and me, by late 30s we all end up in buy and hold category”
“you know it seems very natural, we look for stability and unknowingly, end up in that box”, “we lose that excitement and rush for that flair”
I am still nodding in agreement, “yeah, you are right”.
I am sensing some boredom on DS’ body language. So far, he was looking directly at me and his body language showed enthusiasm. Now, he is looking around all over the place, and I feel he wants to take a walk. I sense the urgency to get up and do something. But he does not tell me what he is looking for. So I try to end this conversation.
“So if you had to sum up your experience in two lines, what it would be?” I ask him.
He takes a moment to think and is still looking around, “simple, don’t jump on everything that you think is available out there, become good at one thing, and do it. Don’t try to become jack of all trades, become master of one”, he now gets up and starts stretching, but he continues talking, “people like you and me who work full time and have a family, it’s a mirage to think that you can manage multiple approaches like trading, investing, swing, technicals, etc, etc”.
“you know, keep it simple”, he then stops and says, “I want to drink something cold”.
I tell him, “sure, why not!”
While walking, he asks him, “I have been doing the all the talking, what about you?”
Feeling uneasy, I ask him back, “what about me?”
“what are you doing in stock market, I know you said you earlier you don’t play, you ditched Harshad Mehta cart and have joined the Buffett bandwagon? Didn’t you” he asks me.
He takes a simple vanilla smoothie. I take lemon juice. After taking the first sip, I realize, I am not on roadside dhabba or a typical Indian juice stand. These flashy looking juice stands really don’t have real fruit juice, its some kind of artificially flavored something. Anyways, I think I only took few sips, that too because it was really chill to the core. DS seemed to be have satisfied his cravings for something cold with his vanilla smoothie. I think he knew what he exactly wanted, and he got it.
I tell him, “believe it or not, I have made less than 20 trades in last 10 years, may be?”.
“that seems right for a somebody who talks like a reading buffett-nomics”, he says to me with sarcastic bent to his voice.
By this time, its almost two hours and 15 minutes. I think I still had three hours to kill before my flight. Well, I will stop at this point. I will cover this part “what about me” sometime later in other post. This part of the conversation will be cliché for readers of this blog.
To me this was a very interesting conversation. I got what I wanted, an honest opinion about maintaining two portfolios. When I said, I toyed with the idea, I really meant it in a sense that I have had this desire to do something additional than my dividends/value investing. But readers to this blog should know by now, I am conservative stickler. I will not do it just for the heck of it. I need to understand the full chain, before I jump on something else. I know for sure, I do not have sufficient time to give to my investments, but another aspect that always bugged me was execution process, the discipline that DS talks about. A small conversation with DS solidified my concerns. My suspicions are real. Trying to do two completely different things will mess up my overall portfolio.
You may read about my investment buckets article. I have a significant portion dedicated to index (30%) and opportunity (20%) investments. I have been contemplating about opportunity aspects for a while now, but have not been able to devote sufficient time. In my case, I have unknowingly re-deployed my allocation from index/opportunity to my long term dividend/value portfolio. Early in 2009, when markets were down, I thought they are opportunity and bought same stocks that I already had.
In case of index, I only have one starter position. There is not much choice except NIFTY BeES. In case of opportunity, I have had only 2 trades in last two years, in which there is nothing much to talk about.
My thoughts fully resonates with DS, when he says, over time, we drift towards something that we do not want. Knowingly or unknowingly, we create this mess. Sometimes we just get lucky that it works out. But luck will not be on your side for through out your investing career. If you keep repeating the same mistakes, then you will never become wealthy.
I have summed up the message I got from conversation with DS. What message did you get, what are your thoughts and experience about running different distinct type of portfolios? Can you share?
beginners guide, conversation, investing conversation, investing portfolio, life, trading conversation, trading portfolio, two portfolios