27th January 2011

maxims wrote:I was having a fantastic discussion about investing with a close friend and thought I should blog about it. It has to do with book smarts and investing. We see many people subscribing to technical charting software (expensively) to try to beat the market, maybe they have given up on trying to understand and beat the market on fundamentals after years of trying.

How does one become a better than average investor, don't even say super market player? I doubt very much one can be great by studying the books. I mean we get tons of super brainy people graduating with honours in corporate finance and/or MBA all the time ... and say these people go on to study religiously the ways and strategies of Buffett, Soros, Graham-Doddsville, Ben Graham, Peter Lynch, Bruce Berkowitz, etc... - can they then be superior investors?

I don't have to answer that because the reality is for all to see, an emphatic NOOOOO. Investing is quite silly and befuddling. We try to regard it as a "subject" that can be studied, I mean if a person is brainy and wants to be a doctor, you will eventually be one by getting the degree, and if one wants to be a surgeon, he can go for more studies and training, and he will be a surgeon, he can be a better surgeon by learning all the time about the latest equipment and research findings and hone his/her skills .... you put in so much, you get so much output and benefits ... but the same cannot be said about investing, its not like you put in so much, you will end up a better investor!!!

I think investing is a like a growing mass of blob or astronomy, the more you know, the more you don't know. Does it mean that if you are a superior analyst for 20 years that you will see a similar track record when you become a fund manager? No. Does it mean if you are a brilliant performer when your portfolio is $2mn that you can then manage similar returns with a $200m portfolio? No.

For many people, we just want to beat the market consistently. Is that a futile effort? I don't think so. I believe there are many that can beat the markets consistently but must also be cognizant of a few truths:

a) no matter how good you are in investing, you will never have a perfect batting record, I believe superior investors will make money in 6 or 7 out of every 10 trades ... if you are not so good your averages will dwindle.

b) if (a) is a truth, then we must let our profits run and know how to minimise our losses, we must not let our losses get us down or get angry and try to average down aggressively again and again - that's like not acknowledging the first time you bought was a mistake (timing wise or valuation wise) and just stubbornly holding on to the hope that you are still right.

c) cutting your losses is something many "aunties" (I use that term not to describe all aunties but male/female who just cannot bear to cut losses) will never do, they just keep holding and holding until they have 30 stocks in the portfolio.

d) you must know that the market is bigger than any kind of technicals or fundamentals, even Public Bank will go down if the overall market is going down, can always buy back later ... e.g. if you hold a stock at entry price of RM3.00 and it went to RM3.60 but you did not sell, it goes back to RM3.00 and you hate yourself, but you know its a good stock so you hold on, then the market turns and it goes to RM2.60, you hate yourself even more but is unwilling to cut, it then goes to RM2.20 and you have no more money to average down ... yes if fundamentals is intact it will go back to RM3.00 but what was the opportunity cost??? It may have taken 3 or 6 months to see that thing climb back. If you had cut at RM2.80 ... you could have bought back at RM2.30 and ride it on the way up. Another point, if you had cut at RM2.80 and did not buy at RM2.20 and then recovers swiftly to RM3.00, even at RM3.10 or RM3.20 you should still go back in (something the majority will NEVER get themselves to do) ... which leads to my next reality.

e) The same stock may be RM2.20 or RM3.00 or RM3.50 and still look good depending on the state of the markets. Buying when it recovers back to RM3.20 may be a good move because the overall condition of the market has improved markedly. Selling the same stock at a loss at RM2.50 my be a good move because the downside or downtrend looks to be quite prolonged.

f) Fixating our basis of fair value. We use anchor and adjust too much in investing. If we had bought SP Setia-WB at RM2.00 and did not sell at RM2.30, we still use RM2.00 as your ultimate reference price, hence when it dips to RM1.50, you think its a good buy because to you this thing cost RM2.00 a couple of weeks ago. You know, and only you know RM2.00 was a "fair price" because the share price has NO recollection that its fair value was RM2.00. Fair value is a moving term, its not formed in an unmovable statue carving. Fair value is dependent of the state of markets. If it has fallen to RM1.50, then RM1.50 is your only reference price, not RM2.00.

g) never belittle a trend, be it upside or downside, is it better to buy at RM1.80 and then later at RM1.50 and then later at RM1.20 ... 3 times in a down trending market as they all represent value? Or is it better to buy after it has hit a low of RM1.20 and then moved back up to RM1.80, and then only buy at RM1.80 - its the latter of course because when you buy at RM1.80 in the latter's case the trend is favourable and market conditions have improved. Must learn not to say "aiyah, it was RM1.30, wanted to buy then but did not" ... that is always only uttered by the usual market losers, I can guarantee you that.

h) Woulda, coulda, shoulda ... stop thinking like the people talking rots at kopitiams because those sentiments will never get you anywhere and always uttered by people who will fail at most things they do in life. Learn, keep learning, give yourself the integrity of bypassing the "woulda, coulda, shoulda", move on ... what you did not do means diddlysquat to you and to all.

So, if you think certain books or courses can help you be a better investor, by all means do it, there is no magic "model" that is out there. If there is, you better believe that it will be selling for millions of dollars. Investing is a large unknown just like your brainpower usage rate, you might know 3% of the whole thing but if something can help you get to 4%, and improve your batting average, how can that hurt.

So, in the end all the gurus are just people who have 5%-6% knowledge of the topic compared to the average investor who may be at 3% ... overall, in that light no one is a guru, not even Buffett.

The market does not owe us a living. How to be surefire winner in the markets - don't be a buyer of shares, be an issuer of shares ... ; )

Netsoft wrote:Morning guys [You must be registered and logged in to see this image.]

maxims wrote:

Netsoft wrote:Morning guys [You must be registered and logged in to see this image.]

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sai lang net

Samseng wrote:wah sime open gap up so high