Saturday, January 31, 2009

Investment soul searching

I did more soul searching in terms of my investments education. I have changed my perspective drastically, even more so as the crisis unfolded right in my very eyes. Here’s a few important lessons that I wished I didn’t commit:


1. Mistaking luck for skill.

When the bull was charging at everything back in 2006 and 2007, I was blinded. I mistook skill for luck. I was dabbling in warrants even though I do not know anything about it, and trading counters like flipping burgers. The tragedy happened when I won, which emboldened me and I began to think that I had real skill. It didn’t take a few ups and downs to wash me out, since at that moment, I had no skill and had run out of luck.

What a humbling experience.


2. Disregarding dividends

After I stopped trading and deciding to see the market in terms of more fundamental aspects, I disregarded dividend stocks and wanted to go all out for growth. I thought that dividends giving stocks means that the company is at the matured stage in its corporate lifespan, hence it’s not going give me a lot of capital gains. Well, how wrong was I… I did not know the true relationship between value and growth – they are like a pair of chopsticks, and one couldn’t do without the other. In my desire to get maximum capital gains, I despised dividend stocks.

Little do I know that as part of the total returns of an investment, dividends are one of the most stable and significant portion contributing to it.

And when I realized how important dividends are, I swung to the other extreme of it. I bought dividends stocks without considering the price of the stock nor the prospects of future dividend payment. Both are equally sinful. So what have I learnt?

Do not disregard dividends when you buy a company. Yet do not buy a company solely on the dividends.


3. Not being satisfied with market returns

This is another humbling experience. When I started learning about valuation, I started to think that I know a lot. The safety of having an intrinsic value and subsequently buying below that value makes me feel safe in an illusory way. Thus lie the danger of knowing too little. I was at the top of the world and thought that I can get a return of 15% per annum.

Well, I still do not know if I can hit that kind of returns, but I certainly know that that is the average returns. This means that in certain years, one can get very bad returns which (hopefully) is offset by years with greater returns than the norm.

These days, I wondered if I will not do any better being satisfied with market returns. By market returns, I mean roughly 8-10% per annum over at least 10 years. For the effort that I put into my investment, and not seeing the results, I wonder if I am actually working hard but in the wrong direction. That’s discouraging, to say the least. Will it be better to satisfy oneself with market returns by buying into suitable instruments that mimics the market, and then allocate a small amount of one’s capital for such ‘luxuries’ as individual stock picking? Might not be such a bad idea at all.

To improve one’s situation, it is important to do a honest assessment of one’s current situation. Once you know where you stand, then you can plan to move forward.

11 comments :

PanzerGrenadier said...

Hi LP

The investment game is for the long term and so long as we engage in self-reflection now and then, I think the tuition fees paid are worth it. What's not worth it is if we continue making the same investment mistakes. :-)

I'm now more actively exploring how to grow online income in addition to putting money in dividend paying blue-chips.

Be well and prosper.

No Regret said...

Seem to me, u still have not learn from yr mistake..
To me dividend stock is useless during bull time...and even worthless during bear time.
Gd luck!

la papillion said...

Hi no regret,

Why do you say dividend stock is useless? Care to explain further from your experiences?

No Regret said...

well..during bull mkt, growth stock helps u earn more money, and dividend stock are more costly to buy,agreed?
during bear mkt, everything gets cheaper and when dividend stock revenue dropped dividends drop too, agreed?
then why buy into it in the first place.Yes,u can earn money but lesser then those who hit and run. I don't advocate gambling but u must know how to read mkt trend...
Do u think the mkt has bottom? I think not... I know I am half right because I know it will not go up for the next 1 year.
learn from those who make millions..they are the one who have the most logical mind and hindsight.
- my 2 cent

la papillion said...

Hi no regret,

Thks for explaining more on what you've said. I suppose you're someone more inclined to technical analysis.

You must have got me wrong, I do not advocate buying a dividend counter purely for its dividend. In fact, dividend are just a nice bonus, good to have it when they are declared. I will not buy a dividend counter because they are 'defensive' - nothing is really defensive in a bear market, as you rightly put it so.

What I mentioned in the post was that I disregarded dividend counters totally because of misconceptions- which isn't such a good idea.

Hey, thks for sharing your views!

kurt said...

another sharing write up, learn from lesson and move on to be better. I believe you would.

No Regret said...

no problem at all..maybe u also mis understood my meaning of hit and run..
I start off with only 10k during the 1980s..
make my first 100k during 1996s..
make my millions during 2006..
now I am 95% cash.
hopping to make my first 10 mil in the next 7 years.
all these without TA or FA..

la papillion said...

Hi Kurt,

Thanks for reading my posts. Hope you learn something in it as well :)

la papillion said...

Hi no regrets,

Wow, your returns are 10x more each time, so I'm sure you can hit your 10 mil in the next round.

Can you kindly share your experience? Do you enter one big bulk and exit one big bulk? How do you know that the market is going to reverse?

Thks in advance!

No Regret said...

Should be my last posting here...
-ignore all penny/S share/reits/unit trust/bonds/oil/gold/warrents....
-it is actually not difficult to sell/buy blue chips in bulk..but I have to agreed that the commission fees is a bit heartache as the amt goes up.
-trade as little as possible to maximum yr returns...most of my holdings lasted for 5-8yrs
-reinvest your dividend
-sharpen yr EQ and control yr emotions..
-Well lastly..I cannot share what i am going to buy and when i will buy/sell..this is not a stocks tips sharing session..

Anonymous said...

No Regret,
1) How do you know which bluechip to buy?
2) Do you determine an intrinsic value for the bluechip and buy only if it's under?
3) Do not concentrate solely on Singapore stocks?