Fear & greed

Another big rally for stocks on Friday. Since Christmas Eve, when the wailing from the steerage section was deafening, the Dow has gained about 3,000 points. That’s a jump of over 13% in less than a month. So if you sold as the obese man with the hypersonic reindeer approached, you were emotional, irrational and, yeah, a fool. As this blog told you, corrections are noise. They pass. Selling into one is a pure amateur move – like buying bitcoin.

But you must be bored with me saying it, so here’s a new voice. Sinan is one of my fancy investment guys, who came over from the dark side a few months ago. He was vice-president of Capital Markets for RBC in New York, a v-p with Credit Suisse in Toronto and has taught high-rolling clients personal options trading strategies. Now he has to tolerate me.

I asked Sinan to shed some of his experience with you. — Garth

  By Guest Blogger Sinan Terzioglu

When I first started investing in the markets in the 1990s, Internet stocks were all the rage and markets boomed.  My brother had been investing for years and would tell me about his gains and top picks so I decided to jump in myself.  Like so many new investors, I had very limited knowledge but was eager to learn and thrilled about the potential.

The first stock I ever bought was of an Internet company selling second-hand cars. I figured there was solid potential as the internet was the way of the future.  That was pretty much the only basis of my research.  I had no clue about cash flows, balance sheets or measures of profitability, not to mention position sizing, risk management or diversification.  Fast forward a few months and my investment crashed 30%.  To add to the pain, I’d put a big chunk of my available capital into the one position.  Painfully, I learned I needed a 43% return just to break even.

I wasn’t deterred though.  As I earned more money over time, I bought more.  Unfortunately, I still didn’t have adequate knowledge and like so many, I was buying stocks that were the recent high fliers.  I fell victim to what is known in behavioural finance as the recency bias – I anchored to recent high prices and speculated prices would continue making new highs.  I was still didn’t understand what drives stock values and the markets over the long term.  I certainly wasn’t acting or thinking like an investor and. like so many new to the markets, merely speculating.

Little did I know many of these companies earned no money yet and others had ridiculous valuations. The recent crypto currency craze and the run up in the weed sector reminds me a lot of the late 90’s tech stock mania. Stories of people making millions investing in a stock or cryptocurrency are very seductive – but a clear sign of yet another bubble. Throughout time, people have accepted the high likelihood of underperformance in return for the small likelihood of owning the next big winner.  In other words, they like to buy lottery tickets.  We want to believe it could happen for us but must always remember the odds are extremely low.

After a difficult first couple of years of investing in individual stocks, I decided I needed to properly learn how to invest which is what led me to a career in the capital markets. I signed up for many courses and read dozens of books but after 20+ years of investing, I know I’ll never be done learning.  The one thing I wish someone would have told my younger self 20+ years ago is that it’s far easier to lose money in the markets than it is to make it, so focus on avoiding catastrophic losses.  Opportunity cost doesn’t get a lot of attention in financial planning.  The lost potential of capital compounding over time makes a very big difference to long term wealth.  As Albert Einstein said “compounding is the eighth wonder of the world, he who understands it, earns it. He who doesn’t pays it”.

Eventually I learned the importance of having an investing plan and being patient.  I realized becoming a successful investor didn’t mean a lot of action and excitement in my portfolio every day, week or month.  In my early days, I was constantly looking at quotes, over trading and all too often getting in my own way.  Also, by investing in individual stocks, I greatly increased my odds of suffering devastating losses.  People invest for a variety of reasons but for most it’s to eventually achieving financial independence. It’s important to always keep that goal in perspective when tempted to deviate from the planned course which for most should be like watching paint dry.

Retail and even institutional investors are trading more frequently than ever as the average holding period of a stock is now well less than a year.  This is shorter than at any time since the 1920’s.  With technology making it easier and easier for us to trade, the average holding period will drop even further.  This can be lethal to investors trying to achieve a particular goal.  Add to that the never-ending media headlines any time there’s volatility and you can see how easy it is for investors to become fearful.  Humans are innately impatient and overconfident which causes us to trade in and out of stocks. Because our actions are dictated by fear and greed, we can’t help but buy assets when the market is peaking, then frenetically sell them after the market plummets.  Data recently released from Morningstar shows actively managed funds in the US experienced outflows of nearly $143 billion in December, their worst month ever.  The S&P 500 is up ~13% from its December low, once again highlighting how so many sell at the wrong times.

2018 marked 20 years of my personal investing in the markets and my professional career in finance.  From the tech bubble bursting in 2000, to the crisis of 2008-2009 and the recent volatility in December, I have seen and experienced repeated cycles. Working in the capital markets in New York during the financial crisis, I witnessed many professional money managers make the same sorts of mistakes retail investors typically make.  Many funds blew up because of excessive risk, lack of diversification and cognitive biases.  Over time I’ve learned to become a successful investor through all the ups and downs you need the right temperament, to avoid speculation, think probabilistically, follow a plan and acknowledge valuations.  Most importantly, always remember investing is best done as a long-term pursuit.

Sinan Terzioglu, CFA, CIM, is a financial advisor and licensed portfolio manager with Turner Investments, Private Client Group, Raymond James Ltd.