Market wrap: What Telstra teaches us about learning from our mistakes

There is an old saying that we learn from our mistakes. But if this is true, why do people continually make the same mistakes believing it will be different next time?

It is not unusual to see portfolios with losses on individual positions of 50-90%, especially in times when the market has had significant falls like we experienced in March.

Obviously, large losses on individual stocks can have an extremely negative impact on the overall performance of an investor's portfolio. When I question investors why they continue to hold these stocks, invariably the argument is that these good stocks will rise back up to their previous value. But this raises two questions; firstly is the stock really a good stock and when will it rise back up to where it was?

When stocks fall heavily in price, the investor is attempting to ride out the market, but is this the best move particularly when they are potentially losing capital and the opportunity to invest their funds in other assets that are rising?

Investors will happily ride out a losing stock rather than liquidate it for fear of losing, while they will gladly sell winning stocks too early for fear of losing the profit they have already made.

Telstra is a perfect example of why the old adage of buy and hold is an inefficient strategy and why investors would have been better off selling their shares rather than holding. By November 2010 Telstra had fallen from its high of $9.20 set back in February 1999 for nearly 12 years into a low of $2.55. It then rose up to $6.74 by February 2015 only to fall back down to $2.60 by June 2018. Yet people continued to hold onto Telstra in the hope it would get back to its previous highs.

This week I reviewed the top 20 stocks to see how often they closed higher than they opened for the year. And yes, you guessed right, Telstra was not good on that front, as it only closed higher than it opened for the year 50% of the time. If we look at the last six years, Telstra has closed lower than it opened in five of those years, yet people held onto it in the hope of making money. But the goal to investing wisely is to always preserve capital, as this in itself would improve the portfolio performance of the majority of Australians holding stocks, which can be achieved by simply applying an exit strategy as I outline in my book.

What are the best and worst performing sectors this week? 

In contrast to the past few weeks, the market has been a little more consistent this week with Information Technology the best sector, as it is currently up more than 6%. Consumer Discretionary and Communication Services are both up more than 3% so far this week, with Consumer Staples not far behind. The worst performing sectors include Healthcare and Utilities, which are both just in the green so far this week, while Industrials is up more than 1%.

Looking at the ASX top 100 stocks the best performers include Evolution Mining up more than 12%, and the Star Entertainment Group and Northern Star Resources, which are both up more than 8%. The worst performers so far include Suncorp Group, down more than 6%, followed by Janu-Henderson Group and Orora Limited, as both are down more than 3%.

So what's next for the Australian share market? 

While the market traded lower on Monday than it did the week before, it has traded up for the rest of this week to trade higher than last week. In doing so, it has increased the chances that the recent down move on the market may be coming to an end.

There has been a tug of war over the past month between the bulls and bears with no side really dominating and, as such, the market has lacked a clear direction. While it is still too early to tell if the bulls are taking back control, we need to see the market trade above the high of 6314 points set on June 9 to confirm this and that the market is bullish.

We need to remember that the US market is closed on Friday for July 4 celebrations, so I expect our market will be a little subdued until next Tuesday when we see how the Dow Jones has traded after the long weekend. Given this, I recommend staying patient until the high of 6314 points is broken, as there is still a probability the market could turn to fall away.

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