December 22nd 2005.
Another day, another year is gonna pass us by.
How?
How has 2005 treated you?
Wanna look back before we look ahead to 2006?
Well, I have been giving this a good thought. In investing or in trading in the sharemarket, before we look ahead again, don't you think that perhaps it is best that we look behind and examine the investing mistakes, the trading mistakes we have made over the years? As Jess Livermore stated: "It takes a long time to learn all the lessons of all his mistakes." Or how about this other statement by Livermore: "If a man didn't make mistakes he'd own the world in a month. But if he didn't profit by his mistakes he wouldn't own a blessed thing." Or as Warren Buffett puts it: "Regarding learning from your mistakes, the best thing to do is to learn from the other guy's mistakes. As Patton used to say, "It's an honor to die for your country, but make sure the other guys gets the honor." Our approach is really to try and learn vicariously."
So what I am want to try and do is this.
I want to create a blog entry for all to participate. And then I will compile everything into one nice little blog entry.
How game for it?
Here is how you can do it:
1. Post me your comments.
2. If you have a blog, post me a link to your blog entry. And I will get your remarks and views up.
3. If you are totally shy about it, send me an email to my_moola@hotmail.com
4. And if you read any interesting articles on the net, post the link (and not the article in full).
Cheers and Merry Christmas All.
And I hope that 2006 brings good fortune to everyone!
:)
Thursday, December 22, 2005
Looking Ahead to 2006.
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3 comments:
Let me start the ball-rolling.
I note that Wallstraits forum has a very good forum thread called "Investment Lessons learnt this year and advice for newbies".
Here is the link to it:
http://www.wallstraits.com/community/viewthread.php?tid=1231&page=1
Here is one interesting comment taken from that thread.
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!!
==> Excellent advice isn't it? Remember who we are. Sometimes, when a so called good share goes down after we purchase, we have to be realistic and ask ourselves a simple question: Were we WRONG in our stock selection? Did we make the mistake? And if we did, averaging down means we are buying more shares in a wrong investment!
Doesn't it make sense?
ADMIT your mistakes and CUT YOUR LOSSES if you are wrong!
Cheers!
Here is a snippet from another good posting found in that forum.
snip
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.
....
(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.
....
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.
~~~~~~
Great write-up!!!!
Cheers!
Published December 28, 2005
Be investment savvy
Here's some advice for those who resolve to manage their money wisely in the new year
By RACHAEL TAY
IT'S that time of the year again when we reflect on the year that has flown by and think about how we can do better next year. To add to the usual list-topping New Year resolutions of losing weight, keeping fit, and quitting smoking, here's some festive food for thought on how to manage one's money a whole lot wiser.
Most resolutions involve breaking habits or practices which are undesirable. And so it is with investment, an area especially prone to misconceptions, bad habits and, inevitably, mistakes.
2006 marks the year that CPF contributions will be based on the new lower monthly wage ceiling of $4,500. The onus of managing our money is in our hands more than ever, which warrants us all to examine more circumspectly our approach to and track record of investing our own money. Here's some sound advice for those resolving to be investment wise:
Decide on your investment goals and horizons
Probably, the most common mistake in personal investing - not having a clear objective - is akin to driving off in a car with no destination nor a time by which to get there.
You might choose the scenic route, or join the expressway, or get lost, but one thing's for sure - you'll burn a lot of petrol for nothing.
Many people carry out their investments in a haphazard manner because they have not set a goal, sometimes behaving more like traders than investors. Whether the goal is building a retirement nest egg, accumulating for children's tertiary education, or paying off a mortgage, the capital sum required and the time horizon to accomplish it will determine many parameters of your investment approach. This will include the risk you are prepared to take, the annual average returns expected and the portfolio composition, that is, which asset classes and investment instruments you will expose yourself to.
Having a goal clarifies and systematises your investment activities. You could establish different portfolios for the objectives you decide on based on risk tolerances. Generally, the more short-term your objective is, the less risk you should be prepared to take, and vice versa. Understanding this basic concept of investment planning will also empower you to start immediately instead of procrastinating (another common mistake). I have been known to repeat like a broken record, 'Time is your ally in investing'.
Practise discipline
Just as you would visit the driving range regularly to perfect your golf swing, you need to develop some discipline when you invest to make sure you are successful. Some good practices include asset allocation, rebalancing, and having a regular savings plan.
If you have an objective in mind, then asset allocation is a simple outcome of the risk-adjusted returns you require. Despite the common disclaimer that past performance is not necessarily indicative of future performance, all asset classes over a sustained period exhibit an average expected return and associated risk.
For instance, global equities as measured by the MSCI World Index have returned 8.5 per cent per annum over the last 15 years or so, at a risk of 17.8 per cent. Therefore, with time on your side, it is perfectly feasible to build your own portfolio with the appropriate mix of asset classes to achieve the returns and risk tolerance your objective demands. Financial advisers with experience in and having systems of managed investments can help you do this.
Your portfolio can weather market ups and downs if you review and rebalance it regularly. A review should involve performance to date in the light of the actual risk undertaken, and whether the original objective has changed. Don't get too emotionally attached to any one investment lest it clouds your judgement of its performance.
Disciplined profit-taking is the result of rebalancing, which is simply the act of selling down an asset class in the money to buy another that has performed less well relatively, to return the portfolio to the pre-determined asset allocation. Opinions and studies differ in the optimal frequency of rebalancing, but experts generally advise doing it at least annually.
Many people believe they can time the market to buy low and sell high, but few get it right, or at least right enough to make consistent returns. A regular savings plan is one way to eliminate market timing and add to your portfolio.
Your most important decision is the amount you wish to invest regularly, which should not exceed your net positive cashflow (income less expenses).
The powerful principle of dollar cost averaging is at work here; over time your overall investment cost falls because during market lows, your fixed amount buys more units and during market peaks, fewer units are bought.
Understand what you are investing in
If investors followed this tenet, many would have avoided huge capital losses during the tech boom and subsequent bust. Back then, the association with 'tech' was enough for people to pile into investments they could not even begin to understand.
Before you commit your hard-earned money, make a conscious effort to understand how capital markets work and what causes price movements. Sound, fundamental working knowledge will do - you don't need to know the stuff in MBA textbooks. Next, progress on to economies, sectors, and companies, and grasp the driving forces that affect growth and outlook. Finally, know what the basic investment instruments are. If you can't fathom a particular investment even after someone familiar with it has explained it to you, it is probably better for you to give it a miss.
Greed drives people to be seduced by promises of astounding returns. It is worth repeating this oft-heard advice: 'If it sounds too good to be true, it probably is.' If you are seeking the investment management services of a financial adviser, in addition to the specific instruments recommended, you should also make an effort to understand the internal processes and control systems used to optimise portfolio performance.
Finally, don't invest in something because you think everyone else is already in it, or your friend tells you it is a sure bet. Every individual's needs and goals are different, and instead of the merits of any single investment, you should be considering the totality of your investments as part of you and your family's financial situation.
And there you have it. Your own cut-out guide to smarter investing, not just for 2006 but for good. Have a Happy New Year and may the markets be with you!
This article is contributed by Dr Rachael Tay of GYC Financial Advisory Pte Ltd
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