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:
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.