Learning the right lessons 2 comments

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I was exchanging posts with one of the forummers on a local online forum these few days with regard to a certain stock Global Tech I had paid dearly for in the past and what lessons I had learnt from it. I will not go into details but basically we didn't agree on what should have been the take-home points from the debacle.

I thought about it later and so here's a topic for my blog today: are we learning the right lessons from every stock experience (buying, selling, holding of a stock) that we have encountered personally over the years?

This is an important question since ideally an investor should be honing his understanding of the market and his trading/investing skills with every new stock experience; if there is no knowledge ramping with time then he will forever be doomed to mediocrity. To me, there are two kinds of "lessons" that an investor can develop from his personal experiences on the stock market: technical understanding and philosophical approach.

Technical understanding is usually quite clear-cut and straightforward. For example, quantitative understanding of valuation metrics like P/E, NTA, ROE, profit margins, PEG etc; qualitative understanding of issues like eg. the demand and supply dynamics of various sectors, an understanding of risk, the various means of financing a company and their impact on its stock etc. I would see these as black-and-white issues; either one is right or one is wrong; one can call this the scientific aspect of investing. As a new investor progresses through his trades, he will start to learn, hopefully not too painfully.

Typically, a philosophical approach takes longer to develop although it usually progresses concurrently. It comprises more of opinions and views of the market; this is the "art" aspect of investing. I have discussed quite a view of these issues (and offered my views and personal philosophy) in my previous articles on this site: Average up or average down? Is the market efficient? Buy with the trend or go contrarian? Speculate short-term or invest long-term? This area is where one might typically learn the wrong lessons which shade his future decisions for the worse: for example, if an investor bought a small cap that collapsed in price hence making huge losses, he might be forever put off small caps "because they collapse and never come back", and thus the opportunity cost is the high potential return these risky small caps could bring. Or take for example the CAO fiasco which has caused investors to be put off China stocks generally. The thing is, there is no reliable rule of thumb, especially the quantitative kind (eg. buy at PE<5, sell at PE>20) that can be employed all the time, and any investment philosophy that is too rigid is asking for trouble. In my view, there are no right answers, because every situation is unique; one exercises one's judgment based on personal instincts and ideas shaped by past market experiences. These experiences are what people cannot take away from the investor; they constitute his vault of knowledge, and hence he should constantly think about what he had done wrong, what he had done right, and seek to avoid similar mistakes or repeat similar successes.

Furthermore, no matter what kind of investment philosophy the investor evolves throug his experiences, the most important thing is that he takes steps to systematically build upon his investing infrastructure synchronously with his philosophy and ideas. If he believes in investing long-term and fundamentals investing, it makes sense to find websites, for example, that provide industry news relating to each of his stock holdings, and keep track of trends regularly; to have some efficient process for doing stock screening and stock monitoring etc. For a short-term trader, his operational priorities would be different: he would seek to build a real-time news network (say of brokers, of reliable sources, of newsfeeds), to develop charting infrastructure on his computers, to develop programs to assess the technical position of the market (is it overbought, oversold etc). Either way, there are plenty of things to do to press one's advantage. Implementation, again, is more important than inspiration, even (or is it especially?) in the stock market.