Tag Archives: investing behaviour

The shock that finally comes

Investors had a rude shock on Tuesday morning when they found out that Dow Jones fell a whopping 1075.21 points the night before.  That followed by an after-shock tremor of another 1032.89 on Thursday, 8 Feb 2018. In total, the Dow Jones fell 1330.06 points for the week. This was the second week of fall since the peak at close of 26616.71 made on the 26 January 2018. To date, Dow Jones fell about 10% from its peak. As the saying goes when the Dow Jones sneezes, we catch a chill. For the week that passed, the STI fell about 6.5% to end at 3377.24. Although the STI volatility is much smaller, it is good enough to drive people crazy rushing in and out of the exit door. By now, we know that the recent peak of 3,600 has already passed us and we may not reach it back again so soon. As shown in reality, we do not know when the peak really is until it passed us in real time.

Out of my normal self, I was forced to react making buy and sell decisions in double quick-time to avoid being swept down by the avalanche and failing to pick up good stocks at discounts. This was happening as I was in the midst of scaling down some property stocks holdings after all the euphoria about en-bloc sales in the past few months. This will help get rid of some lousy stocks and enhance my liquidity in preparation for the next interest rate cycle. During times of distress, all stocks, whether good or bad, are all in a mixed bag, moving up and down with the market swings. Actually, such times are the real tests that separate excellent fund managers from the good ones, and the good ones from the lousy ones. As we all know, in an upmarket, everyone is an expert, but we only know who is really swimming naked when the tide recedes.

Extreme volatilities are also trying times when no classroom analyses are able to capture. It is just the human nature of greed and fear that swing stock prices up and down in real time. Even though I am a great believer of stocks’ underlying fundamentals, there are really more to just doing analyses to find out stock PE, BV or intrinsic value. To me, knowing some classroom fundamental analyses probably help us in the first 50% of winning the battle, we really need to understand how the market works as well as some understanding human & market behaviour. (That was why I decided to launch two courses instead of only one in the investing.com platform – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. The former being more a classroom analyses and the latter one being practical aspects of investing.   To me, these two parts have to come hand-in-hand to be more complete as a successful investor.) But again that does not mean that fundamentals or any analyses are of no value and can be thrown out of the window. On the contrary, I think understanding FA is extremely important. It helps capture the first 50% of the battle. It is usually during these trying times that we get to experience their importance. Stocks with good fundamentals usually fall together with the rest of the stocks during a market collapse but will get to be picked up first when we sense that the market is returning to calmness. And once the market is in the state of steadiness, these stocks leap further up ahead of the others. To me, value investing is still the most important subject to take away the stress off the crazy market place.

Happy investing!

 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Investing personality is all that matters

It is quite common to hear people making references to those famous billionaire investors, like Warren Buffet, Benjamin Graham, George Soros and Peter Lynch and many top-notch investors out there. Yes, we should learn from them, but how many of us can really able to mimic the style or to have the financial means of these investors to influence the companies in our favour?

Like I always tell students, two people investing in the same stock, one could make money and the other could lose money. So, what actually is the something that separates the two – simply investing personality. For example, Warren Buffet’s style of keeping stocks forever would certainly not be able to go down well with investors who are unable to keep stocks for 10 weeks, let alone 10 months, 10 years and, certainly, forever.

In Sun Tze’s chapter on preparation for battle in the Art of War, he pointed out the following anecdote:

知彼知己、百战不殆,

不知彼知己、一胜一负,

不知彼不知己、百战必殆。

In a similar way, we are pitching ourselves against the investing environment. Unfortunately, we can never completely understand or control the investing environment. The only thing we probably can do is to be able to control ourselves. Even that, based on the above saying, our probability of a win is only 50%. But it is an important hygiene factor as not knowing our investing personalities will see ourselves perished in all investments.

However, it is really not easy to know our investing behavior. Especially in times of a crisis, we may act in a different manner from our normal self. Very often, we tend to describe what we want to be rather than what we really are. Many people professed that they are able to ride through a stock meltdown, but when a crisis did happen, they fled so fast and sudden that ‘their tails were not even in sight’.

There were also cases that people professed themselves to be long-term investors following the style of Warren Buffet and Benjamin Graham. But when the market became too volatile, their investing style changed automatically to short-term trading.

Then there were cases when people bought into illiquid stocks or even stocks of loss-making companies in hope that they are next take-over targets. However, when the wait for the ‘white-knight’ got too long, the investors simply gave up and sold back to the market, maybe even at a loss.

Then there were cases when stocks experienced such runaway price that people were sucked into buying a stock at any price so long as somebody was willing to sell it. The bandwagon was simply too attractive to miss.

All these are classic examples of human investing personalities, and when everybody acts in concert, becomes a herd behaviour.

Unfortunately, it is not easy to fully understand even our investing behavior, especially in a crisis. I, for one, was a classic example. During the Asian crisis in 1997-1998, I thought I was able to ride through the financial storm. But when the crisis turned out to be too long and far too deep, I started to get panic and sold my stocks. The worst thing was that I sold my shares at the peak of the crisis, only to discover that the stock index recovered 75% within the following three months, and then another 75% by the following year. Should I able to hold my shares longer, I probably would have not incurred any loss, or perhaps even managed to make some. In hand-sight, it is a combination of being too foolish and too naïve for I had never encountered such a threatening crisis before. Unfortunately, I discovered my shortcomings at a high cost.

Discover your investing behavior early. It carries a long way.

Invest with care!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.