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Old Investing Advice Gems from Wallstraits days
08-07-2011, 03:17 PM. (This post was last modified: 08-07-2011, 03:48 PM by Moolah.)
Post: #1
Old Investing Advice Gems from Wallstraits days
Found some stuff on my pc.

Couple of things.

1. I did not save who wrote what.
2. If there are any objections to this posting, please do remove (yes, you don't need my permission)

I just feel these are gems that should not be lost.

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http://www.wallstraits.com/community/vie...231&page=1

( don't bother clicking on the link. Tongue )

Investment lessons learnt this year and advice for newbies


When I just started investing late last year, this was the first investment website I stumbed upon. I was greatly influenced by its FA bent and the eloquent arguments from fellow forummers.

I have some advice for newbies from personal experiences as a newbie.

There are certain practices advocated by FA proponents that newbies need to be careful of. (If you are a grandmaster like d.o.g or Sage, you can ignore the warnings below. I need your advice more than you need mine. This post is more for the benefit of newbies)

The first one is with regards to averaging down. FA proponents like to say when the share price of one of your holdings goes down, you should buy more because it has become cheaper. So, when prices are depressed, you should be happier because you can buy more of the same good thing more cheaply.

You could try that if you have sufficient grounds to be so confident of your investment. But if you are just starting out as a newbie like me, please cut your losses and don't compound your mistake. You make a purchase, the share price goes down -> probably you made a mistake. Who are you, little junior, to argue against the market? If you are a newbie, assume you are an idiot waiting to pay school fees and don't average down. Cut your losses!!

Perhaps the most valuable advice that I have received from FA proponents is to know your investments very well and avoid those which you only vaguely understand. If you know your investments with the depth that Warren Buffett has with his, then you can average down with less worry.

One of my mistakes was to make investments based on superficial understanding. True, I read prospectus, annual reports and even taught myself accounting so that I could understand financial reports better. Most of my investments were made based on favourable financial ratios without a deep understanding of the business nature. I did not try out the company's goods and services. I don't know if the company's customers, employees, suppliers are satisfied with it.

My main fault as a newbie was to be over-confident. I thought after reading and learning so much, I was ready. I thought I could be as good as the masters and followed one of their strategy -- concentrate your eggs in one basket and watch that basket carefully. Once again, I reiterate that such a strategy is meant for the masters. If you are an amatuer, it is safer to assume that you are an idiot and to protect yourself from stupidity, please diversify. By putting all your eggs in one basket, you may have fatally injured yourself by catching all the falling knives with one hand.

Some FA practitioners do not have a stop-loss policy. They use a similar argument - if a good thing becomes cheaper, I should buy more instead of selling it away.

The TA approach "Cut your losses and let your profits run" is worth considering. It is a safe way to protect your capital. Sell after your losses reach 10% of the intial capital outlay no matter what. After all, he who fights and runs away may live to fight another day. In fact, by adopting such an approach, you could protect yourself against CAO, Informatics and Auston.

Unfortunately, I did not follow the advice above. I waited until fundamentals have clearly decayed before thinking of selling. In the meantime, I continued to average down as the price slided down. When the financial report was out, fundamentals did look bad but ALAS!!, it is too painful to sell now.

This is one of the problems with FA. You can only make decisions an a quarterly or half-yearly basis which by then, the price may have slid to a psychological unacceptable level to sell.

FA proponents like to say making decisions based on price movement is nonsense. Say, the management has been trying to hide important fundamental data from the financial reports for as long as they can. The silent accomplices - auditors and independent directors - who are on their payroll prefer to close one eye or both eyes as long as they have ready excuses to plead ignorance and other disclaimers when the situation implodes.

The poor FA practioner will continue to average down, thinking that he is profiting at the expense of the foolish irrational market. Meanwhile, the insiders are selling the stock down to the sucker - that foolish guy averaging down.

In such a situation, the TA practioners will be safe. Having observed that the price has been in a downtrend caused by insiders selling down, they would have already sold out before the bombshell explodes. In the cases of CAO, Informatics and Auston, the price chart has shown an obvious downtrend before the explosive truth was out.

Are there any other advice and warnings fellow forummers can share with future newbies?

PS: I do not want to get into a TA vs FA debate. If any FA proponent thinks I am wrong, please point it out objectively without making personal remarks. I am still learning and am considering using a mixture of both FA and TA at the moment.

--------------------------------------

I agree that averaging down is a scary thing. When you buy a stock like you buy a business (which means price is only one small component of your overall analysis) and the price falls-- what I do is ask myself "if the business is failing"? A falling stock price may be a sign of danger as other savvy investors see flaws with the business model, increasing competition (usually seen as narrowing profit margins), etc. Or, sometimes it is an over-reaction to what you believe is a temporary setback, like rising commodity prices.

If, after raising your skeptical antenna, you continue to believe your business is on track to continue its long term growth and build shareholder value... than the proper (if corageous) thing to do is buy more shares at the now more attractive price. After all, it is the same business you previously liked at a higher price.

If, on the other hand, your heightened skepticism results in some important questions needing answered-- maybe about intensifying competition or rising raw material costs-- you might want to sit back and wait and study further. But, cut loss on rumors and whims isn't likely to make you wealth. Often, you will be selling into weakness with the irrational crowd without confirming any business weaknesses. A cut-loss system, or any other system that doesn't require careful analysis and thought, is not very wise and not very FA-ish.

An example... Warren Buffett accumulated shares of the Washington Post during the 1970s recession, and bought more during a newspaper union employee strike. He saw these as temporary troubles, while others were cutting losses. He is now up more than 10-fold. He bought American Express during troubled times, he bought Geico Insurance when it was in trouble too. He looked at the falling share prices in each case, and decided to buy more, because he believed the businesses were sound and their troubles temporary. He was usually right.

Most important aspect of FA... be careful you only buy good businesses at fair prices (our 8-step screen, built on Mr. Buffett's wisdom). If you get this right, you eliminate most worries about cutting losses. Step 2... remember Ben Graham's advice... "Never buy a stock simply because it has risen sharply in price or sell one because it has fallen sharply in price. The opposite advice would be wiser."

Sage

Cool
My portfolio performance this year, based on paper losses, has caused great pain. What saved me from financial disaster was knowledge in Personal Finance.

The first book that a investing newbie should read should be in the area of Personal Finance, not investment or accounting. He should analyze his personal financial situation first before analyzing any companies.

In this regard, fellow forummer Dennis has done us a great favour by posting several useful articles on Personal Finance.

Allocating my savings into categories like investible funds (can be lost 100%) and emergency reserves (used in times of unemployment and unexpected medical fees) prevented me from recklessly averaging down as doing so will force me to dip into the emergency reserves.

Imagine someone who had not done a prior analysis of his personal situation and continued to pump in his savings as stocks become cheaper or simply to bet big to recover earlier losses. So what even if he turns out to be right? Before the stocks recovered, he might be forced to sell out at a loss if he suddenly needs money due to loss of job or health.

An investor should understand his personal finances better than the finances of any company that he invests in.

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I think the need for commonsense is the lesson that was drummed into me again this year. I began investing this year in the Singapore market, with the general idea that this was one way to try and gain exposure to the growth story in China. My first pick in the Singapore market was one highly recommended in these forums viz unifood, which promptly began its precipitous descent soon after I bought it - Murphy's law. While I think I had carried out appropriate due diligence on the stock before purchase, I overrode my commonsense caution in (a) purchasing against my contrarian instincts when the stock was more at a high than a low (and China stocks were the rage), and (b) continuing to average down on the basis of the stock's apparent cheapness on all metrics and latterly the expectation of a cyclical turnaround.

In other words I didn't factor in sufficiently the risks associated with "China" stocks and the requirement to get such stocks at very significantly cheaper prices than one would normally anticipate. And I disregarded commonsense largely entirely in building a more risky Chinese share unifood into a larger than appropriate proportion of my portifolio.

Of course no stock is guaranteed (the key rationale for some degree of diversification) and unifood's news went from bad to worse, and, in light of real concerns I now to have about the probity of management in light of recent developments, I have sold out of unifood at a significant loss. This will pull my portifolio performance this year into the red.

(This is not to state that unifood may not be a great performer over the next year or two, but I will probably not be going along for the ride!)

So - think for yourself - and use commonsense.

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here is the reply to the above posting:

~~~~~~~

Hi Mug Punter,

I walked the same bloody path as you did this year. Not only that, I bought this pig on the high end of the trading range this year and refused to sell when it traded higher. I thought this pig was cheap even if it sold at $0.70. I don't think I was wrong if one is to consider the usual financial metrics for stock analysis.

I have done my fair share of homework. I have read its prospectus, annual reports and followed its announcements diligently. I even picked up accounting knowledge to understand financial reports better.

Despite its solid financial reports, there were indeed warning signs about United Food. I even related them to a close friend and yet I ignored it even when I could have sold this pig at a comfortable profit.

The warning signs were insider selling by multiple substantial shareholders of substantial portions of their shareholdings around the same period.


Although major shareholders can sell for whatever personal reasons, how can multiple shareholders have personal reasons to sell at around the same time? Also, each of them were selling significant portions of their shareholdings. Isn't it too coincidental that all of them need so much money at the same time?

Probably, it was something that these insiders know or going to do that prompted them to sell to suckers like me, for example.

I am still hammering myself for not selling(at a good profit) when I actually saw the warning signs.

Why didn't I sell then? For the same usual reasons that have been repeated throughout human history since time immemorial - overconfidence, greed, ego ...
More thoughts for newbies and others:


(a) Try not to invest in stocks with money you will need for lifestyle purposes. (I do not use my investment money for lifestyle costs at all and expect that to remain the case for the next 10 to 15 years; that way I am unaffected by considerations other than the merits of the particular stocks and markets).

(b) Use commonsense – for instance donâ€t put all your eggs in one basket (I once recall looking at the performance of a terrible fund manager, whoâ€d lost 98% of his clients†funds in the previous 5 years; unbelievably he had more than 80% of the little funds he had left – must have been an estateâ€s funds – tied up in one unproven technology stock). You must diversify to at least some extent. (I like to diversify inter alia through stocks in different countries and industries, some big cap some small cap. Although I have taken a real beating with unifood (down $20K) this year, my overall portfolio performance despite fairly aggressive investment is down around 7% in 2004 - a very poor result, but not a disaster).

© Do your own research – that way, if you know that a company has eg rock solid fundamentals you will not be shaken out of the stock if it unexpectedly falls in price. (I like to average down but must express caution in this regard – it is possible to increase your exposure to what may turn out to be a dud stock). Look at the stock firstly as a business of which you are (an admittedly limited) part owner.

(d) Be consistent and patient – what goes down usually comes up again (Again, that terrible fund manager had actually come at the top of the averages one year. China stocks were flavour of the month earlier, now they are out of favour. Their turn will come again. Hone a strategy that suits you and stick to it. (I am now inclined to an FA approach but using TA to determine exit and entry points, and relative market exposure). Donâ€t sell at the lows unless there is good reason. It often pays to be contrarian – often the best bargains are those stocks that nobody wants, the unloved. Train yourself to enjoy stock and market downturns. As Warren Buffett says, you will pay a high price for a cheery consensus).

(e) Some may disagree but I always like to be part cashed up – downturns are part of the scenery in investing and having cash enables you to take advantage of bargains as they arise.

(f) Most of all, investing should be fun – I donâ€t mean fun in the sense that it is a dilettante exercise, but rather fun in the sense that Warren Buffett (who despite his assertions works very hard) “tap dances to work every day”. (That is not to say that one should get carried away by enthusiasm or despair - investing is best when rational and dispassionate). Enjoy this exciting game of investment. If your results this year were not too good, learn from your mistakes; you may have a bumper year next year.

---------------------------------------------

Hi teachme,

I like your objective self-assessment. Although I have much to learn about investing, the past 8 years have provided some useful experience for allocation of my funds.

Ever since I was legally able to buy stocks I have always invested a substantial portion of my money in the stock market (90% or more) and have always put money into a few stocks (even though I didn't know its called focused investing until recently).

One way I use to manage the allocation of my funds is to classify stocks into various categories:

- Cat 1: stocks which by the nature of their business, balance sheet & operating history give me full confidence in the company (eg. SIA, Robinsons)

- Cat 2: stocks which have strong balance sheets and results but which may not have a sufficiently long operating history or whose scale of operations is relatively small and hence do not warrant full confidence (eg. Aussino, Osim, Grandbanks Yatchs, TeleChoice)

- short term investments with limited downside risks (Osim's call option on Global Active is an example, with a potential gain of 10% in 2 mths)

When I identify an opportunity, I would classify them into one one of the above categories. For each category, I have established arbitrary maximum allocation limits (eg. 30% for Cat 1, 20% for cat 2 & 10% for cat 3).

If I identify a Cat 1 stock, instead of buying 30% at one go, I would buy say 20% and only if the stock price falls by 20% would I purchase the balance 10%.

In addition, if the stock continues to fall after I have acquired 30% and assuming this fall does not change my view of the stock I would not acquire any more shares, for the reason that taking too large a position in any company would constitute a gamble no matter how save I think the investment is.

The basic idea is that you do not want to be wiped out by any single decision and there should always be a limit to how much exposure we have to any company, no matter how save the investment appears or how low its price.


The limits used for the various categories can be modified to suit the individual investor's risk appetite and comfort level, eg. you may set a limit of 20% for Cat 1 stocks and acquire an initial stake of 15% and the balance of 5% if the stock falls substantially. Once the 20% is hit, acquire no more shares of that company.

Personally I would not allocate more than 10% of my portfolio to any one China stock. From fundamental anaylsis these companies appear to be cash-rich with strong growth potential.

But for many of us we have not even seen the products they manufacture. Nor do we understand the Chinese business environment the companies operate in. How then can we claim to have sufficient understanding of the company to justify a significant allocation of funds.

[ My comment: Another good advice! How well do we really understand the business of the company that we want to invest in? ]

In addition, much of these Chinese companies' cash is placed with state-owned banks which are technically insolvent (Golden Agri was a cash rich indonesian company that almost went bust because it deposited with a bank related to its parent co. which went bankrupt).

No doubt a few of the present crop of China stocks will prove to be great investments. But as far as investing in these companies is concerned, for the average S'porean investor, a diversification strategy is probably more sound than focus investing. If we are honest with ourselves, most of us do not really have a sufficient understanding of their business environment & pdts.

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here is a posting by d.o.g

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Investment Lessons Learnt This Past Year (2004)



As we begin a new year, perhaps we can all take a moment to look back at how our own investment skills have been enhanced over the past year. Doubtless there were many surprising developments in our respective portfolios, both pleasant and unpleasant. UOL and CAO are obvious examples of such unexpected developments.

While it's tempting to engage in mine-is-bigger-than-yours comparisons, I think it will be more meaningful for each of us to share what we learnt this past year, in investment terms, rather than relate our respective gains or losses for 2004.

Sharing knowledge enriches us all, while comparing portfolio returns will merely generate envy and resentment. I'm not ashamed of my 2004 returns, but putting up the numbers won't help anyone learn anything. (FWIW I ended 2004 in the black, though my returns were far behind what I got in 2003.)

Back to investment lessons:

==========

1. When fundamentals deteriorate, sell NOW. [ hear! hear!]

I had several holdings whose fundamental operations deteriorated significantly during the past year i.e. the negative events were not one-off in nature. That made their current prices unattractive from an investment viewpoint. Some holdings I sold as soon as I could, the others I held for a while before deciding to sell. In each case, I realized a net loss, but where I hesitated to sell, my eventual loss (in percentage terms) was larger.

So I've learnt, in a rather expensive way, that it's better to sell too early than too late.

2. The market leader is not always a good investment.

One of my holdings was the dominant player in its domestic market. However, the management expressed reluctance at the AGM to either gun for more market share at home, or to expand aggressively overseas. It preferred instead to maintain its market share while waiting for cheap overseas investment opportunities to come along.

Yet it seemed to me that it would only be a matter of time before foreign rivals would muscle in on its home turf. Without overseas operations to either counter-attack its rivals, or cross-subsidize a price war at home, there didn't seem to be much promise in its future.

(Building a castle and defending it with a big moat is all well and good, but without an army out there attacking rivals and capturing other castles, it's inevitable that eventually a big enough invasion force is going to show up, and then either destroy the castle utterly, or force it to surrender.)

Indeed, a foreign challenger had recently come ashore, and the management didn't seem to have any good answers at the AGM as to how they were going to fight it off.

The company was (and still is) well-capitalized, but I felt that its current conservative strategy did not augur for a prosperous long-term future. So I walked away. After factoring in dividends, I had eked out a small gain.

The lesson? Management at a leading company can get too comfortable.

3. AGMs and EGMs are a valuable source of information.

Though material information such as profit forecasts cannot be disclosed, it is possible to obtain an update on operations, especially with regards to seasonal trends and whether the outlook is good or difficult.

It is also the only time when investors will be able to ask the management questions face-to-face. There is a lot of difference between off-the-record answers given on the spot, and answers carefully prepared and sent via email.

In addition, one has the opportunity to listen to other investors who can also put forward questions that one has not thought of. There is no monopoly on investor intelligence; other investors can and do ask good questions. Of course, one must be patient - most of the questions asked are either irrelevant (share price) or redundant (already in the annual report).

The meetings I attended provided me with enough information to change my analysis of the companies. In most cases, I opted to change the level of my holdings, either selling out or buying more.

The bottomline: Take every opportunity given to talk directly to the management.

4. The margin of safety must be sufficient.

I learnt the hard way that the margin of safety can only be sufficient when there are multiple criteria for investment. An excellent profit margin, an efficient management, stupendous growth potential, a good dividend policy and a low price are individually insufficient to justify an investment decision. They should all be present to some degree, but more importantly, strength in one area cannot offset weakness in another.

It is difficult to make a good investment out of paying a high price for growth. Nor can efficient management replace a sound dividend policy, and certainly a low price is no panacea for a weak profit margin. Each investment criterion must in itself be satisfactory, and several should be more than satisfactory, before one can invest with the confidence that one's principal is appropriately protected, with a good potential for satisfactory returns.

I invested in a few holdings this year on the basis that cheap valuations, stable businesses and good dividend policies could offset low profit margins; this proved to be unsound, with each of these companies subsequently running into problems which severely eroded their earnings. Going forward, I no longer think it worthwhile to invest into a company that has a red flag or black mark in one or more investment criteria. There are many companies that do not exhibit these problems; why knowingly buy a flawed company?

(I must however acknowledge that "vulture investment" into distressed securities can be extremely profitable for the expert. But these constitute "special situations" and are not a part of normal investment activity.)

Key point: The margin of safety must be provided by multiple criteria.





Some investment thoughts [from 2004]:

1) When an industry is favourable and you want to invest in that industry, go for the stock that are market darlings/market leaders and avoid obscure stocks. The reason being since you are expecting favaurable news from that industry, it make sense to hold market darlings as good news will certainly move the hot stocks more than the obscure ones. Similarly, provided that valuations aren't too expensive, hot stocks may not fall as much as obscure stocks when bad news hit.

2) Whenever there is an insider, especially if it is the management, selling significant number of stocks, you should follow suit.

3) Set a stop loss limit and a time stop limit, whenever possible. Use stop loss limit to think over whether to carry on the investment. Use stop time limit to either set a fixed time for losing stocks to rise again, if you can't bear to sell, and if the losing stocks hasn't moved in that specific time, sell.

4) Don't diversify for the sake of diversification. If the added stock isn't at least as good as existing stock holdings, it may be better to add on to current stock holdings. Likewise, before adding a newly discovered stock, see whether if the new stock is better than your existing ones.

5) In the stock market, sometimes if you encounter something that is too good to be true, attack it from all angles to see whether it is really too good to be true. If it can withstand the attacks, quickly acquire significant portions of the stock.

6) If somebody offer a takeover offer for a value stock, it may be better to reject the offer and wait for the offer to end. Normally if the company is not delisted in the end, the share price often is higher than the takeover offer.

7) And lastly, due to personal impatience, it may be better to wait for a catalyst before buying to shorten the waiting time.


Excellent principle to base on when sharing investment lessons. It is most frustrating to learn that other people are blessed with the Midas touch (everything they buy turns to gold) while I am cursed with the Midget touch (everything I buy shrinks in size).

However, I am not afraid to tell everyone that I should be crowned Emperor Midget for FY2004 as simple psychology tells me that this is the best consolation that I can offer to those who lost money during this period. (When someone is down, a good way to console him is to tell him you are worse off than him).

Thank you d.o.g, LynchBuffetFisherGraham and many others for your valuable inputs.

When this thread was started, it had the intention of helping newbies to avoid getting hurt.

I think this is not possible. Investment is very much psychological. No books can tell you what investment styles suit your personality. You can read as much as you can, ask as many questions as you can from the gurus but since everyone's personality and ability differs, what they practise may not be suitable for you. Basically, a newbie will have to learn from the school of hard knocks to discover himself and fine-tune the style that fits him.

I guess it is best for the investing newbie to start young and start small. Sooner or later, he is going to lose $$$. That's when he learns what is suitable for himself and create an investment screening process of his own.

Excellent principle to base on when sharing investment lessons. It is most frustrating to learn that other people are blessed with the Midas touch (everything they buy turns to gold) while I am cursed with the Midget touch (everything I buy shrinks in size).

However, I am not afraid to tell everyone that I should be crowned Emperor Midget for FY2004 as simple psychology tells me that this is the best consolation that I can offer to those who lost money during this period. (When someone is down, a good way to console him is to tell him you are worse off than him).

Thank you d.o.g, LynchBuffetFisherGraham and many others for your valuable inputs.

When this thread was started, it had the intention of helping newbies to avoid getting hurt.

I think this is not possible. Investment is very much psychological. No books can tell you what investment styles suit your personality. You can read as much as you can, ask as many questions as you can from the gurus but since everyone's personality and ability differs, what they practise may not be suitable for you. Basically, a newbie will have to learn from the school of hard knocks to discover himself and fine-tune the style that fits him.

I guess it is best for the investing newbie to start young and start small. Sooner or later, he is going to lose $$$. That's when he learns what is suitable for himself and create an investment screening process of his own.

IMHO, analysis-wise, there are a few ways to score a multi-bagger:

===

1. Fads. The company goes from undervalued to overvalued e.g. PE rises from 5 to 30. 6-bagger even without any change in operations. This can happen very rapidly and disappear equally rapidly. The current fad seems to be water. A couple of years back it was anything remotely Chinese. Right now in Hong Kong it seems to be casinos. Example fad stock: Hyflux.

2. Rapid growth. The company grows quickly. With good management and favorable industry conditions, this is quite possible. A sustained growth rate of 20% per year for 10 years would give a 5-bagger without changing PE. Example rapid growth stock: Venture.

3. Cyclical industries. Exemplified by steel, commodities, shipping, and semiconductors. All these are highly volatile, with the result that when times are bad, they are really bad, and when times are good, they are really good. The valuations tend to swing wildly also, with the result that it's possible to pick up sound companies cheaply when times are tough, and then unload them expensively when conditions are rosy and valuations are high. Example cyclical industry stock: Noble.

4. Turnaround stories. Companies that are on the brink of disaster often have either negative earnings or sky-high PEs due to miniscule earnings. Nobody wants to touch them with a ten-foot pole. But when things get straightened out, everybody wants back in. Example turnaround story: can't think of one, though Lindeteves-Jacoberg might be a future candidate if their current restructuring works out.

5. Asset plays. Companies undervalue their assets on their balance sheets for years, and nobody takes any notice. One day, a savvy corporate raider (like a certain Mr Oei) shows up and pushes for restructuring to unlock value. Example asset play: NatSteel.

Side notes:

I'd place NOL in the cyclical category, because NOL's woes weren't really solved by restructuring, but by an upturn in freight rates. To me, a turnaround story is one where the rest of the industry - except this particular company - is doing OK. Ford, for example, was a turnaround story at least twice, being saved by blockbuster products (Model A and Taurus) at a time when other automakers were doing fine and eating Ford's lunch.

I also placed Hyflux in the "fad" category because valuations have grown much faster than earnings. Certainly Hyflux could turn out to be a rapid growth story, but right now I think it may be more fad than fabulous.

===

There are probably more methods, but that's all that comes to mind for now. What should be clear is that the 5 methods already described call for different types of analytical skills.

#1 and #3 are clearly dependent on market sentiment. Those who understand human psychology can probably put these methods to good advantage, getting in and out of the market as favorites change.

#2 is the "default" stock type; it typifies the company that most investors try to look for - a well-managed company in a growing industry.

#4 and #5 are "special situations" - they don't occur all the time, but when they do they can be very profitable. Much patience is needed, both to study the usually complicated situation and then come to a conclusion, as well as to wait for the expected developments to occur. Once they occur, though, there's little or no further profit to be had, and the investor has to exit and find a new target.

I admit I am terrible at #1 and #3. For #1, it makes me uncomfortable to gamble on being able to buy high and sell higher - the greater fool theory. For #3, I have very little knowledge of any specific industry, which means I have little sense of when the industry is going to go up or down. So I'm always afraid that I'm investing at the peak.

#4 requires an intimate understanding of both the business and the management's ability - not easy if you're not familiar with that industry. #5 looks like easy money - study the balance sheet, run the numbers, and wait. The problem: I'm too impatient (as others have noted *grin*).

That leaves me with #2 - trying to find a rapidly growing company. The problem: good companies in a sunrise industry are seldom sold at a reasonable price. So I guess that given my reluctance to overpay for quality, I won't be seeing too many multi-baggers in my lifetime. But that won't stop me from trying.

One has to balance Fisher: "buy, the price will look cheap in a few years" - against Graham: "buy cheap now, so that you won't lose much later". Fisher liked to compound a few holdings manyfold over several years. Graham preferred to compound many holdings 30-50% each, over 1-2 year periods per security.

I suppose in the end the decision will turn on how well you know/trust the company. If you can confidently predict where the company will be in several years, or fully believe the management, and work backwards from there, then an apparently high price today in terms of PE, P/NTA etc. would still be acceptable.

But if you do not have a deep understanding/trust in the company, then it would be prudent to apply a discount i.e. demand a lower relative valuation now so that a loss or dimunition of principal is unlikely even if your projections of the future are off. I prefer to err on the side of caution, so almost all my shareholdings are in low-PE type companies.

f. I prefer to err on the side of caution, so almost all my shareholdings are in low-PE type companies.


found an update on this posting...

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Here's one more: beware companies in cyclical industries. If you don't know when to get out, don't go in.

The rise and fall of HG Metal should be instructive. The full-year results show a stunning reversal of fortunes, from a $10.7m profit in 1H05 to a $5.1m loss in 2H05.

Why? Simple - the steelmaking industry is now in an overcapacity situation. In the past couple of years, steelmakers in China have been in a building frenzy. Result: the Chinese have basically finished their import-substitution for low- to mid-grade steel, and are now exporting their output. The result? Plunging steel prices. High-grade steel still retains a price premium, but for how long, nobody knows. Eventually the Chinese will also figure out how to make high-grade steel, and then it's another race to the bottom. I wonder if even Mittal Steel can deal with this, short of buying a steelmaker in China itself.

Anyone buying into HG Metal soon after IPO would have had a real roller-coaster ride. Such is the life of companies in commodities. It should be clear that investors in this type of companies would need, how should we say, nerves of steel (haha).

What lessons can we learn that are transferable i.e. not steel-related? Look at industries that use vast amounts of capital, have little/no pricing power and have a long lead time:

shipbuilding
property
oil refining
oil/gas exploration and production
industrial chemicals
railroads

and so on. Be very careful and study the industry properly before putting money in. Otherwise, if you enter at the wrong time, it's hard to get out with your capital intact. I'd add power generation/transmission to the list as well, but it's usually regulated so the cycle is largely invisible to investors.

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08-07-2011, 05:41 PM.
Post: #2
RE: Old Investing Advice Gems from Wallstraits days
Thanks Moolah!

It sure brings back fond memories of Wallstraits days... I was more a reader then. Never commenting or posting. Just absorbing. It seems every cycle, history will repeat itself.

Somethings have to be learnt personally and the hard way. Its just the way it is. We are all different individuals.

By the way, I miss Lark! She must be enjoying her days of leisure now.
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08-07-2011, 08:29 PM. (This post was last modified: 08-07-2011, 11:22 PM by hyom.)
Post: #3
RE: Old Investing Advice Gems from Wallstraits days
Hi Moolah,

WallStraits was the first investment forum that I stumbled onto in late 2003 and I participated quite actively then before my babies arrived. This thread brought back deep memories of myself during my newbie days almost 8 years ago. This is because the thread "Investment lessons learnt this year and advice for newbies" was started by a newbie who suffered stomach-churning losses in his first year of investment despite working very hard passionately at it. That newbie was an engineer with no formal financial training but he read as many investment books as he could find in the library. Not a very intelligent man because he has met several who are far smarter in his field of work. Fortunately, intelligence is not the only determining factor in investment survival. Temperament is just as important. That newbie is me (I used another nick at that time). I feel flattered that someone would repost what I wrote 6 years ago as a newbie.

I still remember fondly how d.o.g would respond to newbies' (includes me of course) questions free of charge when he had more time on his hands then before he joined the investment business. Old-timers then include yeowiki who is still around and Sage who has disappeared. Prominent forummers today like Musizwhiz and kazukirai have yet to join WallStraits.

Moolah, could you do me a favor by zipping up the thread "Investment lessons learnt this year and advice for newbies" and email to me at help.your.own.money@gmail.com? I would like to re-read what I wrote several years ago as a newbie plus the comments and wisdom contained in the replies of fellow forummers.

Thank you very much. I would be most grateful.
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08-07-2011, 11:11 PM. (This post was last modified: 08-07-2011, 11:18 PM by Musicwhiz.)
Post: #4
RE: Old Investing Advice Gems from Wallstraits days
(08-07-2011, 08:29 PM)hyom Wrote: Moolah, could you do me a favor by zipping up the thread "Investment lessons learnt this year and advice for newbies" and email to me at help.your.own.money@gmail.com? I would like to re-read what I wrote several years ago as a newbie plus the comments and wisdom contained in the replies of fellow forummers.

Wah liew Moolah, this is really classic stuff from the old Wallstraits, thanks man!

Back in 2004 I was still a freshman in investing and was pursuing my MBA then in NUS. I remember thinking to myself that I should read up more on investment as my dad had just lose his job then due to the 2003 recession (SARS), and money became very tight. It emphasized to me the importance of investing properly because my dad never believed in it. He is still holding on to many deadwood stocks which are so deeply underwater that he feels nothing anymore.

It was only in 2004 Dec that I bought my first share - Suntec REIT, and what followed was a 2-year period of discovery where I tried many things such as contra, trading and IPOs. All flopped but because of the bull market I was able to somehow extricate myself, but was still slightly negative overall. Then in 2007 I read up on value investing and Warren Buffett, and also discovered Wallstraits, and the rest was history (cliched yeah I know). Even since then, I have been practising value investing and thinking like a business owner and also attended many AGMs/EGMs to speak to Management. It is a tedious but fun process which is very rewarding not just intellectually, but also for the pocket.

I do recall that I only started investing with $5,000 using me and my wife's money. That was nearly 6.5 years ago. Now I am surprised that my portfolio is worth about $200,000 and helping me to generate about $10,000 in annual dividends. I have Wallstraits to thank as well as generous forumers like d.o.g., dydx and (yes) Dennis Ng too (for his personal finance advice like do NOT buy a car). It has been a long and fruitful journey for me and it's still continuing! Big Grin

Would appreciate if you could also zip up any gems which you copied/pasted from the old forum and send it to me at musicwhiz55@gmail.com, thanks! Smile
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08-07-2011, 11:26 PM.
Post: #5
RE: Old Investing Advice Gems from Wallstraits days
hyom Wrote:I still remember fondly how d.o.g would respond to newbies' (includes me of course) questions free of charge when he had more time on his hands then before he joined the investment business.

Indeed. Reading my old posts, I seem a lot friendlier back then. But at that time I was an employee who could "shut down" when I left the office. Now, as an entrepreneur (albeit a very small one) I never really stop working. I am sure forum members who run their own businesses can empathise with this.

Also, some of the posts (especially the long ones) took hours to craft. As a (small) business owner, I no longer have that luxury of time to devote to such writing. I still enjoy writing, but these days it's mostly for my quarterly newsletter.

My old posts were more cautious and neutral. My recent posts are more skeptical. I think the change was shaped by my experience in the fund I joined when I first entered the industry. We found that some of the Chinese companies that were so attractive at first sight were in fact dubious and very risky. I still remember writing up one company proposing to my boss that we buy it (go long), and after we spoke to its unlisted competitor we had a 180-degree change of mind and wanted to go short instead! Such are the promises and perils of investing in Chinese companies.

I am still active on the forum, partly out of interest and partly out of gratitude. My first client was a Wallstraits member. Without his support, I would not have had the courage to strike out on my own. So in a way I feel obliged to give back to Wallstraits - and its spiritual successor ValueBuddies.

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08-07-2011, 11:36 PM. (This post was last modified: 09-07-2011, 12:34 AM by hyom.)
Post: #6
RE: Old Investing Advice Gems from Wallstraits days
Quote:I have Wallstraits to thank as well as generous forumers like d.o.g., dydx and (yes) Dennis Ng too (for his personal finance advice like do NOT buy a car).

Dennis Ng was the top poster then in terms of quantity. He provided good financial advice free of charge. Unfortunately, he left the forum after quarrels with some forummers. dydx has not changed much. He still provides good stock picks as in the past.
d.o.g, was and is still the best in terms of generosity of sharing his knowledge and taking the time to compose long, quality posts.

Quote:My old posts were more cautious and neutral. My recent posts are more skeptical. I think the change was shaped by my experience in the fund I joined when I first entered the industry.

Actually, your posts had always been skeptical. I remembered in the paid WallStraits forum when you pulled no punches and demolished Curtis's portfolio. It was like seeing two Kungfu Masters trained in the same school (Graham and Dodd) in action. A great learning lesson for us but I thought he must have felt quite humiliated. After all, he called himself Sage and someone made a fool out of a Sage. I remembered some forummers who probably copied Curtis's portfolio did not take too kindly to your negative comments when you indirectly talked down their portfolio by criticizing Curtis's.

Quote:I am still active on the forum, partly out of interest and partly out of gratitude. My first client was a Wallstraits member. Without his support, I would not have had the courage to strike out on my own. So in a way I feel obliged to give back to Wallstraits - and its spiritual successor ValueBuddies.

This is a virtuous cycle where acts of kindness without thoughts of rewards ended up receiving substantial rewards which in turn prompts further acts of kindness. Meanwhile, I am glad that once again, I get to free-ride on another Wallstraits member. The forummers here can continue to look forward to your postings.

Quote:It was only in 2004 Dec that I bought my first share - Suntec REIT, and what followed was a 2-year period of discovery where I tried many things such as contra, trading and IPOs. All flopped but because of the bull market I was able to somehow extricate myself, but was still slightly negative overall. Then in 2007 I read up on value investing and Warren Buffett, and also discovered Wallstraits, and the rest was history (cliched yeah I know).

Musicwhiz, you did much better than me. At least, you made money in your first year of contact with value investing. I lost $$$ in my first year in a year when STI rose 17%. Ouch! It is already painful enough to lose money. To lose money in a year when everyone else seem to be making tons of it makes me want to vomit. The big loss was caused by a concentrated position that arose from numerous averaging-down in a Chinese stock. Ouch! Forummers can read the investment lesson learnt in the first post of this thread.
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09-07-2011, 12:39 AM.
Post: #7
RE: Old Investing Advice Gems from Wallstraits days
Someone did a compilation of d.o.g.'s posts and it was available for download in Afralug (correct spelling?) forum. I have the 2008 and 2009 doc files as per attached below,

.doc   d.o.g. 2008 final.doc (Size: 119.5 KB / Downloads: 231)
.doc   d.o.g. 2009 final.doc (Size: 277.5 KB / Downloads: 241)

If it's already available somewhere else in this forum or if d.o.g. objects, I'll remove it tomorrow morning when I check the forum again (Mods can also remove it earlier if they are around).
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09-07-2011, 12:58 AM.
Post: #8
RE: Old Investing Advice Gems from Wallstraits days
(08-07-2011, 11:36 PM)hyom Wrote: Musicwhiz, you did much better than me. At least, you made money in your first year of contact with value investing. I lost $$$ in my first year in a year when STI rose 17%. Ouch! It is already painful enough to lose money. To lose money in a year when everyone else seem to be making tons of it makes me want to vomit. The big loss was caused by a concentrated position that arose from numerous averaging-down in a Chinese stock. Ouch! Forummers can read the investment lesson learnt in the first post of this thread.

Nah, I don't attribute that to skill; more like blind luck seriously! And I did not actually "make money" in my first year of value investing. In fact I was caught by the bear market of 2008 and at one point in time my portfolio was down by 60% (it is still documented on my blog - see Oct 2008 portfolio review). It was because I held on to the principles and purchased more shares of (then) Swiber, Ezra, Boustead and Tat Hong that I managed to eke out a gain when the market recovered in May 2009. Then again, it took me another year and d.o.g.'s advice to realize that my original logic was flawed (I owned three companies at the time with poor Balance Sheets - Ezra, China Fishery and Tat Hong; all have since been divested). Thus, it would be another 6 months after that that I began to learn to focus on not just business models, margins and growth; but also balance sheet strength, FCF generation and Management quality and candour (through AGM-attendance). My last "mistake" was divested about 4 months back when I sold off Tat Hong.

So it's been a continuous learning journey and my value investing journey was far from smooth; neither was it as profitable as I would have liked it to be. Tongue But along the way I learnt more about investing (and also myself and my temperament); and also adopted an approach and style which uniquely suits me. Big Grin
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09-07-2011, 09:15 AM. (This post was last modified: 09-07-2011, 09:49 AM by Moolah.)
Post: #9
RE: Old Investing Advice Gems from Wallstraits days
Folks I am overwhelmed with the response to this simple 'copy and paste' thread. Blush

hyom & musicwhiz: I deeply regret that I only have a few more postings to share. I will post it later.

d.o.g: Your postings truly inspires and bless your kind soul for the kindness in sharing.

Kopikat: Thanks for the two files. Nice! Big Grin

Jared Seah: I too am a reader most of the time cos I am a Msian and Sporean shares are beyond me. Dodgy





The last few....

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Hi Teachme,

thanx for your compliments. After experiencing first hand how companies can rise like a star and fall thereafter and also witnessing the ups and downs of owners/management I realised that the financial principles are the same whether for corporates or individuals.

The purpose of Financial Planning is to ensure that one will always come out ok no matter what different scenarios pan out.

One of the things I learned is never, never put all your eggs in one basket. I've seen too many people ignoring this and ultimately they pay for this financial mistake. Even Warren Buffett who practise "focus investing" believe in investing into at least 5 to 15 companies. Look at Bershire Hathaway, it has investments in so many companies as well. Whoever say that Warren Buffett ask people to put all their eggs in one basket is not telling you the truth.

I always share: not everyone should invest.

1. you should only start investing if you have built up "just-in-case" fund which covers at least 6 months of your expeneses.

2. you should only think of investing yourself directly if you believe you have acquired "investment licence" (ie investment knowledge) just as you shouldn't drive without a driving licence.


I've seen too many people make the same financial mistakes again and again. I hope some can avoid some of these mistakes by just reading what I share.

Cheers!

Dennis Ng

------------------------------------------------

1) Shorter Value Chain Has Lesser Uncertainity

2004 is a year when we witnessed the rise in price of almost all raw materials. For a company operating just within part of the value chain is unlikely to pass the price hike to its downstream customer, especially if its competitive advantage is built on "low price" alone. An example is Agva who provides low-cost manufacturing outsourcing service to European customer, but failed when oil price hit new height.

Additionally, even when the customer is the end consumer does not imply company can raise the price easily. A consumer product with long supply/value chain will be suffered as well. An example would be Unifood -- when soybean price increases, both pig feed and soy isolate prices increase -- and Unifood can't increase the product price as it faces intense competition in the consumer market. So the number of factors - soybean price, shortage of pigs - that coud affect Unifood business are numerous which make prediction on future performance less certain.


I recalled Buffett's wisdom:
- consumer monopoly/high ROA businesses that can pass price hike to customer during prolonged inflationary environment
- simple business with high certainity

2) All risks must be priced - China Business is facing great Challenge

China businesses are facing uphill tasks today -- rises in raw material price, industry over-investment and hence over supply, price war, industry consolidation is taking place at faster rate, to gain market share for economic-of-scale and increase entry barrier, foreign competition after WTO, establish good corporate governance, to implement Business Process Re-engineering for better efficiency -- and all these have to be achieved within cash-flow capability, and meeting ever-increasing expectation from the capital market.

Using Celestial as an example -- soybean industry will be going through consolidation, perhaps eventually there will be only a handful of national companies and dozen of regional companies -- and the industry is still at its early stage. Who can predict with high certainity that which incumbent will become the eventual winner?

The consolidation journey could be a bumpy ride for investor. Intensified competition, eroded margin, huge capex for expansion, diluted ownership with issuing of new share, all these could be at the expense of per-share earning, and who can predict with high certainity on future per-share cashflow?

I must admit that when I made initial purchase of Celestial at ~34c has not priced in all these considerations. That was due to my ignorance then on the soybean industry as a whole. Today, if I am to make similer investment analysis, in addition to the very four same reasons that Celestial posses (strong financials, wide distribution network, Sun Moon Star brand, and capacity is soon-to-be-expanded 3x with past years earning re-invested), I will demand a larger safety margin to price in industry consolidation risk, not measured by just the share price but a clearer visibility of Celestial's future position in the industry as well.

----------------------------------------------------

Hi,

for those who missed this great article (not written by me)....here it is again. The Key To Winning is how we manage and control our losses".
Cheers!

Dennis Ng

Winning Investment Strategy--Don't lose money!
by Jeffrey Saut

“What determines your stock market performance is not how you manage your winners, but how you manage your losers.”

And so I wrote way back in 1974. Indeed, everybody knows how to win. Few know how to lose. Yet the secret to making money in the market is knowing how to lose. How to control your losses.

Listen to the pros:


“Iâ€m always thinking about losing money as opposed to making money. Donâ€t focus on making money; focus on protecting what you have.” - Paul Tudor Jones

“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” - William Oâ€Neil

“One investorâ€s two rules of investing:
Never lose money.
Never forget rule No. 1.” - Warren Buffet


All of these pros have different market philosophies. They have contradictory strategies for making money. Some are traders; some are value players; some are growth-stock advocates; others are emerging-growth seekers; etc., etc., etc. But their message is clear - “Learning how not to lose money is more important than learning how to make money!” And learning how not to lose money requires you to evaluate risk and have some sort of risk management discipline.

This “risk management” concept has been our mantra ever since turning prematurely bearish on equities in September 1999 when a Dow Theory “sell signal” was registered. Even after turning more constructive on stocks in September 2001, where we suggested that the major indexes were likely to remain “range bound” for a lot longer than most participants envisioned, we didnâ€t abandon our “risk management” mantra. These reasons can be seen in the following table, where portfolio manager A employs risk management techniques to avoid the big losses and manager B does not. While the “time bite” used in this chart is a relatively short eight years, over a 20- to 30-year timeframe the variance between portfolio A and portfolio B tends to widen in favor of portfolio A, especially if one believes (as we do) that the range-bound markets are likely to resemble the 1976 to 1982 era. Recall that back then the D-J Industrial Average (DJIA) was “trapped” between roughly 800 and 1000, punctuated by numerous 25%-to-30% mini-bull and mini-bear markets.

• Returns for the S&P 500 were used for the years 1994-1999. For 2000 & 2001, we used single-digit losses due to their “risk-averse” approach (actual losses in 2000 and 2001 were 10.1% and 13%, respectively.

• *Since they were more aggressive on the upside, they outperformed during up years. Yet since they did not employ a risk management strategy, they underperformed during down years.

Forgive us for once again revisiting the “risk management” concept so often chronicled in these missives over the past 4½ years, but in light of the difficult market environment experienced year-to-date we thought it appropriate. This concept has become increasingly important over the last few weeks given the burgeoning technical reversals visible in many of the charts. For example, since February the DJIA has traced out a series of declining tops (i.e., each rally peak has been below the previous one). This implies that each subsequent rally has been weaker than the previous one. Moreover, during this time the DJIA and D-J Transportation Average (DJTA) have experienced a rare double upside non-confirmation (read: negative). Consequently, if the senior index breaks below its recent closing low of 10048.23, confirmed by a similar breakdown by the DJTA below its recent closing low (2750.80), a Dow Theory “bear signal” will be rendered.

Additionally, an old and long forgotten “Hindenburg Omen” is currently afoot. To wit, when the number of new daily highs, and new daily lows, on the New York Stock Exchange exceed 2.4% of the daily issues traded (like now), and the S&P 500â€s 10-week moving average is rising (like now), and the McClellan Oscillator is negative (currently minus 277), the market is POTENTIALLY in danger of a significant decline. Further, the S&P 500â€s largest sector weighting, namely financials, has experienced its own mini-crash as seen in the NYSE Financial Index (NYK/6431.75), which currently resides below its 50-day moving average (DMA) at 6833 and its 200-DMA (6440). Similarly, many of the other major sector indices have had key downside reversals and consequently reside below their respective 50- and 200-DMAs (read: negative). All of this only reinforces our February statement that, “the highs for most of the equity markets are likely â€in†for the year.” Yet, not only the equity and bond markets appear to be in trouble.

Indeed, the markets have been extremely democratic in that EVERYTHING, save housing, currently seems to be under liquidation. Regrettably, this also includes many of our tangible asset stocks (aka - stuff stocks) that have served us so well over the past two years. We attribute this action to a large degree to the ubiquitous “carry trade.” This year we have repeatedly written about the carry-trade (the process of borrowing on the short end of the yield curve to invest further out on it, often on leverage) and our concern about how it will be unwound. Our belief is that the crisis level of interest rates propagated by the Federal Reserve Board combined with their promise to hold rates at low levels was an invitation to speculate in the carry-trade. The liquidity thus created seems to have spilled over into all markets: stocks, bonds, commodities, and real estate. The central bankâ€s promise to hold rates down was in our opinion an open door to moral hazard.

Apparently, the belief of the Federal Reserve Board is that this policy was necessary to offset the effects of the recent market bubble and prevent its collapse from snowballing into a much worse economic decline. So far they have succeeded. The economic damage of the bubbleâ€s collapse has been contained. Our concern is whether another bubble has been created in the process.

We think that is also the concern of the Fed and that is why they are in the process of trying to talk markets down from their carry-trade induced high. They have changed the language about interest rates in the reports from their monthly meeting from “the Committee believes that policy accommodation can be maintained for a considerable period” to “pledge to be patient before raising rates” and then last week to “measured rate increases.” The experts on Wall Street got the message. The Federal Reserve is preparing to raise rates; you had better start unwinding the carry-trade if you donâ€t want to get destroyed. Destroyed is not hyperbole; the last time the carry-trade was unwound in 1994 we had the worst bear market in bonds since 1927 and speculators like Orange County filed for bankruptcy.

So without raising the Fed Funds rate a single basis point, the air is being squeezed out of the carry-trade and with it all the associated markets. In many ways it resembles a short squeeze. People putting on the carry-trade are in fact “shorting” short-duration assets (treasury bills for example). Fear that the cost of that “short” will go up is causing them to cover that short. This short is matched (often with heavy leverage) with other higher yield assets that must simultaneously be sold. Thus, the short squeeze in the short-end of the curve creates selling pressure and down trending markets for longer duration assets (read: stocks and bonds). Again, the Federal Reserve is doing all this heavy lifting without raising interest rates.

Markets reacting negatively to a rising cost of capital is not news. What is different is the transmission mechanism. Back in the Jurassic age of markets 30 years ago the market cycle and the economic cycle were linked by inventory cycles, autos and housing. The United States was a service- and manufacturing-based economy and the competition for liquidity came from the real economy. The heavy breathing and hot air generated by market commentators was over things like loan demand statistics. When was the last time you heard a wag on CNBC talk about that?

Today we live in a finance-based economy. Banks and non-bank financial companies dominate our economy. Many of the manufacturing companies of thirty years ago are in the finance business. In this environment, manufacturing productivity matters less than capital cost per unit of debt. As a result, economists that used to dissect business statistics have now become linguists that attempt to divine the secret meaning of Fed-speak. They also develop second order indicators that they believe will drive policy. The statistic du jour is employment. Recent market weakness is the result of the developing consensus that interest rates may start to rise, possibly as soon as next month.

As bad as the recent declines have been, we are concerned that it could get worse. As noted, the damage done to date was merely from jawboning. Maybe the markets have fully discounted a rise in rates, but it is always possible that the event will lead to more unwinding. The problem we may face is that carry-trades are “reflexive.” That is, putting them on or taking them off impacts their profitability because it drives the price of the long side of the trade. The spike down in long-term rates early this year is an example of how this process works. We must be alert to the possibility that the reverse can happen when people unwind the carry-trade.

A second difference exists in the economy today from the economy when Alan Greenspan was Gerald Fordâ€s head of the Council of Economic advisors (remember the Whip Inflation Now campaign?). Back in 1974 the upward movement of interest rates was pro-cyclical with profit margins. When business was good, profit margins were good. Raising rates were used to slow the economy (principally autos and housing) and thereby bring down inflation. Profit margins would fall as the economy weakened. In a finance-based economy profit margins rise as interest rates fall because so much of the economy is tied to “spread income” and the generation of financial assets. If and when rates rise the current high level of corporate margins are likely to suffer. With them go profits and corporate spending. So in addition to the negative effect rising rates will have on the historically high P/E levels, they may double their impact by driving down profit margins at the same time.

We donâ€t think we are smarter than the people at the Federal Reserve Bank. We believe they know and understand everything written in this essay. As a result, we think they have used their “bully pulpit” to scare people into unwinding some of their carry-trades. While they are probably prepared to raise interest rates, they are acutely aware that doing so may do more than squeeze a little air out of the markets. We would not be surprised to see little or no rate increase. The pain of returning to a more normal relationship between interest rates and inflation in a heavily leveraged economy could be a perilous one.

Recently, our favored assets class, tangibles, has been squeezed along with all others. We are not surprised. Manifestly, we have been concerned all year about a “backup” in interest rates, a sharp counter-trend rally in the dollar, and a subsequent unwinding of the carry-trade, which is why we recommended hedging most of our investments in “stuff stocks” (energy, base metals, precious metals, timber, etc.). In March we even commented on the fact that gold and other commodities such as timber and oil were trading up and down with the NASDAQ. We noted that this was unusual and speculated that all assets appeared to be caught up in the carry-trade. At some point we expect they will uncouple and we will then discover which asset class is in a secular bull market. Our sense remains that it will be in tangible assets.

------------------------------------------

Hi teachme, perhaps you should consider instead of bothering other people winning result, but focus more on how to sharpen your skills on picking a winner.

Instead of blaming averaging down or not setting a loss/profit limit, try to analyse the mistake and learn a lesson from every mistake made.

Doing so will help you to improve and do better in future. For example the Unifood, it can be due to you just focus on the its financials but ignore other business factors and the risk of investing china.

Are you averaging down blindly by ignoring the facts and beyond your budget? Setting a loss/profit limit will it sell away a winner?

Yes, everyone will lose soon or later, but it is the attitude towards it that make a difference.
----------------------------
Hi Hongonn,

Thanks for your reply. This is exactly the reason why I highlighted the importance of the role psychology plays in investment.

An investor needs to understand himself and be aware of his personal psychological weaknesses. Every now and then, investors will be hit by the same feelings of greed, hope and fear. Even experienced investors can fall prey to such moments of weaknesses, let alone newbies.

A newbie can be well-armed with all the investment principles learnt from gurus and books but the moment he puts his hard-earned money into the market, his psychology changes and objectivity fades.

We need to be aware of our psychological failings and the courage to admit them. That is how we have a better chance of avoiding them in future.

I hope that by using myself as an example, even if it will look bad on me, I can help newbies to be aware of the dangers, of the need to be aware and wary of themselves.

One bloodied investor is enough. I would welcome other bloodied investors to share the experiences of the mindfields that they have stepped on to the newbies who have yet to set foot on the killing fields. (Of course, if you managed to survive, you will reach the gold mine eventually)


Some of my lessons this year. Let's celebrate and understand the winning trades too. Fortunately, not all the bloody lessons were learnt the painful way of suffering capital loss as I do practice maintaining a "virtual portfolio".

(1) Don't believe in hype:
Thought that applying Lynch's "able to see in the shops" fitted to this particular counter. Media blitz with celebrities endorsing its products. Learnt that even several colleagues take its products and there were "little/no" side effects. Spoke to counter staff who revealed how fast moving products were. But easy come easy go - no other similar products was developed to capitalize on its initial product penetration. With A&P spending high, the bottomline naturally took a hit. Coy has since branched into a totally different business line, opening several hip joints all over the island. Hip or not, the stomach churned as the price slide fast south as earnings tanked. Hindsight also suggested that coy was primed for the IPO sale.

(2) Raw materials matter:
Not steel but oil in my case. Financial screenings produced a gem of a Chinese plastic packaging coy. Despite its short listing history, its financials were compelling. But failed to see that oil prices affected resin prices, a key raw material for a plastic packaging coy. Industry consolidation back home didn't help either. When a fund manager who took a large position started selling out, it fell precipitously. Bottomline continued to be hit in recent results. Other than taking into account price of raw materials, need also to take into account that such "back end" manufacturers do not have brand stickiness and thus, cannot pass much price increases to purchasers.

On raw materials, d.o.g. brought up steel and HL Metal. On this, POSCO (Korean coy but ADR) has recently attracted my attention due to its solid numbers. But this is just numbers. On the market competition angle, it is noteworthy that Chinese manufacturers have been flooding the steel market with their cheap knockoffs. Unsure if Posco manufactures high end steel though.

(3) Like attending AGMs, the scuttlebutt technique is priceless.
(a) Earlier in the year, made my way around the island visiting clinics of this company. Learnt that waiting list for certain treatment/services was as long as two months. Clearly demand was high. Was also in HK and took the opportunity to try the service of the stores. Found staff to be knowledgeable and were good at cross selling after ascertaining the nature of one's purchase. The coy has since reported a stirling set of results in 05.

(b) Visited this particular coy on a wet Saturday morning and witnessed its engineers hard at work. Coy had also a clearly swelling order book. Was also one of the last cyclical ship industry related play which did not move yet, perhaps due to its small capitalisation and hence, under the radar of most institutional and professional analysts.

But in terms of profit margin, whilst it was deteriorating over several years as cost increased, it remained in young teens. Reason offered at visit was not convincing - as coy grew larger, was not able to keep a tight lid of things such as staff failing to turn off the lights and air conditioning. Management also had little stake in the coy. Due to the two minuses, coy was passed over.

The lesson offered here: An alternative to what d.o.g. suggested in an earlier post regarding the need to have margin of safety in all aspects. I suggest that it may be very demanding to find a coy with a margin of safety in entire criteria set out. My sense is in investing, at most times, it could well be a balance of probabilities. At times, it may be necessary to weigh the pros and cons and see if one can live with the cons/pros outweight the cons. Of course, I dare offer the foregoing proposition because the counter has since jumped up appx 20% since my visit. But in the long run, the suggestion to have a margin of safety in all aspects under consideration may well be vindicated.

© Another one which turned up on the quant screens due to its financials. Coy's a F&B manufacturer and distributes its products in emerging markets. In fact, one of its flagship products is a clear market leader in a country which is much larger than our little red dot.

Lesson here: Don't simply buy based on numbers (maybe unless you are Ben Graham loading up on a big basket of them.) - Margin of safety offered by numbers aren't everything. A stock is partial ownership of a business. Hence it is important to understand the business and its operating environment. Failed to adequately price in emerging market risks and it has since issued earnings alert due to tax slapped on by foreign authorities. A 20% drop in price ensured literally overnight and left one staring blankly at a gaping paper loss.

(4) Looking at your backyard
If you have no other better ideas and yet have the urge/cash to invest, why not revisit the coys in your portfolio and consider increasing the stakes, particularly if they are delivering the results. After all, as one would have followed them for a while, one would inevitably understand them better. Lesson picked up as noted that one long term holding (engineering control player) kept landing good orders and reporting good results.

(5) A hiccup is an excellent chance to buy into a good business
The description should make the coy obvious however I may choose to fudge it. A penny stock whose strong growth has since brought in into the radar of analysts. But before it entered into the current price of well over S$1, there was a price pull back to appx S$0.80 because of one poor quarter of earnings due to hiccups arising from shipment of one of its new products. Thing to note is that this is a short term phenomenon and should have given a long term investor a chance to open a position.

Do note that since then, much have changed. Coy has embarked onto a massive acquisition trail with much debt, at that. To the extent of buying into a specialty chain in US with particular business economies - historically unprofitable for first three quarters but earnings for 4q would be able to keep acquiree in the black. Got insight about the acquiree when contacts visited its stores in US earlier. Not crowded and did not note any particular differentiating factor. But must caveat that field report was lodged during early days of the acquisition. Only fair to say that jury is still out on its acquisitions.

(6) Force majeure - "Acts of God"
Another coy which should be familiar to all here. An business offering exposure to agricultural sector in China. Undemanding valuations (not many China plays here are). Exciting business prospects with new capacity coming online. Being an urbanite like me who never lived in a farm, simply failed to see that demand for its products is dependent on the weather! Poor weather (floods, et al) has since affected it. You know the price movement of this one.

(7) Believe in "bubblism", not!
Any one recall the REIT bubble in the earlier half of this year? Probably culminated in the offering of a logistics and subsequently a REIT holding Orchard Rd properties. There's clearly one because I had colleagues who asked me how many lots to apply for only for me to learn at the end my suggestion that they didn't have CDP accounts.

When interest rates inching up with no clear signs of abating, investors continued to pile into REITs as if they were the best thing since sliced bread. Maybe they were lured by the price chart which showed the "only way is up" trend of the first few REITs. Back then, the interest rate environment was benign and there was yield compression leading to capital appreciation. When the impact of the rates finally hit home after 2H05, many saw their value of their REIT holdings sliced by some 10% or so. [To my credit, I did suggest a "flip" strategy for the IPOs due to my views oninterest rate.]

(8) Alternative spin
Related to above. Instead of just looking at a cheap stag at a REIT IPO, why not consider the coy which sold the properties to the REIT? A logistics freight coy improved its balance sheet by selling several warehouses to a REIT and has since been a three bagger; rising from a low 3 to 9 cents or so. Another alternative spin: revaluation play on adjacent properties due to listing of a REIT. This often serves as an excellent catalyst to unlock undervalued counters which hold the adjacent properties.

(9) Simple maths - sum of parts
Uncovered this conglomerate where the market cap of its three listed subsidiaries add up and offer more than 50% margin to market cap of parent. It's important to know the investment tact taken as it was decided to be purely a numbers play. Whilst one would have expected to be prepared to have a long investment horizon for such plays, wonderful thing is that it was since raced up from about $3.5 (price I first spotted) to a shade off S$5 in a space of about 3 quarters of a year.

Such peculiarities still persist and one can occasionally uncover them. If fact, one HDD component manufacturer's stock is moving recently possibly due to this reason too?

(10) Postscripts
(a) Some parting thoughts from the super-investors which I try to reinforce in my cranium:
"When the tide is high, you don't know who is swimming naked." - Be careful when market gets choppy or when it turns bearish in 06.

"Thinking of investing as if one has only a punch-card with 20 chances." - I keep reminding myself of this so that I will do more and more homework. On a related note, the advantage of a retail investor is that there is no one standing in the dug out yelling, "swing you, bum!" (unlike fund managers who may view having cash on hand is a drag on the portfolio). So, take your time, analyze till comfortable before investing. A lot of the mistakes above might have been avoided by more though analysis.

(b) Food for thought:
Fund management is a peculiar business. Unlike say a laborer who knows his wages will increase with increased hours put in at work, the long hours, best efforts and though analysis of a fund manager/investor may not come to fruition due to other factors.


Apologise for this long rambling post. Please feel free to discuss and offer suggestions/point out faults here or on my U2U.


Important note: Prices offered are approximations from memory and not verified. After all, being the first day of the year and the fact that it is a holiday does give one a excuse to be lazier. Standard disclaimers apply: No counter is suggested as a buy or sell.
After many years of having seen value investors in action, I note that many of them who ignore sentiment and technicals of the market often fall prey to selling their value picks at the low in frustration and often selling their winning plays all too early because emotionally, it is easier to sell a winner.

However, all to often, they use the proceeds to average down a loser and then sell in frustration.

Sell United Food at the low.
Sell Sarin and Celestial all way too early. What happened to getting mult-bagger gains by holding for the long term? Easier said than done even for a "professional". Because the "professional" himself is still subject to the same emotions of the average investor.

In fact the average investor would be served well if he is taught to fear that his loss gets bigger and to hope that his gains get bigger! Most investors have it the other way round.

When all the global markets start to rally in unison, and all stocks good or bad start to rise, did you make money because you were right in your fundamental assessment or is it because of a more fundamental reason ie. stocks rose because new money came into the markets and caused more demand for shares.

Simple economics - Increase in demand results in an increase in price.

And the fact is that most value investor scoffs at technical analysis which in the simplest form is the measure of the demand and supply of a stock
Last one that I have......... SadSadSad


Err... this one posting... could be very sensitive ....Blush Tongue

However, deep down... it's really a great posting and it certainly has helped me a lot over the years. Cool

-----------------

These are the lessons learnt as a newbie in the Intellivest forum for 2 years. Sorry to Sage for using him as an example and brickbat. Correct if anyone thinks I am wrong.

1. If you are a mediocre investor, diversify.
Sage does not display great insights from his company analysis. A fair amount of the analysis reads like they were copied and pasted from the financial reports.

Given such mediocre analysis, it is risky to concentrate your money into a few holdings.

One may desire to be Warren Buffett, but calling oneself Sage does not make that a reality but merely reflects the desire.
Concentration is for the Masters, not mediocres. Most definitely not for newbies.

If you are a relative newbie and considering to concentrate, think again. Is it because a bull market has deceived you into thinking you are a genius? You think you are Warren Buffett? You want to be Warren Buffett? Trying to be a Buffett when you are actually Forrest Gump only makes you Buffet for Mr Market. Yum yum. Haha.

2. Be humble
I am sorry for sounding rude. If you would allow me to say this. I think calling oneself Sage is unhealthy. When one is mediocre and thinks one is sagely, heavy self-inflicted damage will be done to the pocket. It is also very costly to be arrogant in the market.

3. Reflect over your failures, not boast about your success
When CAO exploded, Sage boasted that "Alarm bells rang in our little Sagely brains on learning about the CEO's extremely high pay. That prompted us to sell". Boasting makes one proud which is dangerous in the market.

When he made losses in Unifood, no reflection was done. The Unifood losses were just brushed aside with something like "We are still confident about Unifood's future prospects, but other stocks and wine are more promising.". So, sell Unifood at a loss. Imagine your fund manager use this sort of excuse everytime he loses your money. First, nothing could be learned from the failure. Secondly, it shows a refusal to admit mistakes made. How to learn from mistakes when you don't even admit them?

Anyway, the reason for selling out CAO was unconvincing. Overpaid CEOs/leaders are a common sight. If that was a good reason, maybe Singaporeans should migrate elsewhere because our political leaders are paid a princely sum. High salaries for our leaders are not necessarily a bad thing if you track the success of Singapore from independence to now.

4. Be open-minded and open to criticism
Curtis insists that fundamental analysis is the only way. He dismisses other market timing techniques and has frequently got into debates with other TA practioners.

Different strokes for different folks.

FA is suitable for those gifted with great powers of analysis like d.o.g and Warren Buffett.
When reading d.o.g's posts, it is like lightning piercing through darkness. You suddenly understand amidst the fog. Things become clear.

If you are blessed with such powers like Warren Buffett in which you can gain special insights just from reading financial reports, FA is the right fit for you.

Otherwise, just being diligent enough to read all the financial reports is insufficient.

Of course, it doesn't mean that you have to have such superpowers to apply FA. FA is not restricted to the best sperm-egg product only. But if you happen to be the product of a lousy sperm from your father and a lousy egg from your mother, then you should compensate such bad luck with more patience.

In other words, if you are "not so clever" (referring to myself) and wants to use FA, swing the bat less often.

Wait until an investment opportunity that comes into your circle of competence appears.

For example, if you have been working in an industry for decades, you obviously have more advantage than smarter people like d.o.g or even Warren Buffett when it comes to investing in such companies.
Since "I not clever", I have resolved to swing my bat only when I have an edge over the smarter people (probably all the fund managers)

Know yourself to find the tools most suited for your abilities and temperament.

(Talking about circle of competence. Forgive me for using Sage as an example again. If you are heavy into investing in Chinese companies and yet cannot speak Chinese, you are at a serious disadvantage. You have to seriously question yourself whether it is within your circle of competence.)

5. Be honest with yourself. Actions must follow words
A high-grade sucker is one who can quote the famous investors and seem to speak wisdom. However, his actions reflect that of a sucker. For example, Peter Lynch teaches that one should sell losers and buy winners. If you look at Sage's portfolio, he has been selling winners and buying losers. Exactly "pulling out the flowers and watering the weeds". Worst thing is that after pulling out the flowers and throwing them into someone else's garden, the flowers blossomed even more beautifully. After Sage sold his winners like Sunray and Powerplus, almost immediately the share price rose. Haha

Also, Sage claims that inactivity is a sign of intellgent investing, but he trades like an active portfolio manager.

One has to learn to be honest with oneself before one can get to know oneself.

For example, the ugly reality for me to accept is that "I not clever". Therefore, I have resolved to diversify and compensate for my lack of intelligence with more patience. Swing the bat less often, only when I have an advantage or when blood is in the streets (when Great Depression repeats).

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09-07-2011, 10:18 AM.
Post: #10
RE: Old Investing Advice Gems from Wallstraits days
My investment journey started in 1998 but was dotted with much failures due to a lack in understanding in investment theories. Anyway, during that period, I was having fun with my career(engineering..) and was not too concerned about trying to build up my retirement nest.
In 2000, I bought a house and got married in 2001. So essentially, most of my savings were wiped out by these two events.
So,left with little money, I started to dabble in some stocks to increase my networth and I discovered Wallstraits.
I could not remember when I joined Wallstraits. I thought it should be 2001 but the decision was really a turning point for me.
Suddenly, I was opened to concepts of retirement planning, insurances, bonds, treasury bills, unit trusts and most important of all, value investing.
Armed with better knowledge and stock tips from forum members, I managed to reach a portfolio with a value of $27k at the end of 2001.
Not too shabby but it was really a long way from financial independent.
So, from 2001 to 2011, ten years had passed and thanks to all the current and past members of WS and valuebuddies, I had gained both in knowledge and a great leap in portfolio value. To me, it was an amazing journey.
The beautiful part of WS or valuebuddies is the unselfish sharing of financial knowledge by the members, notably d.o.g. With their sharing, even an investment newbie like me in 2001 has benefited greatly.

Coming back to Wallstraits, I think I also have to thank Curtis Montgomery for setting up WS. Although his WS business did not turn up well in the end, his active involvement in promoting value investing in the earlier years had created a gathering venue of liked-minded investors.


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