Tuesday, February 28, 2006

More on learning from a Trader

Taken from the trading classic book Reminiscenes of A Stock Operator.

  • I remember very clearly how every day i would buy more cotton. And why do you think i bought it? To keep the price from falling down! If that isn't a super sucker play, what is? I simply kept on putting up more and more money - more money to lose eventually. My brokers and my intimate friends could not understand it; and they don't to this day. Of course if the deal had turned out differently i would have been a wonder. More than once i was warned against placing too much reliance on Percy Thomas' brilliant analysis. To this i paid no heed, but i kept on buying more cotton to keep it from falling down. I accumulated four hundred and forty thousand bales before i realised what i was doing. So i sold out my line.
    To learn that a man can make foolish plays for no reason whatever was a valuable lesson. It costs me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibility expressed by a brilliant mind.
Extremely interesting in my opinion.

Can I learn from this lesson as well?

For example, take those investment advisers. What would equate to brilliant mind? How about a reputable investment advisor? Is there a danger in placing too much reliance on their research notes?

Ah... iCapital for example would be a good example. Yes, they have a good reputation. No doubt. Let me repeat again.. yes they have a good reputation...

however... here's the issue.... since they have a good reputation... is there ever a danger if an investor rely too much on their reports and on their advice?

Good example... err.. the Mieco incident, which was fully described in the posting Mieco: Part II

In which, in Aug 2004, when Mieco was trading at a price around 2.36, with a trailing pe of 15x current earnings, insisted that Mieco was a buy for the longer term (despite the apparent sign of weakness in the company's fundamentals).

So let's ass-u-me, one had relied on this investment advice and purchased the stock. Look at the end result today. The investor would have been punished severely because Mieco currently trades around 1.02.

See the danger?

So for me, I really agree that there is an extreme danger if one relies too much on investment advices and recommendations. No matter who they are, no matter how smart they are and how smart they appear to be, i think it is best we reasoned out ourselves if their recommendation(s) make sense or not. Meaning to say, I think it is really silly to invest in a stock just because so-and-so is recommending it. Let's not take anyone's words for granted and it is best we check out the finer details ourselves and reason out if their recommendation make sense or not. Else we would end up making a fool out of ourselves and our money!

Let's take Mieco into perspective. Yes, there is a justification for iCapital to make their recommendation in Aug 2004 but then, there was also a justification to avoid the stock in Aug 2004 (read the arguments presented in that posting again )