Wednesday, October 12, 2016

The danger of holding too much cash

Today I made a mistake. I was queuing for a counter for about 2 weeks at 1.47. But when the stock started showing surges in its bid and sell volume, I started interpreting it as a sign that the counter will move. Against all reasons, I abandoned my queue and bought at the then sell price of 1.50.


It's only 0.03 cts, yes, and I didn't buy a lot (4,000 shares only), but it was still a mistake. The mistake was not sticking to my plan, which was to queue at 1.47 until it expires or it hits. On reflection, I think there's a few reasons why I did that:


1. I did not do my homework scans on Sunday, which I usually do because I was sick. If I had stuck to my routine, I would have realised that maybe today's funny volume movements are not that funny.

2. I had too much cash lying around. Nearly 50% and was climbing until I bought two counters in the last 2 weeks or so. The danger of having too much money lying around is that you tend to fire more eagerly, sometimes seeing what you mind tells you to see.



I want to take the chance to talk about the 2nd point. This is a relatively new problem for me. I never had the opportunity to handle such a record investment portfolio and a bonanza of cash waiting to be deployed, hence this problem might be more and more frequent ahead. We will all reach there one day. It's best to recognise it and stem it as soon as necessary, which is the real reason for this post. It's to remind the future me to wake up and stop doing adjustments when I should be doing nothing.


If we're doing things right, our portfolio will get bigger and bigger in size. Our money management and our psychology when handling money must also change gear from handling small amount to handling big amount. If your portfolio is 20k, you have a different set of worry from handling a portfolio of 200k. With a bigger portfolio, you also can't do the same thing that you did when you're having a smaller set. You can lose a few 20k, painful yes, but not catastrophically so. Nobody can casually say they can lose 200k portfolio, well, unless you are handling 2 million perhaps.


Some of the things I think we should be careful when handling bigger portfolio size is:

1. Diversification - I'm can't do a concentrated portfolio of 8 stocks. I'm not good enough to know if something will trip up in the companies I invested, so it's better for me to spread the risk to more companies. If one fails, it will not rot and bring down the entire ship. This is very important.

2. Finding a place to store that excess cash that is around. I admit I can't invest 100% at all times, so I will always have some cash lying around. I will always have to find some good place to park that cash and when all my current facilities to max the returns for the cash is used up, I'll have to find new ways to do so. I need to set up a system. I think if the cash is not rotting too much, the problem of wanting to invest eagerly may be reduced or eliminated.

3. How to average in your positions. Now with bigger backing, we can enter in 2 or 3 shots. There's a lot of science on how we can enter with 3 rounds. We can double down, enter at fixed time, enter at fixed interval, enter at subsequent support level and so on. This is vastly different when starting small since we only have 1 good shot if we don't want to over allocate our resources into one single company. The same goes for selling too. We don't have to sell all in one shot. We can sell out in 2 or 3 rounds. I need to experiment and come up with a good system to deal with these, so it's less discretionary also.


Anyway, I've a feeling I'll be blogging more and more about other stuff in the future. However, making silly mistakes is one area that I will never blog less about. If I want to be successful, I should have more and more new mistakes, less repeated ones and more reflections following that haha!

28 comments :

Anonymous said...

Just a side question about that counter you bought: don't you think its debt / gearing is a tad too high (debt is about 7X of cash holding according to latest results) ?

Dowz said...

i would say that if the analysis is well thought out with a good margin of safety, even if you bought at $0.03 above, it doesn't really matter much in the grand scheme of things.

Singapore Man of Leisure said...

LP,

Its a good problem to have ;)


I was sharing with the reader yesterday why I feel its better to start as a trader before moving on to be an investor.

A lot of the disciplines of trading can enhance the competence of the investor when it comes to entries and exits.



Glad you can poke yourself for wasting 2 weeks of "queuing" (little lie of a plan) when at the end, its I "suka" I buy (fire from hip)!

LOL!

OT83 said...

If I never guess wrongly which counter, I still in queue for 1.47. Maybe today I will get it. I like the poem GTD order feature.

Very often I think I make the same mistake as you. I didnt stick to plan!! Mental of investing is the toughest!

Createwealth8888 said...

Try having too much "cash" in CPFIS and especially SRS account. Few can overcome itchy fingers.

temperament said...

Q@ 1.47 then abandoned Q and bought @1.5 is not the question to me.
The Question is are you trading or B & H & S & .......rinse & repeat.

la papillion said...

Hi anonymous,

Haha, I'm not worried about it...my holding period is likely shorter as I'm buying it on the possibility of it going up :) My concerns are different from investors I guess.

la papillion said...

Hi Dowz,

Well, depending... I grade myself on entry and exit point. Today it went to 1.47 just to stab me another time. I should have stuck to it.

If we allow small lapses in discipline, then it will lead to greater lapses. The 0.03 is not the main issue - it's the action that I do, the greed the blinded me that I need to be careful of.

la papillion said...

Hi SMOL,

I think when we make a mistake, owning up is the first step towards redemption haha! Today, the price went to 1.47 just to show me again that I should really have waited LOL

I think you're right. Traders mentality can be applied to investing too, vice versa. Good to learn from both and also concentrate on your own school of thought.

la papillion said...

Hi OT,

It went 1.47 today. Got it? Rmb to report back! Haha

la papillion said...

Hi bro8888,

Haha, last time I know what you're saying, now I understand what you're saying :)

Anonymous said...

Q@ 1.47 then abandoned Q and bought @1.5 is not the question to me.

Actually, this type of behaviour will happen again, again to anyone.
(Whether trading or investing)
If the price goes up and keep going trending up, then you will think lucky me, i did not stick to 1.47.
i guarantee it will happen again in future if you you keep on trading in the market.
Well it has been happening to me since i am in the market.
The last happenings was the "Brexit" incidence.

la papillion said...

Hi temperament,

What's the difference between trading and Buy/hold/sell?

la papillion said...

Hi anonymous,

Totally agree. I've had a few run always before this incident, hence maybe I'm more eager to fire. I think if we don't want to lose money, there must be certain amt of trades that will run off or we miss cos we're too low ball. The vexing thing for me is that I have a plan but I didn't stick to it. So now it had come back to bite me. If it went up from here and I bought at a high, it's still a mistake.

temperament said...

Ha! Ha!
No much difference if talk about making money.
After all, as long as it makes you money, no difference.

But i tend to agree with SMOL, that Day to trend Trading is not so suitable for 50 to 60 years old.

Also from the start, i was old already.
40 years old.
So mainly B & H & S & rinse & repeat.

Seriously lost quite a lot of money when i tried trading
Some are just not born with HIT & RUN mentality.

la papillion said...

Hi temperament,

Haha, besides that, I think the diff between trading and investing is that one bases the decision on charts and price actions, while the other is based on fundamentals deriving from looking through the financial statements. Nothing to do with the period of holding. Hence, I'm doing trading :)

I think when we see masters of both schools of thoughts, their actions are not much different. They are trying to get value when others don't see it.

Cory said...

Feeling rich makes us lose money back. Must overcome.

Sillyinvestor said...

LP,

And I thought my radar is getting bigger and bigger with this hatius of Mr Market, I have close to 90 counters in my watchlist and I dun know which 1.47 u are talking about... sighz.....

Can tell me just to fulfilled my curiousity ??

Sillyinvestor said...

Oh that. LP,

Makes me wonder where have I been looking ... when the bloggersphere are looking at something else lol

la papillion said...

Hi cory,

Indeed. How did you overcome yours?

la papillion said...

Hi SI,

Haha, we're all looking at different things, and that's good! If we're all looking at the same thing, no more bargains :)

Singapore Man of Leisure said...

Sillyinvestor,

Let me troll you even at LP's tavern.

90 counters is not a watch list.

But then hor...

Don't mind me.

Do whatever makes you happy!

temperament said...

We usually feel rich when we have made a pile of $ in the stock market.

This pile of $ then seemed "easy come easy go money".
That was when i thought if people could make money at trading why not me?
i liked to try too.

Alamak!
Not so easy man!
Got Gun
Got shot quite bad, fingers not so itchy anymore.
4Ks liu.

Unintelligent Nerd said...

Hi LP,

Good advice on entering in tranches. That's been my practice as well but multiple commission fees kill. :/

temperament said...

Size positioning is very important buying in a bear market.

How important is it in day to trend trading?

i don't know.

i very rarely trade.

But,

i think if doing size positioning "correctly", the money you saved is much much more then the commission you paid.

To tell the truth, i am still lousy size positioning buying in a Bear Market.

i ran out of capital very fast.

la papillion said...

Hi unintelligent nerd,

Haha, I guess you must see it this way: you either lose a bit from frictional costs of multiple transactions, or you lose a lot more from entering at a high. Of course this is simplifying things, but I think when your acct size is substantial enough, I don't think comms is a big worry. At least it shouldn't be. I see it simply as the cost of doing business.

la papillion said...

Hi temperament,

You mean position sizing is not important when buying in a bull market? haha

I think unless you're a concentrated investor, position sizing is important for everyone.

temperament said...

i actually saying i am still lousy at positioning buying in a Bear Market.
i still have not get it right.
That's why no more capital and the market is still falling like the proverbial falling knife.
So lousy until can't even catch the falling knife.
So "chiat Luk" one.