sitting out, staying put and clarity of thought

I have been meaning to write this post for the last few days… and have finally found the time.

At the beginning of stock market decline in Aug, I was about 7% stocks, 8% bonds and 85% cash… today I’m about 17% stocks, 8% bonds & 75% cash…

A lot of the blogs/comments I have read over the past two years and particularly during the stock market decline in Aug/Sep made me really realize the virtue and reward of staying out and staying put…

Knowing when to sit out and watch the market from the side lines is just as important as finding good trade setups and investment ideas… if you don’t find any, be patient, read/study, analyze and pound when the time is right… I have this much from many bloggers particularly the folks on Stocktwits.

Sitting out has tremendous benefits:

• I didn’t not feel the need to look at my portfolio 3 times a day even after the market dropped 10% and was dropping more… more time to do things I want to do
• I was able to consume and more importantly comprehend whatever I read, be it MSM or the very informative, educational and mostly unbiased financial/econo-blogosphere – it is natural to comprehend less when you are worried.
• I had all the time in the world to read about topics I was interested in rather than looking for topics/posts that would make me feel better and confirm my supposed rationale for holding stocks
• I could analyze a trade or an investment idea with fewer inherent biases

Sitting out is one of the hardest things to do possibly because of the fear of missing out… overcome the fear of missing out and you will have a clearer mind to analyze more opportunities ahead.

Just don’t check their pockets, then

Any budding CFA candidate has got to read this…

Herding – the behavioural trait that causes investors to move in a given direction at the same time – is triggered by career related incentives. This, of course, is not generally a factor for private investors and therefore is often neglected in considerations about why professionals make their recommendations.

What they find is that younger analysts tend to herd more than their more experienced colleagues: less experienced analysts tend to be punished more heavily for getting their forecasts wrong so they have every incentive to stick with the crowd. In contrast older analysts, who have presumably built up their reputations, face less risk of termination. Basically if a younger analyst makes a bold forecast and gets it wrong they’re likely to lose their job, while doing so and getting it right seems to make little difference to their immediate career prospects.

…

One possibility, then, is that the optimism bias perpetuates itself among the analyst community by steadily increasing the punishment for any single analyst to deviate from it (and be wrong).

I guess the CFA standard of professional conduct on “Independence & Objectivity”

Exercise diligence, independence, and thoroughness in analyzing investments, and making investment recommendations, and taking investment actions  [emphasis mine]

goes out the window because of fear of losing your job…

no wonder CFA Institute is reluctant to add more behavioural finance material to the curriculum…

via FT Alphaville » Just don’t check their pockets, then

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