Edge – The Way of the Turtle

Most Friday’s I drop my daughter at dance class, head to one of Melbourne’s best cafés and have a latte while I wait for Borders to open at 10. I then have around 20 minutes to choose and scan an investment book. While I am normally a slow reader I can skim a book in 20 minutes and pick out a few lessons which resonate with me.

Way of the TurtleToday my book of choose was Way of the Turtle, by one of the original turtles, Curtis Faith.

Almost every page I scanned contained a gem. From the introduction where Faith said he has learnt something from almost everyone he has every interacted with to his thoughts on edge and his simple clear rules.

Before I buy this book I thought I should re-read the Turtle Rules, a copy of which is linked at the bottom of this blog post on investment tips.

Faith’s Dos and Don’ts for Thinking Like a Turtle, are a great example why even strict fundamental investors can learn a lot from trading books like this or Tharp’s Trade your way to Financial Freedom.

  1. “Trade in the present. Do not dwell in the past or try to predict the future. The former is counterproductive and the latter is impossible.
  2. Think in terms of probabilities not predictions. Instead of trying to be right by predicting the market, focus on methods in which the probabilities are in your favor for a successful outcome over the long run.
  3. Take responsibility for your trades. Don’t blame your mistakes and failures on others, the markets, your broker, and so forth. Take responsibility for your mistakes and learn from then.”

Jim (BMW) has provided the framework to easily implement number two. The BMW method provides a framework rooted in probabilities for a successful outcome over the long run.

But Dean, what does this all have to do with EDGE? I hope to wrap up the loose ends at and tie it back to many conversations held on the BMW board. First indulge me with one final quote from Faith, this quote spoke to me so strongly that other shoppers looked up as I exclaimed “Fork yeah!”

the best edges come from the market behaviors caused by cognitive biases.

I realise the market is made up of different opinions and communities such as this are a reflection of those opinions. However, I all too often see cognitive biases in TMF posters and no doubt some of mine ooze on to these digital pages.

People talk about price way to much. The worst examples of this can be found in TMF subscriptions publications. Many issues contain phrase like “XYZ is now a bargain at 30% off its high” or “we’re getting to buy XYZ at a 30% discount form recent prices”. While XYZ may be a bargain, I find this constant reference to price insidious in publications which aim to educate investors.

Many people fail to recognise that companies are on sale for a reason and those reasons are obvious to all market participants. Once a reason is priced is, you need to invert your thinking and see if a reversal of that reason is an opportunity for a catalyst. Making predictions based on known priced in reasons or worse predicting based on your own views is unlikely to outperform a focus on the probabilities. This mental momentum, make us believe that as everything is going wrong for XYZ it will keep going wrong. While that can occur the BMW method highlights that it probably won’t keep going wrong. The most probable outcome for companies with proven track records is that they will bounce back.

Consider your biases and formulate strategies to overcome then. If you are not buying more now than you were over the last couple years then perhaps you are predicting and letting your cognitive biases rule the day.

FWIW – in personal and/or model portfolios

  • I continue to hold SSD and sell calls on it.
  • I recently sold my trading position in Amgen. While the news flow has changed from negative to positive recent investors are likely to be nervous and have little conviction. Pocketing 50% in short order was a no brainer and more than compensated for my only ever loss on Amgen (2008 Leaps vertical spread which due to inexperience with spreads I let slip from profitable to a loss)
  • I’ve bought PFE, FDX and GE.
  • Taken large losses on a number of companies.
  • Started buying Australian banks (not recommended for US investors due to Fx rate).
  • Passed on BARE.
  • Safely profiting with SAFT.
  • Continue to hold way to many companies.
  • Trying to make time to look at AKAM and STP, which from a cursory look both appear to offer good value and excellent prospects.
  • Been very distracted trying to get a couple businesses off the ground when I should probably simply be focusing on My Family Inc. Despite having overcome monetary desires I still fail to contain my egotistically desires. While I should be the most contented I have ever been, my ego pushes me to achieve more, denying me the enjoyment of here and now. I must find a solution for that! Oh the pain, the pain of being an A type 😉
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