Thursday, August 31, 2006

My Investing Journey: Hypothetical situations 4 comments

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Sometimes I wonder how my investing philosophy and methods would have been different had I started out on an alternate path. Many newbies lament that they are completely lost where they try to invest in the stock market from a standing start: opening the trading account is the least of their problems (brokers are only too eager to help), after that they wonder where to find out more information about the various stocks, what are good ones to invest, how to read charts and number-crunch the financial statements etc. I read this all the time in the online forums, increasingly in recent months as more and more people realise that investment and not savings is the best way of growing one's nest egg for the future.

I myself started out on a blank slate 6-7 years back, with no-one to seek ready advice from (my friends were not the stock market type). I sometimes read of forumers on online forums claiming that they have "Masters" to teach them the ins and outs of trading, and it sounds great to have a mentor to guide the greenhorn investor/trader up the learning curve. If I had a sinseh in my early days I probably would have found the going less tough. There are however a few issues that one must note with regard to having a mentor to guide oneself: firstly, the quality of the mentor is by no means assured, and this is especially dangerous for the newbie who has no way of telling good from bad; secondly, the quantitative and technical aspects of the stock market eg. how to calculate EPS, NTA, the various operating ratios etc can be taught, but (especially for traders) the "stomach" for risk and money management cannot be imparted --- some things can only be learnt and internalised through experience and actual market participation; thirdly and most importantly in my mind, the "Master" is usually able to teach things from one single set of perspective, which may be adequate in black-and-white subjects like the sciences but may subject the newbie to tunnel vision in the highly subjective field of investing/trading where there are no fixed laws/rules of nature and various situations are highly contextual and subject to good judgment which favours the "fox" who can see things from different angles and weigh probabilities rather than take absolute positions.

Obviously I'm being a bit Ah-Q here because I'm trying to see the half-full glass, or the advantages (retrospectively) of not having somebody to learn from in my early investing days; however learning about the stock market from scratch is, in my mind, really not that difficult nowadays. The penetration of the Internet has democraticised the spread of stock information, and information asymmetry is probably less than at any time in the past. In addition to books, online investing sites like Investopedia and MarketWatch were highly educational in my early investing days, and I also got a feel for the Singapore stock market through online forums where there was much sharing in the early days (I was lucky there.... nowadays there's probably less sharing). Indeed, the online forums, if one learns to sift the wheat from the chaff, are the single most useful resource for the newbie because one can learn the subject matter from different "Masters", hence exposing him to different perspectives (see "Using Online Forums").

What if I had started out in the financial industry instead of in a totally unrelated profession (engineering)? For one thing, my focus would probably have been different. Brokerage analysts would be more familiar with the market technicals, such the big buyers/sellers, market depth, associated technical charts etc, by virtue of their easy access to all these facilities. I would think the overall effect would be to inculcate a shorter-term focus and a trading mentality, by virtue of their better market timing. I myself have tried three or four times to pick up technical analysis in detail seriously, once in my early days, once following my Global Tech debacle when I was re-looking my investment approach, and the most recent after the CAO debacle, where I was not directly involved but had heard traders claim that technical analysis could easily have predicted the coming scandal. However till today my buy/sell timing is often terrible, which is why I prefer to take a medium-term investing approach. Those with analyst backgrounds, like Gallen from the KelongStocks blog, are much better stock-buying timers. At the same time, a trader's mentality typically include risk management techniques such as cut-loss which would probably have taken away most of my big wins.... up till today I believe that such risk management techniques often lull the trader into a sense of complacency that dissuades him from researching or thinking too deeply about his stock picks ("if the stock doesn't perform, I can always cut loss"); I have my own risk management methods but I have developed a bigger stomach for sustaining losses in anticipation of bigger gains.

Secondly, I wonder if I would have had as great an interest in the stock market now if I had started out in the financial industry. Somehow, churning out research on companies day after day as part of routine work would probably have taken the fun out of things way early in my career. Bearing the brunt of criticism from retail investors who suffer from drawing the short end of the stick would probably have been even more deflating. The journey from casual interest to mild obsession over these years has been a more rewarding one for me.

Ultimately, as the saying goes, there are many ways to skin a cat. Thinking about these hypothetical situations is interesting but at the end of the day the best way is to integrate past experience to build a competitive advantage. For me, it is simple: search harder (for good stocks) than everybody else, read more (about emerging trends) than everybody else, think more deeply (about business fundamentals) than everybody else.




Anonymous think not left said...

It's interesting that your competative edges are outsearch, outread and outthink on business fundamentals.

It's even more interesting that I can't really describe my competitive edges. Maybe the edge is focusing on under-research companies, having a process that have a good probability of positive expectations due to the stringent margin of safety requirement (Can call it deep-value investing, I guees.) and read a lot of non-fiction but not much on emerging trends.

I agree that one can see that in forums, there are newbies who are a bit confused what to do / what to learn in equities investing. I do not know whether having a mentor would simplify the learning process since I don't have one. A mentor may help, if what he/she teaches suits the learner's style.

Personally, investing is difficult because
1) there's a lot to read and for one to test
2) humans generally aren't suited to risk-taking
3) one needs time, commitment and capacity/tolerance for pain, sudden pleasure, uncertainty and boredom.

To end, maybe new investors, including I, should first learn and re-learn and accept that the investing can be difficult, painful and boring.

9/06/2006 9:03 AM  
Blogger DanielXX said...

Hi think not left,
In fact I feel investing is no different from other professions; hard work CAN be rewarded with better returns. But hard work doesn't equate with staring at the screen all day, unless one is a tape-reading/price-monitoring genius. You'll be surprised how many trends can be picked out from reading the newspapers alone. Several weeks back there were constant reports of rising caveats, heavy foreigner buying, rising average prices in the luxury homes segment. It was the clearest signal to buy into luxury property stocks. And sure enough, the whole segment has been re-rated now, with Wing Tai, Wheelock, SC Global riding a wave. That shows the usefulness of keeping in touch with the news, and reading them with an objective in mind.

Competitive edge is something I've been thinking about seriously these few months. Once you know what it is, you can take steps to build further. I have always been a generalist because specialising bores me. Hence I am comfortable with reading on various sectors, and it's not a chore for me. It's a constant learning process. For others it might be reading the charts, or picking out good stocks and holding them through thick and thin. Competitive advantage is very important, because it assures you that you have a SCALEABLE edge.

9/06/2006 6:03 PM  
Blogger gsg said...

a mentor can help someone avoid some unnecessary path, a path that may be costly...

however, it is up to the each individual to find the right mentor/s and have an open mind to absorb the good stuff from the mentor

have an open mind, also mean that one has to be humble and know that it takes a lot knowledge, experience and passion to succeed....only then, one will be more mindful of the mentor's pointers and not right ear in left ear out

9/23/2006 9:04 PM  
Anonymous Think not left said...

Hi Danielxx

It seems that you may have shown a bias in your example on being able to profit from newspaper trends. One has to show that for all the newspaper trends he has picked up from the newspaper, and traded on them, he is able to obtain, on average, a net profit. However, this again may only apply to the individual and not to the general population as one cannot expect everybody to
a) pick up exactly the same trends
b) trade in all or exactly the same trends everybody else has picked up

Yes, competitive edge is important and after some subconscious thinking, I guess the my competitive edge hopefully lies in
a) having a process that have a decent probability of positive expectations due to the stringent margin of safety requirement
b) able to use more of the rational brain to make decisions, rather than the emotional part of the brain (which also explain why markets is painful to me as I have to act out-of-script)
c) the awareness that I can make mistakes and losses

Maybe you should include some emotional edges (i.e. discipline, patience etc) in your list of competative edges, since without emotional control (or edges), one would definitely suffer under the savages of the market.

I agree that hard work can provide a higher probability of success. However, I disagree with you on investing being no different from other professions. (Your statement is a bit too restrictive) Investing requires tolerance in uncertainty of returns for the effort put in but most professions will lack the uncertainty as at least basic wages are offered for the effort put in. The intention of the above point is not for sake of argument but rather to show other readers that investing is not like other professions and thus may not be as simple as one thinks. (Or hard work will not gurantee positive results.)

9/27/2006 2:33 AM  

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