John Kay on obsessive price watching

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John Kay is an economist who writes interesting thought-pieces for the Financial Times. Here is some selected text from an article published earlier this month, in which Kay discusses how watching share prices can be unhealthy.

Last week I bought shares in Royal Bank of Scotland ahead of the company’s results. These were ahead of market expectations and the stock, purchased at £20.40, ended the week at £20.75. You would expect me to be pleased, and I was – until I noticed that in last week’s volatile markets, the price between times had dipped below £20.

But regret for not buying RBS shares at £20 serves no useful purpose. The opportunity to buy at that price on Wednesday afternoon has passed. Even if the chance comes again, which it probably will, a purchase will then have to be justified on its own merits.Nassim

Nicholas Taleb, the trader and author, illustrates the curse of knowledge with the example of the investor – call him Warren Buffett – who substantially outperforms the market over the long term. If Warren looks at his portfolio only every five years, the results will almost always be encouraging. If he reviews his investments annually, he will have observed more good years than bad ones. But even a successful investor who looks at his portfolio every day can easily become depressed. Fifty one per cent good days and 49 per cent bad days will produce a good result, just as someone whose coin tosses work out 51 per cent of the time will become extremely rich. But it may not feel like that.

For those who follow events too closely, the pain of regret can far outweigh the joys of success.  Life, and markets, contain so many missed opportunities. Monitoring your portfolio every day will impose a high emotional cost for negligible financial benefit.

Many investors will have concluded that the current turmoil makes it vital to be close to the market. The opposite conclusion is true.” – noise is relative, what is noise? depends on your time horizon.

The message is clear: try to cultivate the broader outlook and don’t obsess with every fluctuation. For short-term, higher frequency traders, the message is that we shouldn’t pay too much attention to the daily swings in our equity. Indeed, in theory, if we are satisfied that we have an edge and if this is supported by our trading record, then we shouldn’t feel overly elated on a day of strong profit, because we know losses are just around the corner, and vice-versa. Imagine a company publishing it’s accounts every day. It distracts from the bigger picture.

I’ll confess that I am a long way off being emotionally neutral when faced with short-term losses and profits, but it is something I am working towards.

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4 responses to “John Kay on obsessive price watching

  1. Well, it’s easy for a busy professional writer to say that one shouldn’t be obsessed with one’s portfolio, after all, there are endless edits and writing projects to worry about during a working day. But a trader needs to watch his portfolio all the time and even if no trades are in play a trader needs to watch the squiggles on prospective trades. What else can a trader do? I do agree with Mr. Kay, however, one is much better off emotionally by not checking a long-term portfolio more often than absolutely necessary.

  2. Hi IPDaily, I agree that one needs to be watching for opportunity and changing conditions. However, I have something to learn from Kays piece because I know I can be excessive in micro-managing my trades. My experience is that being too close to the trade can lead to closing trades too early, and to moving stops closer to the spot price, thereby failing to give the trade sufficient room to breathe.

    The key for me is remembering the rationale and the expected time horizon of the trade. This helps to keep my emotions in check. I’ll admit that my emotions do still track the price and I know isn’t isn’t healthy, but I feel it is largely a symptom of trading with inadequate capital. Further lowering my risk could go a long way to solve this problem, but I am not yet in a position to do that.

  3. hi caravaggio-

    any ideas on a structured approach to avoid micromanagement? i find myself really paying too much time watching the markets as a swing trader. great blog by the way.

  4. Hi Allstarmoney. I feel that I spend way too long watching the markets as well, but for many trading styles (scalping, short-term swing trading) I suppose watching and looking for good opportunities is just a part of the process. You could liken it to a hunter waiting patiently in the bush, or a detective on a stake-out.

    When it comes to placing a trade and watching it, nothing can beat a mechanical system for general discipline, and the avoidance of micro management and other ills. If you have a more discretionary approach, as I have, I find it really useful to really think through the trade before hand. Why am I entering? How much am I risking? When am I right? How best to exit (trailing stop or to just close the trade?). At what level am I wrong? Personally, I find writing down the answers to some of these questions on a scrap piece of paper works as a great reminder of why I took the trade in the first place. This helps keep the trade in context. I know these are all obvious questions to asl, but I’ve lost count of the number of times I entered and exited trades on an irrational whim, and that’s no way to trade. I know ‘writing it down’ isn’t really a structured approach, but it should help. The other trick I have employed on occasion, is to place a trade and then to simply walk away from my desk and go to the gym for an hour or two. This should work on swing trades, provided you aren’t risking too much capital on the trade.

    ps – thanks for the kinds words about the blog.

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