Ask Colin

When you started to invest in the stock market what it was like for you? Did you start off dumbly investing until you got confident using some of your concepts? Did you have some big losses to start with, miss you stop loss points etc?

I began investing seriously in the late 1960s. That is a long time ago now and the way stock market operated was different to the way it works today. The one thing that was similar was that we were in the late stages of a resources-driven bubble market in which we saw some amazing things.

 

I will try to answer your question. However memory is a tricky thing. We all tend to re-write history to some extent, magnifying our achievements and minimising or erasing our failures.

 

I had left university at the end of 1965 and got married. Although I had made my first small investment in 1964, over the next few years I was able to save a couple of thousand dollars to start investing seriously. This was insufficient to exercise any real money and risk management, not that I was really aware of those ideas at that stage. I had prepared myself by reading. I had read The Australian Financial review every day since I left school, a habit I still follow today. I had studied economics, which included a major in government and excursions into accounting and economic history. These were more useful over time than I thought at the time. There were not a lot of books about on investing in those days and were difficult to get hold of. I had closely studied three books, all closely focussed on charting. The first was Edwards and Magee's classic Technical Analysis of Stock Trends. In my opinion, all investors and traders should start with this book today. Then I read Wheelan's book Study Helps in Point and Figure Technique, which is still the best book on the art of point and figure charting. Finally, I read Phillip Rennie's book Share Price Charting, which you will not find today, but gave me an insight into the basic strategy which I still follow today.

 

So, I had some money and some knowledge. I had a basic strategy of buying stocks breaking out from an accumulation zone, following the trend, but cutting losses quickly if things went wrong. The real problem was that I had way too little money, so I was reluctant to start. Then a group I was working with decided to form an investment club. I joined and in time ended up basically managing it as others lost interest, but left their money in the club. Since it was a bull market, it was easy to make money, but there was still plenty of opportunity to lose. The key was to buy uptrends, something I have never forgotten. Eventually, the bull market ended and we closed the club down making a moderate profit overall. What I learned was more important than the profits.

 

I have only hesitated once to sell on a stop-loss. I bought a share at $1.23. My stop loss was if it fell below $1. It did. It drifted a few cents below $1 and I gave it some room to move. A few days later it opened at about 20c, with the management declaring huge losses. I sold immediately and have never made that mistake again.

 

I did not learn money management until the 1980s, but I always tried to give my portfolio some diversification to lessen the specific risk. The other critical strategy was to vary market exposure inversely to risk. This saved me in 1987, when I had only 25% of my money still in the market and that year was my biggest losing year ever in percentage terms. I sold everything the day after the crash.

 

As well as investing, I delved into some trading for a few years. In those days we got the prices out of the newspaper and in the call of the board on the radio at lunch time. Charts were maintained by hand. The only other way was to sit in the public gallery, which was small and up a flight of stairs. You had to watch the chalkies changing the prices and keep your charts from that. To place an order, you had to leave the gallery and make a phone call to your broker. One year I took some holidays and spent every day in the gallery for a couple of weeks. How things have changed today.

 

Over the years I have read hundreds of books on trading and investing. I learned how important fundamental analysis is and that money management is critical. I did not have a complete approach until I reached this stage. I also learned that the big money is made from investing, not trading. All of this is now set out in my books Building Wealth in the Stock Market and Think Like the Great Investors.

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