Trading with Focus – headlines, psychology and pullbacks
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I think I am officially getting old.
Admittedly, I was trading shares way back when the ASX last crashed. It was a scary time, the whole market was down 40 per cent from its high, and it all happened in the space of a few weeks.
I reminded a friend about it yesterday and it felt like I was asking him where he watched the moon landing, or if I could borrow his cassette deck. Apparently it won’t happen again. Things have changed.
“I mean come on! Sure stocks can go down, but things were different back then Gramps. It’s so long ago that Carole Baskin’s not even the ‘weird big-cat exploiter and probable hubby murderer’ that you remember, now she’s going on Dancing with the Stars! This is a bull market, stop negging my high, you’re living in the past!”
Before you convince me it’s time for my bone-density exam (I’m 44 and 11 mths), you need to know that I’ve checked the facts, they can’t pull one over on me this easily. This bear market only happened a few months ago! Months!
Back then we had things called newspapers, and they even tried to stay relevant by ‘going online’, but the headlines were (probably) things like “Market Crash!”, “Superannuation Wipe-Out!” and “The End is Nigh! Sell Everything!”.
At the bottom. You know…the good, solid, sensible advice that newspapers spin without any financial services training or licensing. And people fall for it every time.
It’s like a real estate agent saying “It’s a great neighbourhood” and people believing the agent (who is on commission) like he was a doctor with some sort of Hippocratic Oath.
I don’t read physical newspapers, so I mostly get my dose of crazy-people-updates from various digital outlets. I love how the stock market happens all day, five days a week (and what’s going to happen is waaaay more important than what has already happened) – but it barely gets a mention until well after some major event.
And usually, they imply that a stock market being down is a reason to sell, and vice versa (like they are at the moment!). “APT at all-time high? Great time to buy!”
As I’ve gently alluded before, please don’t make trading decisions in the live stockmarket by reading about yesterday’s stockmarket in the newspapers, or because your friends tell you about the things they’ve already made money on. You need live pricing; you only need to learn from the past, not make the same mistakes or drive with a rear-vision mirror.
At this point I’d like to apologise to all Uber drivers the world over for that photo (because without you I would literally starve to death), but the old joke was that when a taxi driver told you to buy ‘stocks’, it was time to sell.
And taxis are like the banks in this new BNPL-world where, apparently soon, you will be able to Afterpay your home-loan and even Z1P-pay your term deposits. What would an Afterpay ATM dispense?
But think about it. You’re an Uber driver sitting in a car all day and/or night. Mostly people would get into the car, say “Yo, great weather eh, been driving long?”, whack in their ear-buds, stare out the window silently for 20 minutes or so and then say “Thanks, yeah, that was a 5-star job” and give the window a quick, one-knuckle double tap when they get out again. Or is that just me?
What would compel a passenger to tell this stranger about their financial situation, let alone the big financial gain they just had, as casually as they might say “I see that local team did the sports better”. Is it because the Uber app always asks for ‘tips’?
And how many times would that driver have to hear it, that he/she would then think it is worthy of publicly-appropriate banter to engage a disinterested passenger with?
Too many! The answer is Too Many Times!
There’s no moral to that story, its just something to ponder. Except to say, that’s how newspapers operate too. Don’t take advice from them.
So, moving on, let’s have a chuckle at my mate. To keep him anonymous, let’s call him Mr B. Chip. No, wait, better we use Brain C. (still rolling out them fresh Simpsons gags too).
So, a few years ago, Brain invented this new way of being a computer chip. If you haven’t read about it, its pretty amazing…conceptually. Seriously, its such a potential advancement in AI that I’m waiting for a humanoid robot to come back from the future with a working knowledge of shotguns and street fashion from the 90’s to start racing around on a motorbike.
Over the last few years, this Chip of Brain’s was delayed, and they had a few early working prototypes that no-one bought and there were always ‘talks’ with ‘major, unnamed’ companies and generally it was not going anywhere, from an investment point of view.
As it turns out, these new Facebook investors love the idea of AI; it’s lucky they came along I guess. Much the same way they love the idea of BNPL. They have no idea how the company would make money, but if/when it does “it will be a lot, because AI is the future”.
That’s even IF it gets that far, because Intel and Microsoft and all of the others will definitely stop spending billions on their own AI chips to take out a company listed on the ASX”, which we all know fondly as the most renowned and supportive technology market in the world. Pretty compelling rationale. I’m not saying it’s not going to happen, I’m just setting the scene.
Now, earlier this year things improved dramatically for Brain, or Mr. Chip, as they/he (whatever, this analogy is getting too twisted already) announced that they had done another one of these ‘well, not sales revenue, but more of a research project’ deals.
But this time – for the first time – they were compelled to announce who it was with, by the ASX (the bastion and protector of all things good, for companies and investors).
So the floodgates opened and a bunch of other companies decided they’d let their names be used and also announce their research projects too, and the value of the stock improved. Dramatically.
Without judgement, let me walk you through the typical psychology of a trader. This is a timely warning as you may have also had a stock go ‘well’ recently, and may be battling with the ‘Multi-Bag Madness’ – as everyone will be calling it from now on.
You’ll recognise this ‘Multi-Bag Madness’ (or the MBM’s) as one of the symptoms is that you will be compelled to tell the next Uber driver you see about all the cash you now have.
For most of the last few years, Brains’ stock was not going well. So, obviously the rational response is:
“I can’t sell it this low, I still believe it will be higher.”
And in this one, specific, global pandemic/ stimulus cheque/ Facebook super drawdown/ BNPL enhanced rebound case, this worked out fine!! But if you look at the terms of their capital raisings over the past few years, not many so-called professional investors must have agreed, so…clap clap. Your stars aligned.
Then, it doubled. Tripled.
“I still think it’s got legs, the floodgates are opening”
Again, nailed it. I would have been out with any profit, but we already know I can’t trade for sh*t. And this is where the madness starts.
Up 4 times: “I sold a few, but I’m already regretting it”.
Up 7 times: “Can’t stop thinking about how much I would have had if I hadn’t sold any”
Up another 45 per cent in intraday trade (taking the total number of times it has doubled from its March lows to 18): “I’m not selling any more of them as it’s still going up and looks like it won’t stop, and I’ve LOST SO MUCH ALREADY BY SELLING TOO LOW”
So, (and I wrote this last Friday, the 4/9/20) the stock has currently dropped from their recent high by 27 per cent. Now, according to the MBM’s on FB, it’s a buy again because its “cheap at only 13x”.
No, not 13x earnings.
Not 13x free-cash flow.
But ‘only’ 13x higher than it was a few months ago. So apparently it’s cheap now, a ‘buy’ even, not for any other reason than it being less than it was a day or two ago.
Alright, that’s enough made up stories. He’s a good mate and it wasn’t really like this and I wish him all the luck in the world.
But if I have to hear about how he ‘should have sold them all that day, and now he couldn’t possibly sell because think what it was worth’ – then it’s over for us. There’s only so much madness a man can take.
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This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.