Friday, November 05, 2010

Maturing as an Investor

As the months go by, our experience as a human being continues to build up; whether it be with work, relationships or, investing! Every now and then, I will take a step back and reflect on what I had learnt in the past few months as a result of either reading, observation, thinking or analysis. On this occasion, I realized with a start that I had matured a lot as an investor compared to the “Dark Ages” back in 2005 to 2006 when I was still fumbling around for directions. It turned out that value investing became the framework with which I would build my investing foundation, and over the years I have moulded this discipline to fit my own personal character and competence.

So to summarize the lessons learnt, here is a simple laundry list (not in order of significance):-

1) Understanding Valuations and Emotions – After reading many books on behavioural finance, I finally learnt the effects of over-confidence and loss aversion and how it could devastate one’s portfolio. Throw in patience and discipline and you would have a very robust philosophy on how one should approach investing, and I am currently putting that into practice. Value investing also would not be complete without an understanding of human psychology in the stock market and the factors which drive sentiment. At the same time, I was also refining my valuation techniques (still currently a work in progress) and striving to improve to become a better investor.

2) Avoidance of Scams – Not to sound too caustic or cynical here, but the recent proliferation of scams in the news has caused me to be extra wary of the numerous “get-rich quick” schemes out there. As a mature investor, one should be very aware of the long-term average which the stock market can return (roughly 8-10% including dividends) and how even the best investor in the world, Warren Buffett, achieved compounding of about 22% over 25 years. Yet, many of these so-called “seminars” promise quick and easy gains through forex trading, options trading and technical analysis. One may be quick to point out that these are not “scams” per se as they simply contain a promise and the participant is free to choose not to pay to attend. However, some of the claims are nothing short of preposterous! Any investor worth his salt would be quick to steer clear of such talks which promise fast and easy money. In my world, there’s only hard-earned money; and when one invests properly one has to put in the hard work, diligence and patience to sift out bargains. There are no short-cuts to becoming rich (unless you win the lottery!).

3) Absolute Returns versus Relative Returns – This was actually mentioned in Sham Gad’s book “The Business of Value Investing”, which I am currently still reading. In it, he mentions that value investing itself is a framework and philosophy which emphasizes on consistent and steady gains through both bull and bear markets, as one focuses on the business rather than the stock market. Therefore, it makes sense that returns should NOT be benchmarked to an index; as the main objective of an investor is to get a consistent return on investment, regardless of market conditions. If one uses relative returns as a yardstick, then one would have “out-performed” the index assuming one’s portfolio dipped 8% while the index dipped 15%, for example. But absolute returns focus on getting a steady and consistent return from investing in well-run companies with a stable business and competitive moat; hence one should not stress too much on relative performance.

4) The Importance of always having cash – OK, I guess this is more of a personal finance topic, but then again I have learnt that having constant opportunity fund means that one is poised to take advantage of favourable situations as and when they arise; for example when attractive valuations emerge all of a sudden due to an unjustified sell-down in the stock market. Therefore, it is important to have free cash flows in one’s personal life too, in that spending must always be less than earnings.

5) Avoiding Mistakes previously made by myself, as well as others’ mistakes – I have spent the last 12 months continually reading through the mistakes I had made with regards to China Fishery, Swiber and Ezra and sought to avoid making the same errors of judgment. At the same time, I have also studied mistakes made by other astute investors by reading books and noted down exactly what to look out for and what to avoid, as part of my continuous learning process to become a better investor. Moving forward, I am sure I will still make mistakes, as I am only human, but the aim to avoid major mistakes which will derail my wealth-growing path and to keep the mistakes small and manageable.

There is still much more room for me to grow and mature as a value investor; as my journey is still young at just slightly over 3 years. As I am constantly reading, observing, analyzing and learning, I can feel my knowledge base increasing as the months pass, and my analysis time is also lessened as I am more aware of what to look out for; and to ignore the irrelevant or unimportant. There is still so much more I have to learn as an investor, and I look forward to many more years ahead to hone my skills as an investor and to achieve much better returns.

Readers can expect another update perhaps 6 to 9 months later as part of my update on my investment journey.

20 comments:

Singapore Stock Picker said...

i fully agree with most of your points!

telstar said...

I have been investing for about 22 years.

And if I tell you some of the mistakes I have made (even after reading books & books on investment/finance), you will laugh your head off.

And I feel like kicking my own butt now. Ha! Ha!

But nothing can compare to the practical lessons I have learned when I have lost my hard-earned money by making "foolish mistakes" which actually I have read about them in some books.And yet I still made the mistakes. Anyway that's me, very foolish ahh...

Hope most of you do not have to learn by practical lessons like the "foolish me"

Anyway, by God's Grace & Blessings I Prosper.

For those who don't believe in GOD then maybe "Luck"?

No? Don't believe also?

O. K.

But then let's say you are 100% sure of a stock after TA & FA and you buy the stock.

After you have bought the stock do you agreed you are powerless now how this stock going to perform?

If for example "Lehman Brothers", "Enron" & "World-Com" can kaput and many, many too big to fail companies too,do you think you can honestly be sure nothing like this can happen to the company of the stock you have bought?

What about the "Black Swans"?

What about the other "risks" in the market?

What about greed & fear?

It's O.K. if you still believe in your hard work and skill. It's the basic.

But I like to remind you after you have bought the stock can you or anyone "really control" what is going to happen next to the company in a moment; in a day's time; in a month's time and so on.

So do we need God's blessings and maybe for some is luck?

And we need a deep pocket and longevity too.
telstar.

Musicwhiz said...

Hi Singapore Stock Picker,

OK, thanks for visiting!

Regards,
Musicwhiz

Musicwhiz said...

Hi Telstar,

I think it's common to make mistakes, and we have to continually learn from them. It's seriously not easy to avoid making mistakes even if you had read about them in books, as emotions are at play here and as an investor, you need a lot of discipline.

I am not a religious person, hence I put my faith in my research to minimize the risk of investing in certain companies. While we will not know what is going to happen tomorrow, next month or next year, having a margin of safety can at least prevent huge losses. That's what I strive for.

Thanks for your comment, it's enlightening indeed!

Cheers,
Musicwhiz

telstar said...

Hi Musicwhiz,

You said it well - base on research, discipline, and safety of margin.

From years of investing in the market, I think before anyone start to invest in stocks one must study (research) the "principles of investing" Safety of margin is one of the principles.

And subject(discipline) oneself to the "principles of investment"

The more one learn about the "principles of investment" and apply them , the more one should prosper.

There are many common "principles of investment" but not everyone adopt or believe or practise the same.

But the most difficult part of investing is still "Disciplining oneself."

Therefore, anytime one violates the "principles of investing" knowingly or unknowingly, one usually lose money.

NB:
I like music too. But allow myself to listen to any type of music before I decide. So I have a "crazy collections of music".
God Bless.

Musicwhiz said...

Hi Telstar,

Yes! I fully agree with you that disciplining oneself is the toughest part. Strangely, I was just telling my wife this a short time back when you mentioned it here, haha. A coincidence? :)

As for music, most of it is in my head, and though I do not collect many CDs or Vinyl, I do attend concerts of artistes which I like. My most recent concert was Retrolicious @ Fort Canning Park.

Regards,
Musicwhiz

PanzerGrenadier said...

Hi MusicWhiz

I think avoiding the scams and other poor investment products such as "structured deposits" and "mini-bonds" type of product is one big part of value investing.

They turned out to be such risky derivative products sold under the guise of "deposits" by banks and other financial institutions that really the layman is at the mercy of the legal (and illegal) sharks in the sea of investments.

I can relate to what telstar talked about in that investing involves an element of luck or fate or divine power because we cannot 100% predict or control the investment outcomes. We can only control our own behaviour (to some extent). :-)

Thus, I find that my own journey towards financial freedom has now become a mixture of prudent management of my equity portfolio to have some exposure in the market vs none. At the same time, I don't trust the market enough to commit 100% of my investible portfolio into pure equities. I still keep a significant chunk as cash and cash equivalents for opportunities as well as prudence for unforseen cash needs.

Ultimately, I see investing as being a steward of my own personal networth to beat 2x fixed deposits and to minimise realised losses. I won't be able to bring it all with me when I pass away from the world but I can enjoy some of it and keep enough for my daughter to be able to have the most value-for-money education that $$$ can buy.

Be well and prosper.

telstar said...

Hi Musicwhiz, Hi PanzerGranadier,

Allow me to share the below "extract" from a financial website.

"What Is The Right Asset Allocation For You"?

(Finding the appropriate asset allocation requires you to know your own financial and life situation and yourself. You must analyze your net worth, employment and income, saving rate, spending rate, housing situation, income you will need for savings, when you will need it and who is getting the remainder when you are gone.
Beyond that the right allocation is the one that you can live with during a deep and prolonged bear market. It’s a mix where you will be ready to buy more stocks as stocks fall and sell stocks as they rise.
It doesn’t do any good to be brave and select a risky allocation that you don’t have the stomach to stick with during the poor market conditions).

So after reading the above, it is still quite difficult for me to practise the right asset allocation to my satisfaction.
I find my 'financial position' keep on changing because the stock market, world economy and many aspects of life never ever stop changing.
I suppose that's life.
If we stop changing it means we are "dead".
Hope you enjoy reading.
God Bless.
Telstar.

JW said...

Hi MW,

while it is prudent to do homework on companies before putting our hard earned monies in, it is at times not quite worth the time to do so, and focusing too much on just valuations and numbers could make one susceptible to value traps as you have put it.

In addition, as you mentioned, human psychology is too paramount in value investing. However, I have no idea why you avoid TA as much as possible when it is a tool to help ascertain human psychology.

What are we but mere ikan bilis in the sharks-infested SGX? The very best investments are always on oneself, one's family, one's kids, one's businesses... and seldom on others. The main reason? As ikan bilis, we have zero control and zero say in how the businesses are run. We are akin to being sleeping partners.

Musicwhiz said...

Hi Panzer,

Thanks for sharing your own personal investment journey as well. Appreciate it!

Regards,
Musicwhiz

Musicwhiz said...

Hi Telstar,

Thanks for the article. You've made a good point - life is always changing and there is never always a "correct" asset allocation strategy. I guess that's why we have to stay fluid and adaptable. We as humans have to keep evolving and adapting in order to survive as well. After all, it's a cruel world out there!

Thanks,
Musicwhiz

Musicwhiz said...

Hi JW,

I will always start my research on the business model and industry environment before really drilling down to the company fundamentals. Hence, at least one will not waste too much time focusing on companies which are in lousy or declining industries. Value traps are around all the time and one must always be watchful for them.

Human psychology is important to the extent that you know how to take advantage of it to buy/sell at the right valuations, based on your personal objective study of the business. I don't subscribe to the "science of wiggles" and I've mentioned this before as well - TA can turn out to be an unnecessary distraction to what is really important, which is finding out the value of a company and how it will do in the medium-term.

The fact is that when we invest, we entrust the Management of the Company to the managers, while we are the owners. I won't use the analogy of ikan-bilis though - it's more like managers are the stewards of the company while shareholders are the owners who help to make important decisions should they come about (through AGMs). I do agree that we should focus on family as one of our biggest assets! For this, listen to Mike & The Mechanics' song "Beggar On A Beach of Gold". He says in the song that with his family all around him, he has all the riches he can hold. I agree.

Cheers,
Musicwhiz

sharexchange said...

as an " old bird" i offer this advice only to my friends.. 股票可以买,大便可以吃!

Musicwhiz said...

Hi Sharexchange,

My Chinese was never very good. What exactly do you mean by that?

Thanks,
Musicwhiz

telstar said...

HI sharexchange,

If what you say is true, there won't be anyone investing.
All the stock markets will closed.
And everyone will be eating shit.
Ha! Ha!
Very funny you.

Musicwhiz said...

Hi Telstar,

Oh well I guess there could really be such people out there who are so risk-averse they dare not put even a single cent into equities. But fortunately, that's just a small segment of the population. :)

Regards,
Musicwhiz

telstar said...

Hi Musicwhiz,

Yes, very fortunate for us.
I confirm I have an ex- colleague who only believe in putting money in "safe", fixed deposit in the Banks. And at that time there was no minimum sum of insurance guarantee in case of the "Band on the run". Oops, I mean "Bank on the run".

Even now the insurance guarantee per account by the bank is only miserable $20'000.00 if I am not wrong. So if the "Bank is on the run" what can you do?

Besides, interest rate is a pittance now. I wonder what this group of people do now? Where would they put their money? Also, no matter what their investment return, they can never beat "Inflation".

Actually, I myself also don't know where is the best "place" to park my stand-by fund for share investment. I have sold about 30% of my portfolio. Do you have any "lo-bang"?
Ha! Ha! Look like I belong to that group also; a case of "the pot calling the kettle black".

And yes I always tell people who believe only in placing fixed deposits in the bank, to consider what happens if the Bank kaput?
I ask them isn't it better to purchase the bank equities then?

Regards.

Musicwhiz said...

Hi Telstar,

Haha, the people you described are common, but a bank run is highly unlikely in Singapore, no matter what Paul McCartney sings. :P

I think MAS has also given guarantees for all deposits within local banks, so there is a very low risk of losing everything even if the financial system is in deep trouble. Singapore has the reserves to shore up the financial system if need be.

Perhaps you can consider investing in blue chips which yield about 3-4%? Of course, I can tell you which ones specifically but a little research will convince you of the right ones to place your money for the long-term. Granted, even SIA bonds are paying better than the FD rates right now. I won't recommend REITs as there are inherent risks to that business model, which thrives in low-interest rate environments.

If you want good risk-reward, focus on good companies generating solid FCF and which have decent margins and a strong Balance Sheet.

All the best!
Musicwhiz

telstar said...

Hi Musicwhiz,

Thank you for your reply.

The trouble is I still have 70 % portfolio in the stock market. At this stage of the market I am weary to buy any more shares.

Besides I have purchased a free hold one room property at District 16 (1st time trying to be a landlord) which has to be fully paid-up by 2012/2013.

I am not sure whether I do the right thing after all like you said, "I can easily get 3% or 4% dividend by parking my money with a blue chip company". And I don't have to worry about tenant and associated landlord's problem.

Actually, I wanted to convert some cash and share assets to "hard asset", worrying fiat money may meet "super inflation" one fine day. That's why trying to be a landlord.

So you see, I need about a lot more cash to fully paid-up for the property. I try not to take loan now.

And yet I still waiting to sell some of my on-paper profitable shares. It seems I am very greedy.

But my wife's CPF money is the cushion money to see us through in the "worst case scenario". I mean sudden appearance of a "black swan". She can withdraw her CPF anytime.

May I know your opinion about what I have share? May you be
forthright? It's most important for me to hear your "honest opinion".
Best regards.

Musicwhiz said...

Hi Telstar,

I understand your wariness with respect to purchasing shares, as valuations are pretty fair by now. However, you can still get a decent yield provided your view is long-term and you choose a business which is growing at a steady clip.

You bought a one-room property (i.e. Mickey Mouse unit)? From what I've read, those may be tough to rent out and there's no guarantee rental rates can stay firm, as one-room apartments tend to cater to a "niche" segment of the population (foreigners, no family, do not cook much etc). My knowledge of property is rather limited though, and I am sure you are more senior and experienced in this respect.

But if you want my honest opinion, paying off the property is of course a good idea so that you do not have to fret about loans, but at this point in time it may be better to either sit on cash (in other words, take a long-term cheap loan due to low interest rates) and wait for better opportunities. Rather than realizing cash from your profitable shares (which means you are locking in gains rather than depending on these shares for recurring cash flow), you could choose to use leverage (with your wife's CPF as a "cushion") and build cash for emergencies. You'll also probably need a decent cash buffer in case you cannot find a tenant, or in case the rental does not cover the installment.

In short, my advice is to stay liquid and have a cash buffer. It is also, of course, important to be cash flow positive every month, but I am sure an experienced person like yourself can do your sums! :)

Hope this helps,
Musicwhiz