The Difference Between Conviction and Stubborness

Today I saw this posting in a forum titled: The Difference Between Conviction and Stubborness

• When is holding on to your beliefs considered foolish stubborness, and when does it constitute "conviction" ? Look at it this way, when Warren Buffett refused to buy tech stocks during the dot.com bubble, he was criticized as being out of fashion and out of touch. But books have always mentioned (on hindsight) that he stuck to his guns and had "conviction" to stick to his beliefs, and thus avoided the inevitable crash that followed.
  
  To take another example, another investor stubbornly holds on to his beliefs that a company/industry is good and growing, yet he is actually wrong and the investment goes on to perform badly in the next 5-8 years.
  
  So how do we separate "conviction" from "foolish stubborness" ? Objective data may guide us, but as the future is always murky, there is no such thing as a sure thing.
  
  Note that mistakes of omission (i.e. not buying something which you SHOULD have, on hindsight) are always easier to bear than mistakes of commission (i.e. buying something which you SHOULD NOT have). In the former, it's just opportunity cost. In the latter, you lose real hard cash.

I like the following reply by d.o.g.

• Speaking for myself, I think "conviction" is when you follow the course of action suggested by the facts, against the actions of the herd. But I think Benjamin Graham said it better in chapter 20 of The Intelligent Investor:
  
  You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
  
  "Foolish stubborness" is when the facts subsequently show that the initial decision was wrong, and yet one continues with the old conclusion.
  
  In other words, conviction can easily turn into stubborness if we are not insistent about staying rational i.e. focused on the facts.
  
  Personally, when the facts change, I change my mind. What about you?

Yes, what about me? For me, this reminded me so much of the post I wrote back in June 2008. I wrote the following posting: Do Not Be Stubborn In Investing!

That post would be my view on this issue. Let me reproduce what I wrote back then again.......

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Blast from past. From Sun Tzu On Investing

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

Sun Tzu often warned his generals that it is adaptive strategy that win wars, not persistence.

Persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful.

Your persistence must be rational.

Stubbornly holding onto losing stocks as their business fundamental decay, hoping they magically return to your purchase price is no way to ensure victory, in fact, it all but guarantees defeat.

When the evidence says sell, then sell. Be persistent in the application of your strategy, not in banging your head against the wall or burying it in the sand. Be open to accept new information, face facts and take action as necessary. Ignoring important business developments in your portfolio won't make them go away.

Selling a stock that no longer measures up, or one that was purchased without accurate or complete evaluation is not admitting a mistake or any cause for embarrassment, it's just one more necessary, even essential step toward victory.

If the stock price rises after you sell, don't be frustrated - you made a rational decision, the best you could based on the information you had at the time - and over your investing lifetime this rational approach will win out.

You invest your time and your energy into every business analysis, so after a sell decision you need not write off the company forever. If the business prospects and fundamentals improve later, you can and should reconsider repurchasing. Each decision must be viewed independently from previous decisions. Selling as fundamental decay is essential, as it frees capital to be redeployed into another productive investment.

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

Ahh... the most common behaviour I have seen is one tends to be frustrated because after we had decided to sell the stock, that darn stock decides to move up!

Celaka betul!!!

Haven't we not witnessed this before?

It's like we are the sole reason why that rotten piece of stock is NOT moving, and the minute we sell, it flies! It's like they know. It's like they have them eyes on me!

And even for the investor, sometimes after the most intense thorough reasoning, sou searching and consultation from our Auntie May to Uncle Bennie, we finally come to the conclusion that the certain stock is not worth to be invested in anymore. And the very minute we finally gathered all our courage to execute our SELL decision(s), the stock miraculously rises!

Aisehman! #%$^(*@#

Err... so what gives?

Yes, being frustrated is understandable but what else can be done?

Nothing more! I repeat nothing more!

The point is, in the stock market sometimes this kind of stuff does happen, and it would most likely to happen again in the future! This is simply how the game is. All can we can do is say 'Que Sera Sera'!

For me, there is no way I could tell whether a stock is gonna go up or down. It is mere impossible for me to figure out which way the stock is really going to go. Haven't we seen them bad to the bone, them rotten stocks, them almost bankrupt stocks, go up faster than Iron Man on some rocket booster?

It does happen but for me, trying to catch which and when these rotten stocks will go up is the equivalent of buying a lottery ticket.

I simply cannot do it.

Again, let me say out loud again, I am not saying that it cannot be done, all I am saying is that I realise I do NOT have the abilities to play such a game.

And in my opinion, for the investor, the most important issue is making clear logical reasoning to invest in a stock or to stay invested or to cash out of a stock investment. That's the investors edge. Making commonsense investing decisions. That's all that matters. If we take this edge away from ourselves, what then will become of we? Does it make sense to try to play a game that we don't understand too well just so long as we can be a hero?

Remember..

• Without faith in his own judgement no man can go very far in this game! - - Lefevre

Or this one.

• "A man must think for himself, must follow his own convictions...Self-trust is the foundation of successful effort." - Dickson G. Watts

So what's our investment edge?

The very basic of our edge is we buy a 'good' stock at a cheap price and we sell the investment when either we get a really 'good' price (ie some paying an insane price for our investment stake... but how could i call it insane since this will be a good thingy for me? :P) for our investment or if the investment makes no sense anymore - ie the stock used to be good, but due to for some reasons or another, there are clear signs that the stock won't be good no more! And obviously we also sell if and when we made an investment mistake, ie a wrong stock selection.

Remember the issue of making mistakes? Here's some words of advice yet again...

There is no shame in making a mistake. Despite a great deal of research and analysis, I make plenty of them -- and so does every other investor -- because the future is inherently unpredictable. But there is shame in refusing to acknowledge a mistake and rectifying it. - - Warren Buffett

So if a stock goes up after we decided to sell (ie the stock investment makes no sense no more), what's there to be frustrated?

Should we continue to stick to our game plan and not get bothered? (see this blog posting: Developing A Good Investing Mindset )

Or should we try to get the best possible price out of our mistakes?

(Isn't this like HOPING for the market to correct our mistakes?? Does it make sense? Are we even that lucky all the time that the market will rectify our mistakes? What if that one mistake wipes us out of the game? How then?)

Or some would rather stay delusional by insisting that their paper losses caused by their own flawed stock picking is not real. It's only paper!!?!! ( See Is Paper Loss Not A Loss? and Do Not Cheat Yourself! )

Lastly...

• "ppersistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful"...

How very true!

Remember ... there is a verv, very fine line between being correct and being stubbornly wrong... hence it is most important that one's persistence must be rational!

Last but not least, in Buffett Partnership letters (July, 1966) there was this really little set of comments which is simply much, much, much better! (Aiyah.. he's the man, Warren Buffet mah!)

• "The course of the stock market will largely determine... when we'll be right, but the accuracy of our analysis will determine whether we'll be right. In other words, we... concentrate on what should happen, not when it should happen... If we start deciding, based on our guesses or emotions, whether we will... participate in a business where we... have some long-run edge, we're in trouble. We will not sell our interests in businesses when they are attractively priced just because some astrologer thinks the quotations may go lower even though forecasts... will be right some of the time... The availability of a quotation for your business interests should always be an asset to be utilized if desired. If it gets silly enough in either direction, you will take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn form your judgements."

Do Not Be Stubborn In Investing!

Blast from past. From Sun Tzu On Investing

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

Sun Tzu often warned his generals that it is adaptive strategy that win wars, not persistence.

Persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful.

Your persistence must be rational.

Stubbornly holding onto losing stocks as their business fundamental decay, hoping they magically return to your purchase price is no way to ensure victory, in fact, it all but guarantees defeat.

When the evidence says sell, then sell. Be persistent in the application of your strategy, not in banging your head against the wall or burying it in the sand. Be open to accept new information, face facts and take action as necessary. Ignoring important business developments in your portfolio won't make them go away.

Selling a stock that no longer measures up, or one that was purchased without accurate or complete evaluation is not admitting a mistake or any cause for embarrassment, it's just one more necessary, even essential step toward victory.

If the stock price rises after you sell, don't be frustrated - you made a rational decision, the best you could based on the information you had at the time - and over your investing lifetime this rational approach will win out.

You invest your time and your energy into every business analysis, so after a sell decision you need not write off the company forever. If the business prospects and fundamentals improve later, you can and should reconsider repurchasing. Each decision must be viewed independently from previous decisions. Selling as fundamental decay is essential, as it frees capital to be redeployed into another productive investment.

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

Ahh... the most common behaviour I have seen is one tends to be frustrated because after we had decided to sell the stock, that darn stock decides to move up!

Celaka betul!!!

Haven't we not witnessed this before?

It's like we are the sole reason why that rotten piece of stock is NOT moving, and the minute we sell, it flies! It's like they know. It's like they have them eyes on me!

And even for the investor, sometimes after the most intense thorough reasoning, sou searching and consultation from our Auntie May to Uncle Bennie, we finally come to the conclusion that the certain stock is not worth to be invested in anymore. And the very minute we finally gathered all our courage to execute our SELL decision(s), the stock miraculously rises!

Aisehman! #%$^(*@#

Err... so what gives?

Yes, being frustrated is understandable but what else can be done?

Nothing more! I repeat nothing more!

The point is, in the stock market sometimes this kind of stuff does happen, and it would most likely to happen again in the future! This is simply how the game is. All can we can do is say 'Que Sera Sera'!

For me, there is no way I could tell whether a stock is gonna go up or down. It is mere impossible for me to figure out which way the stock is really going to go. Haven't we seen them bad to the bone, them rotten stocks, them almost bankrupt stocks, go up faster than Iron Man on some rocket booster?

It does happen but for me, trying to catch which and when these rotten stocks will go up is the equivalent of buying a lottery ticket.

I simply cannot do it.

Again, let me say out loud again, I am not saying that it cannot be done, all I am saying is that I realise I do NOT have the abilities to play such a game.

And in my opinion, for the investor, the most important issue is making clear logical reasoning to invest in a stock or to stay invested or to cash out of a stock investment. That's the investors edge. Making commonsense investing decisions. That's all that matters. If we take this edge away from ourselves, what then will become of we? Does it make sense to try to play a game that we don't understand too well just so long as we can be a hero?

Remember..

• Without faith in his own judgement no man can go very far in this game! - - Lefevre

Or this one.

• "A man must think for himself, must follow his own convictions...Self-trust is the foundation of successful effort." - Dickson G. Watts

So what's our investment edge?

The very basic of our edge is we buy a 'good' stock at a cheap price and we sell the investment when either we get a really 'good' price (ie some paying an insane price for our investment stake... but how could i call it insane since this will be a good thingy for me? :P) for our investment or if the investment makes no sense anymore - ie the stock used to be good, but due to for some reasons or another, there are clear signs that the stock won't be good no more! And obviously we also sell if and when we made an investment mistake, ie a wrong stock selection.

Remember the issue of making mistakes? Here's some words of advice yet again...

There is no shame in making a mistake. Despite a great deal of research and analysis, I make plenty of them -- and so does every other investor -- because the future is inherently unpredictable. But there is shame in refusing to acknowledge a mistake and rectifying it. - - Warren Buffett

So if a stock goes up after we decided to sell (ie the stock investment makes no sense no more), what's there to be frustrated?

Should we continue to stick to our game plan and not get bothered? (see this blog posting: Developing A Good Investing Mindset )

Or should we try to get the best possible price out of our mistakes?

(Isn't this like HOPING for the market to correct our mistakes?? Does it make sense? Are we even that lucky all the time that the market will rectify our mistakes? What if that one mistake wipes us out of the game? How then?)

Or some would rather stay delusional by insisting that their paper losses caused by their own flawed stock picking is not real. It's only paper!!?!! ( See Is Paper Loss Not A Loss? and Do Not Cheat Yourself! )

Lastly...

• "persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful"...

How very true!

Remember ... there is a verv, very fine line between being correct and being stubbornly wrong... hence it is most important that one's persistance must be rational!

Last but not least, in Buffett Partnership letters (July, 1966) there was this really little set of comments which is simply much, much, much better! (Aiyah.. he's the man, Warren Buffet mah!)

• "The course of the stock market will largely determine... when we'll be right, but the accuracy of our analysis will determine whether we'll be right. In other words, we... concentrate on what should happen, not when it should happen... If we start deciding, based on our guesses or emotions, whether we will... participate in a business where we... have some long-run edge, we're in trouble. We will not sell our interests in businesses when they are attractively priced just because some astrologer thinks the quotations may go lower even though forecasts... will be right some of the time... The availability of a quotation for your business interests should always be an asset to be utilized if desired. If it gets silly enough in either direction, you will take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn form your judgements."

Good Investors Stay Humble

Here's a great lesson from Sun Tzu On Investing

GRANDIOSITY

Some psychologists point to a human behavioral concept called grandiosity, as the primary cause of bull markets and bubbles. Grandiosity is a very strong belief in one’s greatness, abilities, knowledge, or character. One of the earliest stories of the danger inherent in grandiosity is from the Greek myth of Daedalus. Daedalus had built a labyrinth for Minos, the King of Crete, and when it was finished he wanted to return to his home in Greece. Because Daedalus was a useful engineer, King Minos refused to allow him to leave Crete.

King Minos controlled the sea, so Daedalus and his son Icarus could think of no other escape route from the island of Crete except by air. Therefore Daedalus used his great engineering skills to fabricate wings for himself and his young son Icarus out of feathers and wax and gave the whole gentle curvature a shape like the wings of a bird. When the father and son were prepared for the escape, Daedalus warned Icarus: Keep at a moderate height, for if you fly too low the damp will clog your wings, and if too high the heat will melt them.

As the two took flight, farmers and shepherds on the hillsides watched them in amazement, believing they must be gods. Suddenly the young Icarus, exulting in his new-found ability to fly, soared upward toward the heavens. The sun’s increasing heat began to soften the wax that kept his feathers in place and Icarus plunged helplessly into the sea and drowned. Daedalus arrived safely in Sicily, where he built a temple to Apollo and hung up his wings as an offering to the god.

This Greek myth, as is common in ancient tales, has a dual lesson for us. First, the obvious danger involved when one is overcome with feelings of grandiosity. But also, the amazing accomplishments that are possible when such grandiosity is applied within the confines of rational ambitions and ideals. When investors are hot and feel they can pick nothing but winners, they tend to be overcome with grandiosity--invincible, brilliant, unable to make a mistake. They no longer feel the need to consider risks and insist on a rational margin of safety after careful evaluation within their disciplined strategy. At that point, you can almost smell their portfolio holdings melting into a ball of soft wax!

Hopefully there will be times when you feel brilliant for making some timely decisive investment moves that reward you quickly and significantly. Resist the tendency towards grandiosity. Sun Tzu-style investors control such foolish emotions, always rationally facing the fact that 40% of all investment decisions are likely to produce average or sub-average results. In other words, stay humble and you’ll stay financially healthy.

I would really agree that more often that not it is very costly to our pockets and to our souls when one is too arrogant in the market.

Knowledge is power and being confident in one's own method is extremely important but there is a very fine line between being confident and being arrogant.

When one is arrogant, naturally one feels that one is Ze Special One.

And Ze Special One is simply special. One that can pick one winner after another. And Ze Special One makes no mistake, yes? And Ze Special One needs not much of margin of safety for they are simply SPECIAL.

Hmm....but can Ze Special One be so dead sure in the share market?

Is it even possible?

Let's be honest with ourselves. Take a good look at what we are. Are we really blessed with super powers to be so-called Special One? One who could pick winners after winners all the time? If we could, we wouldn't even be lurking around in message boards, forums or blogs. Face it.. we are just ze normal ones. Sometimes we can get good winners and sometimes we will make mistakes.

By staying humble, we will at least have a chance to recognise and acknowledge a mistake, if and when we do make a mistake. And when we do, it's utmost imperial that we correct our mistake(s) immediately and not hope and pray for the market to correct our mistake(s) for life is never always that kind to all of us.
Now if one is arrogant, would one ever admit that perhaps one is wrong in their stock selection?

And since one is not wrong, obviously the danger is one would not even consider cutting loss on a wrongly reasoned investment!

And since one is not wrong, would one even consider selling even though the market is proving them wrong and the stock's tumbling prices is also proving them wrong?

See the danger in such thinking?

Me? I think it's always good to stay humble! I am just a normal bugger who can make mistakes! And when I do make the mistake(s), I will correct it ASAP!

I won't let the market make a fool out of me and me moolah!

A Look At Contrarian Investing Approach for Tong Herr.

Taken from Sun Tzu on Investing

Contrarian Investing

Contrarian Investing is a method of moving against the crowd, which relies heavily on a broad understanding of investor psychology, and when done successfully, you will appear to have seen the future. Sun Tzu advised his generals to devise strategies that deceived their opponents, wore them out, and put them at natural disadvantages. Rational investors will have a natural advantage during time of excessive bull market optimism and bear market pessimism. The key to recognizing such dangers and opportunities is to remain loyal to your Sun Tzu-style assessments, continue screening stocks one at a time and remain focused on determined business value. Your discipline will help you avoid paying too much during bull markets and enhance your confidence to buy bargains during bear markets. You will become a rational contrarian and your peers will think you have seen the future (or lost your mind).

Contrarian Investing is one of those terms often misunderstood. A contrarian investor doesn't move against the popular crowd simply for the sake of being different. The true contrarian is a strategic investor whose disciplined approach to stock selection is often at odds with the current trend. If you stick to any particular investing style, be it based on low asset valuations, high earnings growth rates, or high dividend yields, there will be period of times when your style will be in line with the popular thinking, and other times when it will run contrary to the style of the day.

The more long-term focused your strategy, the more likely it will be at odds with popular market trends. Contrasting styles of investing often result from investors' perspectives of the stock market. Chartists, technical analysts and speculators are looking at the short term price movement patterns in the hope they can glean some sense of a trend, able to predict what other investors are thinking. They are trying to understand the emotions of other investors and profit by anticipating their next move. As their guessing game becomes more sophisticated and everyone is observing the same charts - the professional guessers must now predict how the other predictors are guessing about how emotions of the majority investors will affect short-term price movements - this quickly becomes a frustrating guess-what-the-guessers-are-guessing game with no likely winners.

Taken from Mary Buffett's The New Buffettology

CONTRARIAN INVESTMENT STRATEGY VERSUS SELECTIVE CONTRARIAN INVESTMENT STRATEGY

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years. This strategy focuses on falling stock prices and pays little mind to the underlying economics of the companies. With the traditional contrarian investment strategy investors don’t discriminate between price-competitive-type businesses and companies that possess a durable competitive advantage. So long as the share price has recently fallen, the stock is a candidate for purchase.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

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In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

As you are very well aware that the market is full of risks.

And the success of an investor or even a trader depends on how well they acknowledge and manage their risk.

Let me give you some of my views. Not sure you would agree but here goes...

So firstly i would try to understand the theory.

The main assumption in this strategy is that all beaten down stocks will one day rise again.

Which basically saying is that all stock price movements are cyclical. Stocks will have their up and their down days.

So where could one go wrong?

1.How safe is our purchase price? What if the beaten down stock gets more beaten? Or simply put... is it time to buy now?

2.Yes, in general ... most stocks that get beaten down... will rise again... but what if it rebound does not past my purchase price? Meaning will the recovery be worthwhile? Will it be profitable?

3.What if the selected stock in the beaten down industry does not rise?

4.What if shit happens? Beaten down stock gets beaten down because it is so poor fundamentally. And the real danger is what if it turns into a real disaster? Yes what if the stock really goes DOWN under?

5. How long would it take for this recovery to happen? Say if we buy the stock now.. seeing that the stock price is beaten down... what if this recovery takes much longer than we expected? Will the stock price hold?

Well these are the questions I think that require much thinking.

In fact, me myself, cannot give you a logical answer to all of it because the bottom line is that the answers to the questions is itself unpredictable.

Which is why, in my opinion, I find what Mary Buffett wrote in her book, The New Buffettology , about her ex-father-in-law is a rather more useful approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Which basically means that the beaten down stocks must represents companies which has a durable competitive advantage.

Companies that are of good quality.

This, I believe will help the investor safeguard themselves versus the issues that I had written earlier.

This would be my contrarian approach.

Being contrary just for the sake of betting against the crowd is rather silly isn't it?

There's no need to go and get ourselves killed for the sake of being different yes?

Let's do a current example on Tong Herr.

• In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 3.40 and a 12 month high of around 4.25 (adjusted for bonus issue).

Price of Tong Herr is now 2.85, off 1.40 (or 32%) from its peak last July. And Tong Herr does have a rather better than average balance sheet.

So would one be influenced just because of the low price to adopt a contrarian investing approach on Tong Herr?

Let's see, Tong Herr stock has performed poorly and surely one would say that the stock has fallen out of favor.

So would one consider Tong Herr as a candidate under this contrarian theory approach?

If so, let's put a marker at 2.85 and do a review on it maybe a year later? Ok?

Now compare the other contrarian approach. The selective contrarian approach.

• A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple reasoning.

Does Tong Herr, a producer of stainless steel fastener (bolts), have a durable competitive advantage?

My answer would be NO.

This is clearly a cyclical stock which had enjoyed tremendous fortune recently due to a couple of reasoning. Back in 2002, the removal of trade barriers (there were early accusations of price dumping in this industry) helped. But the biggest factor in my opinion that the management was simply brilliant when they stocked up their raw material inventory before the amazing bull run in the nickel started. Margins were fantastic and great profits were made in the early days. But all advantage from the brilliant hindsight of the management to stock up the inventory has passed.

And as stated in the company's recent quarterly earnings:

• The higher revenue and lower profit before income tax for this quarter are due to higher demand for the product and higher cost of raw materials purchased in the preceding quarters.

And when you compare the quarterly earnings, the negative impact caused by higher raw materials is showing. Compare the recent announced earnings versus the same period last year.

And based on these facts, I would question the long term competitive advantage of Tong Herr's product.

And when you factor in the current massive changes in the local business economic environment, where the petrol and power tariffs had been increased, I feel that perhaps NOW is not the time to adopt the selective contrarian investing approach and buy Tong Herr at 2.85.

That's my opinion which obviously could be faulty.

Invest Only When It's Easy To Make Money!

Sun Tzu was no speculator. He was unwilling to take any unnecessary risks - patiently waiting and continuously preparing, gathering information and honing useful skills - until the day arrived when victory was assured. His timeless advice was, "fight only when it is easy to win."

The most accomplished investors are noted for their uncanny ability to make decisive moves at just the right time. When you dig deep to investigate their strategies, and look at them from a SunTzu perspective, the mystery will vanish. To win when it is easy to win requires self-control to wait for the right circumstances to arrive, and to prepare thoroughly in order to recognize the opportune time for confident and decisive action. If the preparation is not done ahead of time, the opportunity passes unnoticed.

pg.24 of Sun Tzu On Investing

Hmm... here are some famous Warren Buffett wisdom which parallels Sun Tzu teaching of fighting only when it is easy to win.

• "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."- Warren Buffett, Oct. 2003 talking with Wharton MBA students
• "The important thing is to keep playing, to play against weak opponents and to play for big stakes."- Warren Buffett, Nov. 2002 talking with students at Gaston Hall

Playing against weak opponents and to play for big stakes... fight only when it is easy to win.. really, really makes sense, doesn't it?

Let's take an old stock scenario and put things into perspective, let's use my old favourite, Mieco.

Way back in Aug 2004, the stock fell from a high.

And because of the fall, folks like iCapital was calling it a long term buy based on one factor, Mieco's new factory equated to good prospect.

Now, an investor, investing in Mieco, the investor was actually investing based solely on this factor (err.. would it be wrong to define it as 'speculating' that the new factory will deliver?).

But what were the other issues faced by the investor?

Should we be delusional and act as if it did not exist? And should one invest simply because of iCapital?

What about the reasoning and the justifications behind the recommendation?

Well, iCapital and the investor should have known that one was investing in a company that was witnessing a huge decline in earnings and earnings margins. Fundamentals changed from a company in a nett cash position to a company in a nett debt position. And more importantly, how much earnings will the new factory deliver and when will one see the positive effect of the new earnings. And more importantly, the price around 2.30 for Mieco, wasn't cheap when one based it on current earnings.

Now let's reason out the justifications and weigh the pro versus the cons.

Isn't this a simple commonsense thing to do?

Now based on the variables that were present then, would one define Mieco as an easy stock picking?

Reasoning for earnings to improve was there if and if the new plant could deliver.

Reasoning to be cautious was there. Stock wasn't cheap and worse of all, the fundamentals were worsening.

So ass-u-me one followed iCapital kind advice and Buy and OLD for the long term (doh!) at around 2.30.

Do you know what the price of Mieco now?

0.505!!!!

Look at the end result of fighting a difficult battle!!

Or how now?

Look at the current economic variables.

What do you see?

Yes, things could get better in the future. In the long run, surely there's a better tomorrow.

But what about now?

What kind of business environment do we see out there?

Aren't most companies enjoying their best ever earnings currently?

Ask yourself this, do you reckon that these companies could improve their earnings in the near future, given the current changes in the local economic environment? Petrol, gas and electricity tariffs have all increased at the same time. Can the companies pass the buck down and shaft it to their customers? Or do you reckon that most companies will be forced to bear this new burden?

Most of all, do you think earnings would improve or decline?

Do you think that now represents a period where it is easy for any investor to make money?

Or do you think that that it makes good sense to be a ninja turtle and obediently hide in the turtle shell once the going is tough and only fight when i KNOW very well that i can whack and hantem the bugger kow-kow!!!

ps: what was Billy Ocean singing about When the Going Gets tough...

Do Not Cheat Yourself!

Here's an old posting which I had made a couple of years ago.


...... if i bring up this delightful investment piece from the book, Sun Tzu on Investing.

There’s an old Chinese story about an Emperor and his pet dog.

The Emperor awoke one day when he heard a loud noise. From his bedroom window he could see a large ox-drawn cart had run into a wooden flagpole used to raise the Emperor’s family crest high above the castle. The flagpole was ever so slightly tilted, but the damage appeared minimal and no repair work was initiated. Later that day, the Emperor was walking his dog past the flagpole and the dog stopped to, well, to do what dog’s do to flagpoles. Suddenly, with a loud snap the pole crashed down onto the poor dog before he could even lower his raised hind leg, killing him instantly.

What the Emperor and his attendants couldn’t see was damage hidden below the surface. The flagpole had leaned ever so slightly, but it was enough to cause a critical break in the structure just below ground level. Obviously, the dog got the raw end of this whole deal. But let us pose a simple question: If you were trying to assess blame for unnecessary risks in this situation, where would you place it?

You could blame the workers employed by the Emperor to erect a flagpole for choosing a pole with a weak spot and concealing it below the ground. Or you could blame the Emperor, although it may cost you your life, for his vanity in demanding such a tall flagpole to fly his family crest above the castle. Maybe the fault was with the deliveryman who carelessly backed his ox cart into the pole causing the imminent damage. We could also blame the dog for marking too wide a territory! The story illustrates how difficult it can be to assess where risk originates. To the dog it mattered not how or why it happened, or even to who the blame should be assessed--just the fact that it happened.

When it comes to equity investing, you are the dog. If there are risks being taken by companies you hold, you are the one who will suffer the most direct damage. That’s the cold, hard truth. The thing is, those who are taking the risks may not recognize them as such, or may be purposefully concealing them from you. All the more reason for you to be extremely careful in selecting the companies you choose to invest in, and the integrity of the managers.

Enron Corp, a leading Houston, Texas-based global energy giant employing over 6,000 people was dramatically exposed during 2002 as its executives and its professional consultants had been going to great lengths to hide some of the risks that the company was assuming from its shareholders. But even without their efforts to cover their trail of secret off-balance-sheet high-risk investments, one would guess that 99% of the people who bought Enron stock never attempted to sort through Enron’s financial footnotes searching for risks. Had they done so, they would probably not have identified the key risks, as even some of the smartest accounting minds in the world have disclosed that Enron had been a black box--i.e. a complete mystery to them. But the point is that millions of intelligent shareholders (including a good number of global professional fund managers) accepted the blue-chip status of this massive business without performing any due diligence tests, they accepted broker advice and analyst buy recommendations, when the sad reality was (despite audited financial reports to the contrary) that the company was literally on the verge of financial collapse.

We are never going to have all of the information necessary to assess all the risks inherent in equity investments. Despite moves to improve corporate transparency, companies are under no obligation to reveal their internal operations to outside investors. To do so would require making some sensitive information public when good business acumen dictates keeping it as a secret to preserve competitive advantages. However, we are each obligated to at least consider potential risks and ask the right questions. If not, like the Emperor’s dog, we are sure to eventually be crushed under the weight of our own ignorance.

Investing is all about risk. The more risk you take, the higher your potential returns. And this is all correct, except for the fact that it is exactly wrong. Investing is all about perceived risk. Where you as an investor have an advantage is only in situations where you can correctly assess that the market has overestimated (or underestimated) future risks or returns. That requires foreknowledge. Remember Sun Tzu’s words, Foreknowledge cannot be gotten from ghosts and spirits, cannot be had by analogy, cannot be found out by calculation. It must be obtained from people, people who know the conditions of the enemy.

Foreknowledge only comes from asking the right questions of the right people. Occasionally, we all miss a key piece of information and suffer an unexpected loss on an investment. These situations can be minimized by investors who refuse to accept broker and analyst opinions at face value, insist on asking their own questions of management, analyze a company’s financial footnotes on their own, and purposefully list every possible downside risk involved in a business--even a business they have already invested in and consider a favorite holding. The most difficult risk to assess is the risk of a negative unexpected event affecting one of your favorite stocks, the very stock you have been buying and recommending to all your friends.

A truly excellent piece.

What is most interesting about the write-up is the very last statement.

The most difficult risk to assess is the risk of a negative unexpected event affecting one of your favorite stocks, the very stock you have been buying and recommending to all your friends.

How?

Your Favorite stock, the very one that you have been banking on, the one that you recommend to all your friends, has a serious flaw stemming from a negative unexpected event.

How?

What are you going do about it?

Are you going to accept that your investment is very likely to go bad, accept the defeat and move on?

Or are you going to continue digging in the hole that you found yourself in?

Or maybe you might tell me that a Paper Loss Is Not A Loss?

Or are you telling me that you are going to adopt a Buy And Old strategy?

Never heard of this strategy before?

This is where you buy a stock which only you think it's good (but apparently the market doesn't think so) and you hold on to the stock till you get older and older waiting for any sort of positive return of investment!

Why is holding long term bad?

In a much older posting, I posted Is Ze Market for Suckers? Think of the following scenario.

• You can have as long a term horizon as you want, but like most other long term plans we have, most peoples lives dont match up to their “horizons”... And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.

Is that scenario not possible?

You can hold on to your investment for as long you want and deny that the paper loss is not a loss and you can hope that one day you might recover your paper losses but as they say, life is never fair and one might day, you might just need to sell. And when that happens, is the paper loss real or not?

So let me ask, are you cutting your loss or are you cutting your profit?

Frustration, Persistance & Stubborness

More from Sun Tzu On Investing

Sun Tzu often warned his generals that it is adaptive strategy that win wars, not persistence.

Persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful.

Your persistance must be rational.

Stubbornly holding onto losing stocks as their business fundamental decay, hoping they magically return to your purchase price is no way to ensure victory, in fact, it all but gurantees defeat.

When the evidence says sell, then sell. Be persistent in the application of your strategy, not in banging your head against the wall or burying it in the sand. Be open to accept new information, face facts and take action as necessary. Ignoring important business developments in your portfolio won't make them go away.

Selling a stock that no longer measures up, or one that was purchased without accurate or complete evaluation is not admitting a mistake or any cause for embarresment, it's just one more necessary, even essential step toward victory.

If the stock price rises after you sell, don't be frustrated - you made a rational decision, the best you could based on the information you had at the time - and over your investing lifetime this rational approach will win out.

You invest your time and your energy into every business analysis, so after a sell decision you need not write off the company forever. If the business prospects and fundamentals improve later, you can and should reconsider repurchasing. Each decision must be viewed independently from previous decisions. Selling as fundamental decay is essential, as it frees capital to be redeployed into another productive investment.

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

Ahh... being frustrated when after we decide to sell the stock, the stock decides to move up!

In the stock market, haven't we witnessed that sometimes after thorough reasoning, we come to the conclusion that the certain stock is not worth to be invested in anymore. And the minute we execute our SELL decision(s), the stock miraculously rises!

Err... so what gives?

Yes, being frustrated is understandable but what else can be done? Nothing more! I repeat nothing more! The point is, in the stock market sometimes this kind of stuff does happen, and it could happen again in the future. All can we can do is say 'Que Sera Sera'!

For me, there is no way I could tell whether a stock is gonna go up or down. It is mere impossible for me to figure out which way the stock is really going to go. Haven't we seen them bad to the bone, them rotten stocks, them almost bankrupt stocks, go up via cosmic movements? It does happen but for me, trying to catch which and when these rotten stocks will go up is the equivalent of buying a lottery ticket. I simply cannot do it. Again, let me say out loud again, I am not saying that it cannot be done, all I am saying is that I realise I do have the abilities to play such a game.

And in my opinion, for the investor, the most important issue is making clear logical reasonings to invest in a stock or to stay invested or to cash out of a stock investment. That's the investors edge. Making commonsense investing decisions. That's all that matters. If we take this edge away from ourselves, what then will become of we? Does it make sense to try to play a game that we don't understand too well just so long as we can be a hero? Remember.. Without faith in his own judgement no man can go very far in this game! - - Lefevre

So what's our investment edge? The very basic of our edge is we buy a 'good' stock at a cheap price and we sell the investment when either we get a really 'good' price (ie some paying an insane price for our investment stake... but how could i call it insane since this will be a good thingy for me? :P) for our investment or if the investment makes no sense anymore - ie the stock used to be good, but due to for some reasons or another, there are clear signs that the stock won't be good no more! And obviously we also sell if and when we made an investment mistake, ie a wrong stock selection.

Remember the issue of making mistakes? Here's some words of advice yet again...

There is no shame in making a mistake. Despite a great deal of research and analysis, I make plenty of them -- and so does every other investor -- because the future is inherently unpredictable. But there is shame in refusing to acknowledge a mistake and rectifying it. - - Warren Buffett

So if a stock goes up after we decided to sell (ie the stock investment makes no sense no more), what's there to be frustrated?

Should we continue to stick to our game plan and not get bothered? (see this blog posting: Developing an Investment Philosophy )

Or should we try to get the best possible price out of our mistakes? (Isn't this like HOPING for the market to correct our mistakes?? Does it make sense? Are we even that lucky all the time that the market will rectify our mistakes? What if that one mistake wipes us out of the game? How then?)

Lastly...

"persistence can be a fine quality, but blindly, stubbornly and obstinately pushing ahead in the wrong direction is not going to make you more successful"...

How very true!

Remember ... there is a verv, very fine line between being correct and being stubbornly wrong... hence it is most important that one's persistance must be rational!

Internet, Investing and US

I'm recycling this earlier blog posting (Feb 13th 2006).

Why? Because I think it is very interesting and interestingly fitting that I bump this article to the main page. (and sadly, the only known way that i know is to delete the older posting and create a new one again!)

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

There's this nice little book by Dr. Richard Geist called Investor Therapy. Wallstraits.com had an article based on this book some time ago: Investing In the Internet Era

Here's a snippet from the Wallstraits.com article.

...Psychologist Richard Geist says, 'These new communication processes are restructuring how we do business, how we form social organizations, how we relate to one another, how we understand ourselves, and how we invest.' Psychologically, the Internet (stock chat sites) facilitate random intertwining of people, machines and organizations. We can communicate in spaces (cyberspace) instead of places. A single opinion, valid or self-serving, can be spread to millions of anonymous readers instantaneously. Dr. Geist points out some important implications of this phenomenon that we should all consider.

First, in the new economic era we will continuously perceive large groups forming around us, thus exacerbating the pull toward crowd behavior. Whenever investors feel uncertain, they turn to the Internet, an electronic space that provides information (erroneous or not) to support any view they want to confirm. As reliance on this new aid to decision-making increases, crowd behavior is exacerbated.

Second, the pressures of the herd increase geometrically when there is a live community voting for decisions in real time. As a result, investors will have an increasingly difficult time resisting the influence of the herd at major turning points in the market. If you turn to a stock message board just before making a trade-- even when you've done intensive research-- it can be extremely difficult to resist the impact of the most recent ten messages discouraging you from buying your stock.

Third, in between turning points, when in the past the herd has often been correct, major whipsawing of small investors can be expected. Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.They will be influenced in and out of positions with a kind of volatility not seen before on such a mass scale.

Another way of thinking about the effects of cyberspace on investing is to consider psychology's three traditional areas of expereince: the external world, our inner world, and the boundary that separates them. The external world refers to our perceptions of our surrounding environment; our inner world refers to our fantasies, daydreams, and emotional reactions; and the boundary that separates inner from outer is our skin. Individuals become disoriented and upset when the skin fails to maintain the boundary between inner and outer.

~~~~

Interesting isn't it?

Do you agree that the herd mentality exist in internet investment forums/message boards/groups? Take the most knowledgable, intelligent person in that group, should one follow the investment idea suggested by that most knowledgeable, intelligent person? And when the majority of the group agrees with that stock selection, should one follow because everyone else believes in the suggestion?

And the last part, this I think is rather interesting. I had a comment back in this blog posting, Sun Tzu: Grandiosity . Anon mentioned the following: "By monitoring the guru prediction, it will be very useful to take the contrarian approach when they are falling out of favour. One of the most useful good indicator to be incorpareted in one's trading approach."

Compare what was commented versus Dr.Geist remarks.

Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.

Now Anon has suggested to use the contrarian approach when a so-called stock guru is falling out of favour, while Dr.Geist remarks that because the investors belongs to that internet investment forums/message boards/groups, the investors are subjected into a situation where they are influenced either to act contrary to the group or to follow the group decision. The alternative? Why do we have to act for or act against the stock selection? Since so many other stocks avaliable, why can't we just avoid?

Have you seen internet boards being subjected to mainly one stock investment idea? Why this one stock? Well, this is the popular stock being championed by the leader or the so-called most intelligent person in the group. Now in regardless of whether this stock selection has its merits and justifications as an investment grade stock, the interest on that stock has been created. And the members of this group is then being subjected to act for or act against the stock.

Now this plummeting stock could also cause unreal danger. This is as suggested by Dr.Geist, investors will be influenced to act contrary. For example, if the stock guru had been suggesting a buy on the stock at 1.20. Now what if the stock plummets to only 60 sen. Wouldn't this influence one to buy at 60 sen? The popular thinking would probably be that if the guru called a buy at 1.20, at 60 sen, how wrong can one be? For a stock to plummet from 1.20 to 0.60, commonsense will tell us that something is seriously wrong with the stock. Right? For example, the stock's fundamentals are simply decaying. A continuous decline in net profits could easily cause a stock to plummet so badly. And the next danger? What if the decline in earnings turns into a loss in earnings? Not possible? Or what if the losses continue for a prolong period? How would one rate the probability of it not happening? And what will happen to the stock price then? Will it plummet some more? Dare we take such risk? And is it even wise to take such a risk?

How?

So, do you think that investing is a game of follow you, follow me?

How does one rate such investing strategy? Is it true that many poor investment results occured because investors joins chatrooms/email groups/stock forums/message boards in search of investment idea(s)? The search for an investment guru so that one could follow and benefit from the guru's stock picks. What if the so-called investment grade stock reasoning is simply flawed? Not possible? Even stock legends like Warren Buffett acknowledges and admits to investment mistakes. As long as there is a crowd following a so-called sifu of a chatroom, it is deemed that the investment is good. And worse still, they refuse to believe that their worshipped sifu could be wrong!

Oh, and even if the so-called guru knows that they are wrong, would they ever admit to his or her followers in the group? For if and when they do admit they are wrong, wouldn't it create a selling-panic of some sort within that group?

Here are some possible risks when one picks up investment ideas from stock message boards

1. Vested Interests. Guru buys the stock at 0.80, and they only SHARE their idea to you at 0.90. And then because there is a crowd instinct acting upon it.. the stock goes up to 10% to 0.99. But the originator of that idea cost is only 0.80! Who benefits more? The stock guru or you? Or is this (vested interest and stock guru profiting) all ok as long as we also profit from the stock investment idea(s)? But what if we don't?

2. Some stock investment ideas are ACTUALLY based on speculations. Wouldn't it be silly to invest in a stock when the stock guru is merely speculating on the stock?

3. Some stock investment ideas are ACTUALLY based on very poor fundamental reasonings. The faulty stock selection issue. Actually, I have seen it happen quite often. The fundamental reason itself to buy the stock could be based on wrong data. For example, the earnings could be boosted by one-off earnings but the originator of this idea had failed to recognise this fact. How? If you follow you follow me, then it would a simple case of a blind leading the blind! So do check the facts. Just the facts. (and i have seen cases where the reasonings is so good that it blinds the actual facts!)

4. The right reasoning or the right stock movement? Sometimes one would read in message boards why certain stock is not worth investing in. But it does not necessary means that stock is going plumment to the deep blue sea cos as everyone knows anything could happen in a stock market. Rotten stocks can sometimes go up if there is manipulations. How? Which is more important? The right reasoning or the right stock movement?

How brown cow?

Winning Wars And Losing Fortunes!

Selling Early Can Win Wars and Lose Fortunes!

According to a story passed down through many generations, more than 800 years ago in China, in the State of Song, there lived a man by the name of Zhang. He bleached fabrics for a living, which was tough work, especially during the brutal cold winters in Northern China when the gone-dry air rapidly cracked the skin on Zhang’s wet hands. An enterprising man, Zhang formulated a special hand cream to prevent his skin from cracking as he worked. His secret formula became well known in his land.

One day, as Zhang was working on his fabrics, a merchant by the name of Lu appeared at his door and offered hum 100 ounces of gold for his secret hand cream formula. Zhang had been bleaching fabrics his entire life. He had learned his trade from his father, who had learned from his father before him. They had always been poor, and the three generations of fabric bleachers combined had never amassed a fortune equivalent to this sudden offer of 100 ounces of pure gold. With this amount of money Zhang could feed his parents, his wife and his children for their entire lives, and there may still be some left over to will to his children when he died. So Zhang accepted the offer and sold away the rights to his secret hand cream formula.

It was winter, and Merchant Lu had a plan. He took Zhang’s recipe to the State of Wu, which was in the midst of a bitter war with the State of Yue. Merchant Lu made a huge supply of Zhang’s hand cream and presented it to the King of Wu. The King of Wu was on the verge of a grand naval offensive against the King of Yue, and immediately saw the advantage of Merchant Wu’s offer. Before the battle began, the King of Wu ordered his soldiers to apply a generous coating of Zhang’s secret cream to their hands.

Soon a fierce battle erupted. It was bitter cold and a strong dry wind blew from the north. The water was freezing cold and the soldiers fought spiritedly. They fought for three days and three nights before the battle eventually ended. The war was over because the Yue solders could no longer fight. Their hands were so cold and the skin was severely cracked and their flesh was so sore they could no longer wield their swords. They could no longer throw their spears. They could not even raise their shields. They had no choice but to surrender to Wu’s army.

King Wu had won a great victory. To show his gratitude to Merchant Lu, the King awarded him with 10,000 gold coins and a large estate worth more than 10,000 times the price he had paid Zhang for the secret hand cream formula only a month earlier.

What is the moral of this ancient story of Zhang? When Sun Tzu-style investors hone their skills to the point they can confidently identify a great business and bravely purchase the shares when they are safely priced below half the intrinsic value, they should be very reluctant to sell, even for what appears to be a sudden windfall profit. As your business gains momentum with improving sales and profit, there will be many a Merchant Wu offering you a seemingly tidy sum for your shares. Like poor Zhang, you may find that a short time later your hand cream company shares had escalated in value 10,000-fold.

Wait for the next release of financial results, investigate further to uncover new developments, and recycle each business back through your screening and valuation process with all new data before you make a hasty decision. Had Zhang waited just a few days to consider Wu’s offer, the anxious Wu would have likely made a much larger follow-up offer for Zhang’s secret formula in pursuit of a profitable deal with the King of Wu. Think carefully why the market is suddenly offering you a much higher price for your shares. Remember Master Sun’s discussion of the nine grounds, as an exhaustive re-assessment of your investment business, industry environment, and psychological conditions of the market can prevent you from costly early sales of fine long-term investments just beginning to blossom.

Learn to buy assertively when opportunity presents itself, but sell reluctantly and consider selling your losers first.

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

This great story is again taken from Curtis Montgomery's Sun Tzu On Investing.

This story reminds me of Warren Buffett's investment success in Washington Post ( see Using Our Advantage ) . Warren's success story in Washington Post was also mentioned by Montgomery in his book.

Here is Montgomery's version of Warren's Washongton Post success story:

The Washington Post

In 1971, Katherine Graham decided to take her family newspaper and publishing business public. Katherine Graham was respected as an independent leader, and just two days after issuing public shares, she gave the go ahead to publish the Pentagon Papers despite governmental threats. In 1972, the share price of the Post climbed steadily, from $24.75 in January to $38 in December. Although business at the paper was improving, the mood on Wall Street was turning gloomy.

In 1973, the Dow Jones Industrial Average began to slide. By spring, it was down more than one hundred points to 921. The Washington Post share price was down 14 points to $23. Gold broke through $100 per ounce, the Federal Reserve boosted the discount rate to 6%, and again to 6.5% by June, and the Dow Jones Index fell below the 900 point level. Meanwhile, Warren Buffett was quietly buying shares in the Washington Post, eventually accumulating 467,150 shares at an average cost of $22.75, a purchase worth US$10,628,000.

How did Buffett view the gloom and doom market that was driving the Post price to new lows? In 1973, the total market value of The Washington Post was $80 million, yet Buffett independently calculated the intrinsic value of the business at $400 million to $500 million. Cash flow produced by the Post in 1973 was:
net earnings ($13.3 million) + depreciation ($3.7 million) - capital expenditures ($6.6 million)= $10.4 million.

If the annual cash production of $10.4 million is divided by long-term Treasury bond yields at the time (6.8%), the value of The Washington Post Company reaches $150 million. Buffett believed capital expenditures would eventually equal depreciation, increasing the value to $200 million. Furthermore, he believed the unusual pricing power of a newspaper, a natural consumer monopoly, allowed earnings to grow faster than inflation, increasing the value to $350 million, and if profit margins improved as much as 15%, the value would rise to $485 million.

According to Berkshire Hathaway’s 2001 Annual Report, Buffett’s initial investment of less than $11 million in Washing Post stock had grown in value to $916 million, an astonishing return of more than 83-times the initial outlay, an annual compounded return from 1973 to 2001 of 17% before considering significant dividend income.

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

Warren identified the great business in Washingto Post and realised that it was selling at a large discount from its underlying business values. He purchased the stock some 33 years and he has held on to his investment ever since. An investment which grew from 11 million to about 1.3 billion! An annual compounded return of 15.58% for 33 years.

See how Warren won his fortune?

Btw.. for those that is interested... here is Washington Post's pretty pix..

http://finance.yahoo.com/q/bc?s=WPO&t=my

Internet, Investing and We

There's this nice little book by Dr. Richard Geist called Investor Therapy. Wallstraits.com had an article based on this book some time ago: Investing In the Internet Era

Here's a snippet from the Wallstraits.com article.

...Psychologist Richard Geist says, 'These new communication processes are restructuring how we do business, how we form social organizations, how we relate to one another, how we understand ourselves, and how we invest.' Psychologically, the Internet (stock chat sites) facilitate random intertwining of people, machines and organizations. We can communicate in spaces (cyberspace) instead of places. A single opinion, valid or self-serving, can be spread to millions of anonymous readers instantaneously. Dr. Geist points out some important implications of this phenomenon that we should all consider.

First, in the new economic era we will continuously perceive large groups forming around us, thus exacerbating the pull toward crowd behavior. Whenever investors feel uncertain, they turn to the Internet, an electronic space that provides information (erroneous or not) to support any view they want to confirm. As reliance on this new aid to decision-making increases, crowd behavior is exacerbated.

Second, the pressures of the herd increase geometrically when there is a live community voting for decisions in real time. As a result, investors will have an increasingly difficult time resisting the influence of the herd at major turning points in the market. If you turn to a stock message board just before making a trade-- even when you've done intensive research-- it can be extremely difficult to resist the impact of the most recent ten messages discouraging you from buying your stock.

Third, in between turning points, when in the past the herd has often been correct, major whipsawing of small investors can be expected. Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.They will be influenced in and out of positions with a kind of volatility not seen before on such a mass scale.

Another way of thinking about the effects of cyberspace on investing is to consider psychology's three traditional areas of expereince: the external world, our inner world, and the boundary that separates them. The external world refers to our perceptions of our surrounding environment; our inner world refers to our fantasies, daydreams, and emotional reactions; and the boundary that separates inner from outer is our skin. Individuals become disoriented and upset when the skin fails to maintain the boundary between inner and outer.

Interesting isn't it?

Do you agree that the herd mentality exist in internet investment forums/message boards/groups? Take the most knowledgable, intelligent person in that group, should one follow the investment idea suggested by that most knowledgeable, intelligent person? And when the majority of the group agrees with that stock selection, should one follow because everyone else believes in the suggestion?

And the last part, this I think is rather interesting. I had a comment back in this blog posting, Sun Tzu: Grandiosity . Anon mentioned the following: "By monitoring the guru prediction, it will be very useful to take the contrarian approach when they are falling out of favour. One of the most useful good indicator to be incorpareted in one's trading approach."

Compare what was commented versus Dr.Geist remarks.

Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.

Now Anon has suggested to use the contrarian approach when a so-called stock guru is falling out of favour, while Dr.Geist remarks that because the investors belongs to that internet investment forums/message boards/groups, the investors are subjected into a situation where they are influenced either to act contrary to the group or to follow the group decision. The alternative? Why do we have to act for or act against the stock selection? Since so many other stocks avaliable, why can't we just avoid?

Have you seen internet boards being subjected to mainly one stock investment idea? Why this one stock? Well, this is the popular stock being championed by the leader or the so-called most intelligent person in the group. Now in regardless of whether this stock selection has its merits and justifications as an investment grade stock, the interest on that stock has been created. And the members of this group is then being subjected to act for or act against the stock.

Now this plummeting stock could also cause unreal danger. This is as suggested by Dr.Geist, investors will be influenced to act contrary. For example, if the stock guru had been suggesting a buy on the stock at 1.20. Now what if the stock plummets to only 60 sen. Wouldn't this influence one to buy at 60 sen? The popular thinking would probably be that if the guru called a buy at 1.20, at 60 sen, how wrong can one be? For a stock to plummet from 1.20 to 0.60, commonsense will tell us that something is seriously wrong with the stock. Right? For example, the stock's fundamentals are simply decaying. A continuous decline in net profits could easily cause a stock to plummet so badly. And the next danger? What if the decline in earnings turns into a loss in earnings? Not possible? Or what if the losses continue for a prolong period? How would one rate the probability of it not happening? And what will happen to the stock price then? Will it plummet some more? Dare we take such risk? And is it even wise to take such a risk?

How?

So, do you think that investing is a game of follow you, follow me?

How does one rate such investing strategy? Is it true that many poor investment results occured because investors joins chatrooms/email groups/stock forums/message boards in search of investment idea(s)? The search for an investment guru so that one could follow and benefit from the guru's stock picks. What if the so-called investment grade stock reasoning is simply flawed? Not possible? Even stock legends like Warren Buffett acknowledges and admits to investment mistakes. As long as there is a crowd following a so-called sifu of a chatroom, it is deemed that the investment is good. And worse still, they refuse to believe that their worshipped sifu could be wrong!

Oh, and even if the so-called guru knows that they are wrong, would they ever admit to his or her followers in the group? For if and when they do admit they are wrong, wouldn't it create a selling-panic of some sort within that group?

Here are some possible risks when one picks up investment ideas from stock message boards

1. Vested Interests. Guru buys the stock at 0.80, and they only SHARE their idea to you at 0.90. And then because there is a crowd instinct acting upon it.. the stock goes up to 10% to 0.99. But the originator of that idea cost is only 0.80! Who benefits more? The stock guru or you? Or is this (vested interest and stock guru profiting) all ok as long as we also profit from the stock investment idea(s)? But what if we don't?

2. Some stock investment ideas are ACTUALLY based on speculations. Wouldn't it be silly to invest in a stock when the stock guru is merely speculating on the stock?

3. Some stock investment ideas are ACTUALLY based on very poor fundamental reasonings. The faulty stock selection issue. Actually, I have seen it happen quite often. The fundamental reason itself to buy the stock could be based on wrong data. For example, the earnings could be boosted by one-off earnings but the originator of this idea had failed to recognise this fact. How? If you follow you follow me, then it would a simple case of a blind leading the blind! So do check the facts. Just the facts. (and i have seen cases where the reasonings is so good that it blinds the actual facts!)

4. The right reasoning or the right stock movement? Sometimes one would read in message boards why certain stock is not worth investing in. But it does not necessary means that stock is going plumment to the deep blue sea cos as everyone knows anything could happen in a stock market. Rotten stocks can sometimes go up if there is manipulations. How? Which is more important? The right reasoning or the right stock movement?