We’re coming to the end of another wild year. In January, the markets recorded the worst start to any year in history . . . and now we’re floating towards DOW 20,000. Just a crazy roller coaster ride!
Regardless of how the year goes, whether the markets are up substantially or down, an important exercise that every money manager should go through is a self-evaluation. This includes asking yourself the questions, what did I do well? What mistakes did I make? What would I do different? Were my mistakes emotional or something else?
Jason Zweig of the Wall Street Journal said the following regarding self-evaluation.
Evaluating yourself honestly is at least as important as evaluating your investments accurately. If you don’t force yourself to learn your limits as an investor, then it doesn’t matter how much you learn about the markets: Your emotions will be your undoing.
This whole idea of self-evaluation and reflection is something that both Brian and I do constantly at Iron Gate Global. We’ve learned the importance of this process from master investors like Warren Buffett who often discusses mistakes more than he does successes.
We are also fortunate enough to have a checks and balances type system. Each week we have an investment policy meeting where we discuss current investments and potential new ideas. We follow our investment checklist and will catch each other if we become too emotional about a certain investment. This helps prevent a lot of emotional mistakes. But let’s be real . . . it doesn’t prevent all of them.
Recently I spent an entire weekend reviewing every options trade that I made in 2016. This, as it always is, was very educational to me. Overall it was a very successful options year, but it wasn’t by any means flawless. This review not only allowed me to see my mistakes clearly, but also learn things. It also helped me and important principles were reiterated.
Here’s three principles that stood out to me that will hopefully help you:
- Hedging. Everyone likes the idea of hedging, losing less when the market is down then make money as it goes higher. However, when implemented hedging can be a very big drag on a portfolio. It is so hard to time hedges when putting them on and taking them off.Very rarely have I, or anyone else for that matter, been able to time both ends perfectly.
For those that are trying to outperform the markets, I think it’s a fool’s game. For those that are just trying to minimize risk and don’t care about outperforming the market, then it’s appropriate.
- Patience. The trades that lost money were those trades that I “chased.” When the market doesn’t provide opportunities to trade, don’t trade! For example, when the market is up for weeks at a time, it’s important to stop, wait for a market pull-back, then trade. It was those times that I didn’t wait for the right pull-back opportunities that I entered trades when I shouldn’t have.
- Pressure. Whether your managing $100 million or $100,000, the pressure to make money is real. This pressure often leads to overtrading, chasing trades (see above), or not being patient enough to let a trade work. The key to overcoming pressure is to have a checklist, a plan, that includes psychological questions. In addition to a checklist, it’s important to have someone to talk to. Both Brian and I help one another relieve the pressure that comes with managing over $100 million. Find someone that knows what it’s like to invest, and talk to them, especially when you feel emotional about the markets.
Take some time over the next few weeks to review what went well and what didn’t, and certainly let us know if we can help you in any way.
Here’s to wise investing,
What We’re Reading.
Howard Marks: Masters in Business Podcast. This single podcast I have listened to over twenty times. It’s becoming a monthly review for me. Howard Marks is one of the best investors of our day and speaks to many things in this podcast including second level thinking, how investors become successful and the folly of market forecasting. If you haven’t listened to this . . . it’s a must!
60 Minutes Segment – “Lost.” Okay, this isn’t finance related but it is amazing! Imagine being 5 years old getting lost in India on a train . . . not knowing your last name, where you live or how to get home. Then, after 25 years you find your family again using Google Earth. Just an amazing story!
How Investors Develop Bad Habits. This is by Ben Carlson who points out three mistakes that investors often make. We agree with his assessment of the risks and thinks it’s important to understand these not only bad habits, but risks.