You hear about a company, you do some reading, have a look at a chart, and then — BAM!, its on twitter, or CNBC being talked about. You want to invest, quickly, you dont want to miss the move.
In my estimation in 99% of cases this is the wrong thing to do. As a friend of mine (#Louis) recently wrote, the best investors ‘leg’ into a position. That is to say they recognise short term timing is unlikely to be a long term winning strategy (particularly in light of the long term buying objective).
We studied the impact of sizing, price action and responses at my previous hedge fund, in a bid to understand behaviours and improve performance. Even in professional investors, people chase the price, and overreact to short term pull backs, particularly during the first 3–5 days of initiating a position.
Why?
Because in most cases they are not following their own process.
Find the company, do the work, build a picture, a return expectation. Think about what will go wrong, what could do wrong, and work out how you will feel at that moment. How will you react?
In my experience is is always better to set a position maximum size upfront, in $ or £ or %. Stick to it, and build towards it. Do not just add on up days (beta). Recognise your expected holding period and expected return. Markets move in the short term based upon millions of factors, if you are a long term investor, do not allow yourself to be knocked off course by small short term movements.
Add as you build conviction, add on pull backs while your thesis holds, and leave unspent $ or £ to one side.
Every investment is as much a choice about that idea, as it is about not being another.
Take your time, be patient and leg in.
