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You need to learn to sell. 'The horror!' Photo: Andrew De La Rue
We're in the middle of teaching SMSF newbies about ''timing''. This week we're going to address how to do it yourself.
When you talk about ''timing'', most investors, especially conservative, pension-phase and long-term investors looking for a return think ''timing'' means trading and trading has an image problem.
They think it means a ''short-term'' soul-sucking, life-wasting activity for manic obsessives with sunken eyes, pale complexions and McDonald's mayonnaise dripped down the front of their T-shirts.
And, truth be known, even the less conservative investors, people in the accumulation phase, in their 40s and 50s, people who are still working and have a higher risk profile don't want to trade either.
Not because they have some philosophical objection but because they are busy, have jobs, have kids and don't want to spend the evenings or weekends looking at a computer screen again.
In most cases they have also tried their hand at trading already and while they may have had the occasional success, it was a bit of an insult to their intelligence, their household budget, their school fees and their mortgage responsibility to pretend it was anything more than a rather irresponsible if not stupid gamble that put far more money at risk than the odds warranted, just because it was called ''investment'' instead of betting. Agree.
Trading, actually trading on charts with all the technical education and trading skills you will need, can't be done part-time and other than those with an intellectual interest few want to do it full-time. Which leaves the average SMSF investor in a bit of a quandary.
The GFC taught you that ''set and forget'' is dead and you accept that, but you don't really want to trade, don't have time to trade and are not prepared to learn how to trade.
So what do you do? The answer is this, ''Trading Lite''. This is the art of timing stocks for investors.
As an investor you basically want to keep doing what you're doing, buying stocks for the long term with the intention of holding them forever, but you want to avoid two things: (1) getting a stock completely wrong a la Babcock & Brown and ABC Learning, or (2) avoiding a GFC-style ''market'' event.
Sounds simple, but despite your best intentions you will absolutely not be able to avoid either of these events until you change the habit of a lifetime and learn to do something you are particularly useless at. To sell. The horror!
The sharemarket is not about buying and never selling and it is arrogance in the extreme to assume that you can make an assessment of a company on the current incomplete and ever-changing information and get that stock right forever after.
You are bound to get it wrong and denying that by never selling is unintelligent. Of course things change and if some old Warren Buffett misquotes and your pride and arrogance prevent you from changing any decision you deserve to get caught. So step one is to accept that you are not that smart, will get some things wrong and will occasionally sell.
The final step is to work out when you sell. My advice on this is the same, whether you are worrying about a particular stock or the whole market. Do it on a stock-by-stock basis.
On your SMSF equity spreadsheet you have a column that shows how far the stock is up or down since you bought it. Now add a column called ''HIGH''. Every day or week or whenever you open the spreadsheet, look up the highest price the stock has hit since the last time you looked. Type it in.
Unless it hits a new high you leave it. In the next column log how far the current price has fallen from that high. Put a conditional format on that cell that turns the cell red if the fall is more than 10 per cent.
If you open your spreadsheet and there aren't any red cells, go back to your life. If a cell turns red, ask why. One red cell for one week means you may have got a stock wrong, one red cell for a few weeks means you have got a stock wrong and lots of red cells for more than one week means you've got the market wrong.
Red cells that last more than a week mean you are ''constipated''. See how long you can ignore them.
Marcus Padley is a stockbroker and the author of sharemarket newsletter Marcus Today.