Should your past trades tell you anything about your future ones?
Have you ever come across an old share certificate, looked back at a trade made years ago, or picked up an old newspaper, had a look at the share prices and though; 'if only!'?
Many of us have, and that 'if only!' can work in both directions. Anyone looking at some share trades or prices from a decade ago could be forgiven for thinking 'if only I'd sold then!' if it was any kind of tech stock as the bubble burst almost exactly a decade ago.
But it's probably more common the other way; you look at a share you made a few quid on a while back, only to see you'd have made a damned sight more had you stayed in for the ride.
Why look back at all?
So what's the point in all this musing on history? In some ways, there's no point whatsoever. The past is the past and all that matters from an investment point of view is the future. This is inarguable. BUT … there are lessons to be learned from your investing history. The tricky part is in deciding which ones.
For example, if you bought TT Electronics (LSE: TTG) back in July when the company looked like good value at under 33p, then sold two months later for twice the price as the basic value was outed -- were you wrong to do so as the price has since motored on to 93p? Of course you "were"; you'd have made almost 50% more had you stayed in. The same goes for many other companies which exhibited value which was soon realised, such as Elementis (LSE: ELM) the same month, ORA Capital Partners (LSE: ORA) which tripled, or a whole host of others.
Know what you know
The problem is that you couldn't possibly know this was going to happen. But what you did "know" -- if you agreed with the basic analysis anyway -- is that the company's shares were undervalued back then. If you subsequently decided they were more fairly valued having risen by X% and sold, so be it. The fact that it went further isn't your concern.
OK, you'll hear people talk about the value of stop-losses in such situations, but they don't really work in practice for the value hunter as the chances are you'll get stopped out too early on the odd blip or market shake. The method certainly doesn't cater for those of us who like to average down. The value hunter's timescale aren't, and shouldn't be, the same as a trader's.
"Leave some in for the next guy" is an oft-quoted market maxim. Though this may seem illogical at face value, what it really means is what I'm talking about here. Similarly, one of the Rothschilds used to say he never bought at the bottom nor sold at the top. In other words he was happy to buy at levels he perceived as cheap and sell at a reasonable profit.
What can all this teach us?
The market often gets valuations very wrong -- and it can stay wrong for a long time. As John Maynard Keynes put it: "The market can stay irrational longer than you can stay solvent". But this is only true if you've overdone it -- investing more than you can truly afford to lose, or using leverage.
On the other hand, when things seem a long way out of kilter, history usually shows us that they were. The tech bubble was a joke in hindsight, but how many were calling it so before March 2000? The value hunters would have left the party long before its crazy climax, missing out on the latter stage rises. But so be it.
Forget share price performance and the short term ups and downs. Instead, judge a company's worth on earnings, likely future profits, debt, assets, sales and cash-flow -- and make your investments accordingly. History shows us time and again that you'll make progress by so doing.
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