Coronavirus cases have fallen in the past two days, despite suggestions that they would steadily march on to 100,000 per day. It goes to show how quickly things can change and how tricky it is to forecast something.
The problem is – once someone has publicly forecast something they then have a biased interest in themselves being right. They’ll then seek information that only proves their thesis correct and ignore any new information which could threaten their position. This is called confirmation bias, and it’s been plaguing trading and investing accounts and portfolios since stock markets began. You may’ve caught yourself in this trap before – I know I have. Once we put on a position we become a hot plate of Bias Bolognese, and it is difficult to remain objective when we have a financial and emotional interest in a stock. Of course, the bigger the position, the stronger the bias becomes. Recently on Twitter I saw a chap admit that his position size was so large that he ignored all dissenting information. This is why people attack others and try to discredit them, because they have taken offence at the other side of the argument and rather than attack the point, they want to attack the person instead. Whenever you see this it means they are overexposed and too emotional.
If you notice it in yourself then take a step back, breathe, and ask yourself why you’re reacting to this. Are you in too deep? Do you want to save face? Your goal is not to be right but to make money – and to do that you need to be constantly looking for new facts and putting them into context.
Beat your bias and trade on your terms
When investors see profit warnings on stocks they hold, their typical reaction is to think that they’ll just buy more at the bottom, and try to sell for ‘breakeven’. This is irrational thinking. If you think that the stock is going to go down, then the obvious option is to sell some or all and then buy it back cheaper if you actually want to buy a stock that has had a profit warning. But selling for a loss means admitting you were wrong, and the ego does not like being wrong. Furthermore, when there’s a profit warning and an institution decides they want out, they can hammer the stock down for days until they’ve exited their position or sold down the amount they wish to sell. Sometimes this provides an excellent bounce trade which is often a simple reversion to the mean trade (or ‘dead cat bounce’ as some call it) before normal service is resumed, and it’s rare for stocks to have profit warnings and come back to their pre-profit warning levels in a hurry.
Being able to take a quick time out is an effective skill in trading. If you catch yourself thinking irrationally or just can’t think clearly – stand up, take a deep breath, and try to get back to thinking objectively. Flashing screens and broker alerts are all designed to pump your emotions and get you to trade. But getting you to trade does not mean you’ll make money – you need to trade on your terms.
A copper bottomed opportunity?
One company that has been on my watchlist for almost a whole year is Phoenix Copper (PXC). It’s a USA-based pre-production mining company that is going to start producing at the end of 2022. The company is currently drilling and exploring around the area, and management believes that from production Phoenix will have $43m in post-tax cash flow in year 1 (at $3.60 copper price). However, Doctor Copper is trending higher and so these figures could be materially better, as the company is geared towards the commodity it will produce.
The company listed in the summer of 2017 and for years saw its stock price languishing in the doldrums, falling from its listing price of 40p to below 6p.
Chart 1 shows the extent of the drawdown. We saw that the stock failed to break resistance around 52p and from then started to trend below all of the moving averages. If a stock is trading below the 200 day exponential moving average I often find it best to just leave the stock and wait for it to turn around. What’s the point in buying into a downtrend? Doing so is just gambling that you are printing the bottom. You might find it fun, but go to the casino instead. It’s cheaper.
Moving across to Chart 2, we can see the stock has been trading upwards towards the closing high of 53.5p. It’s been a long period of consolidation where the stock has traded in a range, and the company raised money at 35p a few months ago.I took this placing as I thought the deal was attractive and have since sold my stock. But now I’m eyeing the 52-week and all-time high at 53.5p.I believe that if the stock breaks this range, the price will go on a run. It’s well funded and there are plenty of updates to come on the mine to whet investor appetite. Phoenix Copper is looking like an early stage 2 stock and for trend following traders this would be a solid base to buy the breakout from.
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