Systems and Mistakes..

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.
- LiverMore - Reminiscences of a Stock Operator

During the past few years, I or rather we have witnessed so many various stock market strategies applied in the market in an attempt to make money from the stock market.

Some punted and simply whacked Ze market, some chiak and chiak da bugger, some whacked simply based on hot-air, some used various trading techniques and skills, which included trading in a short term basis, scalping, tape reading, swinging and daytrading, while some others traded on a longer term basis based on Market Timing or cycles, and some simply invested in the market - yeah the buy and hold long, long buggers, and then we have the more technical savy techno canSLIMers, traders/investors who combine ta/fa in their strategy, some simply bought and prayed hard-hard!

So how are we doing?

Good, bad or so-so?

Or is there something wrong in our system?

Are we 'playing the game' correctly or are we in the need to go on a holy grail search for Ze best method?

Now, for the holy grail searchers, those switch hitters who moves from one system to another in search for the best method, the biggest problem and the biggest risk is simply time. Mistakes cost money and what if one takes too long to discover our mistakes?

Each system/strategy has got its own winning point and its weak point. And this the holy grail seekers greatest risk. Finding, testing and discovering each strategy takes time and lots of mistakes will occur along the way.

And of course, the ultimate question would be: could one ultimately find the best ever technique?

Is there ever a 100% fool proof strategy?

What if it takes you too long a time to find it?

And what if there isn't such a thing as a perfect strategy?

Ahhh... how? Profiting from our mistake(s). This is i think is the ultimate key. Be it if you are an investor or you are a trader. So the alternative is to take a good review of what we have done and what we have not done correctly the past year. Look at our own methods. Can we avoid repeating the same mistake or we doomed to make the same mistake again?

Or are we even using the technique correctly?

Or how about arguement which argues that the system is usually correct, it is the user of the system which is wrong?!

Or even to the more extreme, do we and will we ever acknowledge the flaws in our own system?

And lastly, what if our current system is really a no-hoper?

Are we going to accept and acknowledge these fact(s) or are we just going to keep on repeating our mistakes over and over again?

Read thru Ze Compilation!!! a couple of times and i thought it would be really good if I had shared my own personal investing mistake.

Isn't this not one of the most important thingy? Are we are gonna profit from our past mistake(s)?

Let's go back in time.

Way back in 2003. Near towards the end of the year, I 'invested' into one furniture business stock. Baswel Resources.

It was a small little decent company, with decent profit margin and there was growth also.

Hence, I embarked on an investment into Baswell. 8,000 shares at around 1.50.

Now my mistake was that after my purchase, I failed to acknowledge the weak trend shown in its fiscal year 2004 Q1.

Yes, the sales were pretty much flat, however, the net profit total declined quite substantially. From 14% to a mere 7%.

I discounted its poor performace as a temprorary dip in form.

Now the weakness continued.

The next quarter, 2004 Q2, the clear GET OUT sign was there!

Its profitability slumped to a mere 3%.

Oh, another issue first, i had also failed miserably understanding the rubberwood furniture business.

Baswell did not have it own resources.

It had to purchase the rubberwood and when the price of rubberwood increased, Baswell's margin was squeezed.

And another issue, Baswell, was not active in all those furniture trade fair we see now and then.

Ahh, this should have had been a clue for me. A big one. I should have realise that by being not active, perhaps its business maybe was not as attractive or as strong as other.

All said, after reasoning out Baswells 2004 Q2 earnings, I decided that I have made a poor rotten investment decision, and it was time to sing 'so long and farewell, it's time for me to go...'

But... butt... butttt....

I faced another issue... this was a dead counter!!!

Yalor.... D E A D ..... not laku at all....si-kiau-kiau!

So disposing that 8 lots or 8000 shares became a truly task for me.

I was faced with trading quotes such as: buy 1.10, sell 1.30...

The huge gap between the buyer(s) and seller(s) and the lack of buyers turned into a huge PROBLEM for me....

Now the thing was, I could have and I should have 'given' to the buyer as soon as i decided.... but noooooo sir me... i tried to be a smarty alec... and i dilly-dallied on my sale....

In the end.... i got out.... 6 lots at 1.20.... and the last 2 lots at 1.08.

Ouchhhhh!!!!!!

And yes.... this will be a big lesson for me!!!!!

And regarding the D E A D counter issue....

I think that this is was one big lesson I've learned.

Do not discount this factor when investing.

Now, do not get me wrong, for I agree very much that IF a stock is truly great, then it matters not how the stock is traded.

Yup, my focus has always been on the stock and not the market... for simply, the market is just where we make our transactions.

However, i am afraid to say, that there is one small thingy.... there is a potential failure in such system... ie... what IF we are wrong?

Ahhh.... what if we made a mistake in our stock selection?

Let's face the facts, we are just normal buggers, tiok boh?.

We are not Ze super-duper investors, rite?

Sooo sometimes (as hard as we want to avoid doing so) we can still make mistakes!

So if we make a mistake in our stock .......

then how?.....

Soooooo..... if the stock is a D E A D counter.... then our escape hatch... our cut-loss strategy faces a huge obstacle....!!!!!


ps.
Baswel is now trading at 0.51!
Baswel lost money for the last 3 quarters!
buy and hold will never work if u hold a company gone bad!

Ze compilation!!!!

Here is a compilation of some great investment lessons and mistakes posted in the Wallstraits forums:

(ps: If anyone wants to share their investment lessons, it would be really great if you could leave some comments)

(comments made in this color format denotes my usual mumbling and bumbling! :P)

(Oh... and this time.. i placed them new comments on the top instead at the bottom! )

last edited 8.34 pm, 8th Jan 2006

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There is no shame in making mistakes, only in failing to learn from them.

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On the other hand, the value investor believes that the market is often wrong in pricing a company and persists in averaging his initial stock purchase at lower prices at every turn. Often to his dismay, when the company reports the quarterly or interim results, he realises that actually, the company profits have taken a turn for the worse. What was bought on single digit PE assumption turns out to be double digit PE based on the new profit forecast.

So what does he do then? Sell or buy more assuming that this is only temporary setback in the business.

(how? Good issue, eh?)

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my key point is just "how does a value investor know he is wrong" before it is too late?

or how does one decide when the business is facing a temporary setback or a more serious detoriation in its business?

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I was fatally optimistic that the near future would look like the recent past. I forgot that the recent past is only a starting template, and that the final analysis must depend on current inputs - inputs which I sought and received, but failed to use properly.

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Dividends are important however don't be blinded by dividends either.

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Don't believe in hype

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When fundamentals deteriorate, sell NOW.

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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.

* * * * * * * * * * * * * * *

( hmmm.... one of the best advice!!!!!!....

know urself is the most important thingy!

We can always aspire to be the greatest trader... the greatest investor....

but... butt.... buttttt.... sometimes.... life is never truly fair, isn't it?

Sooooooooo if we dun know ourselves... how to be the best we can be???? tiok boh? )

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It is quite right that sooner or later one is going to lose money. However, if for every losses, one can gain a lesson and it will be a fair bargain.

( How very true!!... but... butt... buttt..... most important.... one must be willing to learn from their mistakes! or else... da fool will keep on repeating their losses!!!.... and if it takes too long to admit our mistakes... how then? )

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the most difficult part about investing is "psychological"....yes, I believe for that you need to invest yourself to really learn about it. However, investing without learning from books, seminars, other people is simply by trial and error. You can keep on repeating mistakes without knowing it. So in order to speed up your learning process, everyone should read books, attend seminars, learn from others.

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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.

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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.

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If you don't know when to get out, don't go in.

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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.

( Ahhh... this one is so, sooooo important! Remember the key word is that they should ALL be present and that one area of strength cannot be used to offset the other!

Meaning to say, a company with a terror geng profit growth does not necessary equates to a MARGIN of SAFETY if the management cannot be trusted or perhaps the growth is achived via razor thin profit margins!!!!!)

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

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Don't simply buy based on numbers - 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.

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Value Investing and Value Destruction?

Many... 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.

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

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!

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.

..most value investor scoffs at technical analysis which in the simplest form is the measure of the demand and supply of a stock.

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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!!! 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: Did we screw up in our stock selection? And if u did, averaging down means u are buying more shares in a wrong investment! Doesn't make sense, does it? Remember CUT YOUR LOSSES!!!! )

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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.

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.

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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.

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So - think for yourself - and use commonsense.

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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?

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

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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.

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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.

( Another good advice! How well do we really understand the business of the company that we want to invest in? )

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Few know how to lose. Yet the secret to making money in the market is knowing how to lose. How to control your losses.

Jaks Resources

Water infrastructure company JAKS Resources Bhd has been seeing some pretty heavy duty trading activity.

Now there is this interesting piece on the Star Business section today.

JAKS shares up for third straight day

Shares in JAKS Resources Bhd rose for the third consecutive day amid heavy trading, despite the company announcing on Dec 30 financial results that were below analysts’ expectations. JAKS ended yesterday 50 sen or 11.11% higher.

Hmmm... stock's financial results were below ze market sifu's expectations ... and yet... the stock is selling like hot cakes.... yeah, yeah, guilty once more. Mumbling yet once more... anyway, I do like this following one statement the best...

An analyst with a local research outfit attributed yesterday’s five sen jump to the overall positive market sentiment, adding that there was no particular reason for the stock to garner so much interest.

Hmmm.... No particular reason for the stock to garner so much reason... LOL!!!!

Now i find that so farnee hor...

Don't you?

I mean... stocks needs a catalyst for people to buy mah, tiok boh?

Now this sifu cames out and sing loud-loud that there is no particular reason...

hmm... mmmmmmmmm

Looks like the stock got legs to kaki-kia hor... LOL!!... :P

Now here are some ... err... trick questions... LOL!!!

From a business-perspective, why does one invest in a company?

My answer?

The company is making tons of moola and it's very likely to continue to make much, more moola in the future.

And the possibility of the company to make much, much more moola is perhaps a catalyst for folks to buy the stock.

The company is finding big moola mah.. u want onot?

Now of course, silly-billy-me, on the other hand, there is Ze CHIAK (err.. hokkien word hor) theory!

Now dis Chiak theory... we buy the stock cos ze stock is gonna fly (or fry?) up, up and awayyyyyy (fiyoo.. long time no say this pharse)....

Soooooo since the share is going up .. isn't dis why i should also CHIAK the bugger!

How? :P

Ok, enuf humour for now... let's get serious a bit...

So ... we have a stock whose earnings were below sifu's expectations and there was no particular reason for the stock to garner sooooo much interest... so i am wondering just how is Jaks doing because the only financial info that is written in the article is the following:

For the financial year ended Oct 31, 2005, JAKS posted a net profit of RM8.9mil on revenue of RM235.6mil compared with net profit of RM32.4mil and revenue of RM215.7mil a year earlier.

Hmmm....

Jaks current net profit for current fiscal year is rm 8.9 million.
Jaks net profit for its previous fiscal year is rm rm 32.4 million.

Hmmm.... Net profit not so geng wor! Dropped soooo much. No wonder they call it below expectations!

But.... butt.... butttt....

Here is the link to Jaks latest earnings...

Quarterly rpt on consolidated results for the financial period ended 31/10/2005

Wahhh.... that reported 4th quarter... JAKS lost rm12.195 million!!!

Wahhh.... isn't this a rather piece of important information???

How come the reporter no say this in the article???

How cannnnnnnnn???




ps... JAKS and CHIAK.... err... does it rhyme? :P

Netresearch-Asia coverage on Johor Land

Johor Land Bhd (JLand) is one of the largest property developers in Johor. It has four major property development projects (on-going and soon to be launched) with a combined Gross Development Value of RM6bn, which will span 20 years.

That's how NetResearch-Asia described Johor Land.

The write-up can be found here. JOHOR LAND BERHAD

And the Business Times carried that article here. Report: Projects to sustain JLand earnings

Now what is interesting is this statement:

“Overall, we expect net profit to show a CAGR of 37 per cent over the next two years,”

CAGR of 37 per cent over the bext two years?

Well, Johor Land made some 14 million for its fy 2005.

So what Netresearch-Asia is projecting/estimating/ass-u-ming that.. (see table in their pdf file link)

Johor Land will make 16.6 million for fy 2006.
Johor Land will make 26.3 million for fy 2007.

37 percent wor. So geng ah? Property business so bang-bang sound so geng, meh?

Here is Johor Land's last reported earnings.

Quarterly rpt on consolidated results for the financial period ended 30/9/2005

Total 3 quarters net profit is only 10.115 million versus 22.541 million the previous fiscal year.

Hmm.. not much evidence here to support the explosive growth Netresearch-Asia is projecting...


How? What say you? Good ah?

Berjaya Corporation

Restructure.

In business, perhaps that's a word describing the actions taken to rectify and to correct past faulty and poorly excuted business decisions.

Now Berjaya Corporation's restructuring scheme took more than 3 years to complete.

Massive.

Really massive.

And with the massive scheme comes a massive corporate exercise. And in that exercise, Irredeemable Convertible Loan Stocks were created as part of a means to help Berjaya Corporation out of the mess it created.

Now these ICULS came into play last Tuesday.

As they say, the rest was history.

Both the stock and the Irredeemable Convertible Loan Stocks (ICULS) fell by more than 81 per cent and 89 per cent respectively on heavy trade.

This morning, the Business Times carried an article on it.

Tan reaffirms commitment to BCorp

Now, me is just wondering... what's your reaction to all this?

Top of Ze World: Part II

Top Glove announced its earnings tonite.

Quarterly rpt on consolidated results for the financial period ended 30/11/2005

and here is the Edge's newsclip on it.

Top Glove 1Q net profit up 42%
04 Jan 2006 6:22 PM
Top Glove Corporation Bhd's net profit for the first quarter ended Nov 30, 2005 rose 42% to RM18.36 million from RM12.91 million a year earlier, and it expects continuous growth in the remaining

How?

Was their earnings results impressive?

Do you like what you see?

Do you reckon that their capital expansion has paid of?

How did their Thailand and China plants results appeal to you?

Me?

Just mumbling and bumbling and mumbling as usual... err.. a bugger who owns not this stock!

:D

Megan: Part VII

The issue of a company shareholder disposing their shares and the issue of a company buying back their shares.

Take a look at this two announcements.

Changes in Director's Interest (S135) - DATO DR HJ. MOHD ADAM BIN CHE HARUN

See the disposals made?

Now consider the issue of the company share buyback.

Notice of Shares Buy Back by a Company pursuant to Form 28A

Compare those dates.

How?

What's your view on this issue?

DVD price wars

Just saw this interesting news:

Distributor hurt in DVD war
DVD prices had dropped by half at two shopping complexes in recent weeks. A group of distributors could not get a key distributor to agree to end the price war.

Price war on the DVD market?

If you are a Megan Media shareholder, how would you evaluate this situation?