The Rule About Never Adding on a Green Day
An arbitrary-sounding rule that removed an entire category of my worst decisions. The reasoning is behavioural rather than analytical.
I do not make discretionary additions on a day when the price is up. The rule has no analytical basis and it has improved my results measurably.
Where it came from
I reviewed every discretionary addition I had made across four years and noted what the price had done in the preceding week.
Eleven additions. Eight came after a rise. Of those eight, six were made at prices above where the asset traded a month later.
The three made after declines were all better than the subsequent month’s average price.
Small sample, and consistent enough with the obvious mechanism to act on.
The mechanism
An addition after a rise is not a decision about value. It is a response to momentum, dressed in reasoning assembled afterwards.
The reasoning is always available. The asset has broken a level. The trend has confirmed. Institutional interest is arriving. All of these sentences are constructed to justify an impulse produced by watching a number go up.
Why a crude rule beats judgement
I could try to distinguish between good additions after a rise and bad ones. My record says I cannot.
A rule that eliminates the whole category loses the occasional good addition and eliminates a larger number of bad ones. That is a favourable trade given a documented inability to tell them apart.
Crude rules beat nuanced judgement whenever the judgement is demonstrably unreliable, and the record is the only way to know which situation you are in.
What the rule does not cover
Scheduled contributions. The monthly standing order at a platform I can leave a standing order on executes regardless of what the price did that day. That is the point of a schedule.
Rebalancing. Quarterly, mechanical, in whichever direction the band requires.
The rule applies only to discretionary additions, which are the category my record shows I am worst at.
The related rule
No decisions after 9pm.
Reviewing the same set, nine of eleven discretionary additions were made in the evening. I do not have a theory beyond being tired and having a phone, and I did not need a theory to write the rule.
The general principle
Look at your own record before trusting your own judgement about a category of decision.
Most people have never scored their discretionary trades against the alternative of doing nothing. I had not, for four years, and the exercise took an hour and produced two rules that have done more for my results than any analysis I have performed.
The rules sound arbitrary because they are arbitrary. They are also derived from evidence about a specific person, which is a better basis than a principle derived from someone else’s market.
This is a personal account of holding through market cycles. It describes what one person did and why. It is not a recommendation, and past cycles do not predict future ones.