Expectations

20th February, 2016

One of the key challenges to successful investing is managing and dealing with the emotions of our expected returns.

We all have this unrealistic expectation that we will learn to forecast and trade the market and then never make another loss. The Holy Grail of investing. Perfection in our investment decisions.

But this is the real world and the markets have a very frustrating way of sometimes making us look like fools. Worse than that, at times it can take our money!

Sorry folks – that’s investing! We make no guarantees that we or anyone else will not invest without at times getting it wrong.

The key is that it doesn’t stop us from approaching the markets with a game plan. We know that the Calnan Flack Economic Cycle Action Plan will guide us through the cycle. It tells us what to expect and what action to take.

The most detrimental decision an investor can make is to be too afraid early in the cycle and too bold at the end.

Warrant Buffet is famed with the expression “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.  Perfectly said Warren.

We can expect to get it wrong every now and again. What’s important is to ensure that when you get it wrong it doesn’t put you in a position where your capital (both financial and psychological) puts you out of the game!

It is often said that you should invest like you are a casino, as though you are “the House, as the House NEVER loses.” The Casino analogy is painstaking used when trying to make the point that investors need to invest with an edge. This is exactly the model that the Casinos use to strip money from the punter sitting on the other side of the table.

But it might surprise you that occasionally, Casinos, like savvy investors, sometimes just get it wrong!

Star Casino has had to give away about $80M of profits to what could only be termed an incredible ‘lucky run’ that has been enjoyed by Six VERY BIG high rollers.

Chief executive Matt Bekier described the VIP gambler win rate as a “freakish” statistical event, and shareholders have grappled with the loss.

Being effectively capitalised is so important when investing and this extends further than just your speculative trading account. You see the most money lost by investors is when they are forced to take some action that they don’t want to at a time they have no control over.

Point in case is the GFC. When some undercapitalised investors became forced sellers of assets as banks foreclosed and margin calls were made. They were forced to take action and had no control over the timing of such actions.

Capitalisation extends to ensuring that you can withstand a shock or unexpected circumstances long enough to make a rational and sensible decision. How often have you heard of over leveraged property investors who became forces sellers due to longer than expected duration without a tenant? Or a change in the required level of bank coverance (LVR’s). Any trader who as ever overtraded will understand how there is NO flexibility from a broker when you violate your margin requirements.

If your strategy is wrong or broken then you must adapt and change. But sometimes you just need to accept that there will be some ebb and flow in your investment equity, even with the most robust investment plans. What you don’t want is to be Greedy when you should be Fearful or Fearful when you should be Greedy…

So your investment strategy must be robust enough to be able to withstand the whipsaws that the markets can throw at us – and part of this is a being appropriately capitalised so that you are still “In the Game” when the next opportunity presents.

It’s on this last point that I did have to chuckle at Matt Bekier’s response to Star Casino’s unexpected $80m loss when he said “There’s six very, very happy guests who we cannot wait to welcome back to our properties…..”

Even though the house might not win every hand, it WILL win in the end and this is a great lesson in investing.