When you sit back to ruminate at the investing styles of the market greats we covered, you will notice that while they appear to have some slight differences in the way they bet and enter the market, they follow a common principle in money management.
As to how they exit the market, they have different triggers but they also have a common modus of exit based on an algorithm found in the recovery table of money management.
There are just three instances when our market greats sell their equity positions. It’s when they want to take profits, sell for another investment or to avoid further losses for a wrong market call.
Again, all of them seem to have a common approach in handling the matter. They prefer to make gradual buys or sells.
This strategy apparently takes away most of the pressure of making more out of one’s investment position. Just imagine how you would feel when after you have sold your stock in one sweep, the price of your stock recovers steadily.
You may become more regretful when the price of the stock you sold doubles but becomes a rare “10 bagger” in no time.
This means your stock’s price went up 10 times or your P1 million becomes P10 million. The same feeling prevails in buying when the opposite happens.
Recovery table
What may overrule the strategy to sell gradually is the degree of losses one may incur following the recovery table.
The recovery table is a calculation of the percentage of losses one may incur along with the corresponding percentage of profits or gains needed to recover.
To start with, if you lose 5 percent (called the drawdown rate) of your capital, you have to make a 5.3 percent profit on the balance of the capital that is left to get even.
If you lose 10 percent of your capital, to get even, you will need to make an 11.1 percent gain on what is left of your capital.
The percentage of losses and corresponding percentage of gains needed to recover proceed further as follows: a 15 percent in losses will take 17.6 percent in profit; a 20- percent loss will take 25 percent profits, and a 25-percent loss will take 33 percent profits.
At this point, the required profit needed to recover will now grow geometrically. For instance, it will now take 50 percent gain to recover from a 33 percent loss, 66.7 percent gain from a 40 percent loss and a 100 percent gain from a 50 percent loss.
The experience turns into a horrifying experience as the rates of losses go higher. An additional 10 percent in loss bringing the total to 60 percent loss will now take 150 percent in profit.
Going higher by another 15 percent or at the frightening loss of 75 percent, the profit needed to recover now go up to 300 percent.
If that is not yet enough to scare the wits out of you to make decisive actions to cut your losses, to recover from a 90-percent loss, you need 900 percent in profit. Again, this is just to put you back to zero-loss status.
In conclusion, while losses in the recovery table grow arithmetically, profits needed to recover should increase geometrically.
If you will observe, the losses revealed by the recovery table is one big underlying factor that reinforces the primal need to automate, as strongly recommended by the legendary market greats covered.
William O’Neil’s has a very vivid story on just how emotions rule with its false hopes. The story goes this way: “There was an old farmer with a turkey trap that consisted of a box held up by a prop. Wild turkeys would follow a trail of corn under the box. When enough turkeys are inside, the old farmer would pull a string attached to the prop, thereby dropping the box over the turkeys inside. The goal was to trap as many turkeys as possible.”
“One day, he had 12 turkeys in the box. One wandered out, leaving 11 behind. Gosh, I wish I had pulled the string when all 12 were there, said the old farmer. I’ll wait a minute and maybe the other one will come back, he added. But while he waited for the 12th turkey to return, two more walked out. I should have been satisfied with the 11, the old farmer muttered.”
“As soon as I get one more back I’ll pull the string, he thought. But the turkeys kept wandering out. The old farmer couldn’t give up the idea that the original number would return.”
“With a single turkey left, the old farmer said, I’ll wait until he walks out or another goes in, then I’ll quit. The last turkey joined the others and the old farmer returned empty-handed.”
The story is also very descriptive of the usual psychology of retail investors in how they handle their investment activities because they are ordinarily without any system or systematic strategy.
Bottom line spin
The month of September ended last week. It closed lower at 6,379.81 as it suffered a weekly loss of 44.64 points or 0.69 percent given the daily trading losses in the last four days of the week.
Notwithstanding this, our market’s performance for September was still better than that in August just like how Wall Street did, too, for the period. Our market advanced in September by as much as 304. 64 points or 5.01 percent from the August close of 6,075.17.
Looking forward, while October is still considered another difficult period traditionally, October may just turn out to be different this time. It might just be a more auspicious month for investors.
Fire with fire
The statement that “the legal profession is an honest profession” became also a hotly argued subject in a recent powwow with friends. The majority had the same emotional sneer rather than intelligent reaction except for one retired—also in his time, controversial—lawyer.
The legal profession is “indeed” an honest profession, he emphasized. But since legal practice is adversarial, this makes its practitioners look dubious in character in the ordinary man’s eye.
For better appreciation, knowing that I’m a member of the current board of listed Philcomsat Holdings Corp. (PHC), let me cite a recent news that said, “PHC won its case against Bank of the Philippine Islands (BPI) in RTC-Makati Branch 62. The court found BPI liable for some P102,661,715.00 disbursed to the wrong party (representing PHC).”
In winning the case for PHC, he said my friend, lawyer Dennis Mananzan, might just be a better lawyer but certainly not more honest than the lawyers of BPI.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com