Chasing China

by Mike Holman

One of the things I’ve read in many investment books and articles is that you should create an investment plan, write it down if necessary and stick with it regardless of what happens in the markets. At this point I don’t have a finalized investment plan set in stone, but one of the negative investment behaviours that I’ve identified in my investment past is chasing returns.

Chasing returns usually refers to the activity of switching from a poorly performing (or average performing) investment into one that has an extraodinary recent return. This kind of investment philosophy is probably the quickest way into the poorhouse. It’s been proven in many studies that funds that perform very well in the short term rarely continue that success.

Last fall I purchased some units of a China mutual fund. At this point in time I was already on my way to becoming a low cost diy passive investor but for some reason I thought I should catch a short ride on the China express. As it turns out the fund actually went up about 20% over two months after I bought it which is a pretty incredible return. Towards the end of January this year I made the decision to sell the fund because I decided that the fund was too risky and was not the type of investment I wanted to own plus the reason I bought it was because I was chasing returns which I didn’t want to do anymore.

I figure that if I do the passive investing method properly then I could set myself up for a good retirement and I didn’t need to try for any home runs along the way. This new Canadian blog explains this baseball analogy much better than I ever could.

Since I sold the fund, it has bounced around quite a bit and currently stands at about 10% above where I sold it. In the past I would have been steamed that I had “lost out” on that 10% gains but now I honestly don’t care.

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{ 5 comments… read them below or add one }

1 NurseB,911

Hey Mike, thanks a lot for posting the link to the article. Glad the analogy helped & hopefully it can provide great insight to other investors. Nothing fancy about it – just an example of how consistency can generate remarkable long-term results.

2 FourPillars

No problem NurseB, your post was very well written and a great analogy for the investment style I’m trying to emulate.

Mike

3 FourPillars

Lol, no I don’t smoke cigars thanks!

I think my new feelings on this subject are a direct result of having an actual investment plan in place which makes it easier to handle losses and missed gains.

Ultimately it’s the gain or loss of the entire portfolio and how it fits with your investment plan that matters, not the performance of any one part.

Mike

4 Gates VP

Hey FP, good job on setting out the plan. And really good job on the “emotional detachment”.

My step-father spent 25 years as a financial advisor fighting emotions all the time (his and his clients). It was always about sticking to the plan, cutting losses, cashing out wins and basically doing what was emotionally difficult.

He often described the markets as the collective of investors’ emotions. And the more I watch the more I must agree. It’s like a giant pot of human emotions with a small dose of reality to bring things back in line every once in a while.

As an easy example look at the recent Amazon shift, 45 to 62 in one week, that’s 37%. Amazon didn’t magically become 37% more valuable over the course of 5 business days, there were no new acquisitions or instant profitability turnovers. They basically had a good quarter of earnings and tons of people jumped on the boat and said “Hey, I’d like a piece of that Amazon action”. Nothing really significant changed in those 5 days except that a bunch of people felt that Amazon was worth more money (emotions), b/c they did really good the prior three months.

So you’re doing well not kicking yourself about the 10%, a little ice in your veins is ridiculously important 🙂

5 FourPillars

Thanks Gates – it’s definitely a process, I don’t have much ice in my veins just yet!

Interesting comment about Amazon – you’re right, is it really worth 37% more than last week? Is it overvalued now? Was it undervalued last week?

Mike

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