Thursday, November 20, 2008

Silly stubborness and Cannular conviction

What's the difference between stubbornness and conviction? I was linked to this thread in Wallstraits by musicwhiz, but it was during one of those walks, with the pettering and pattering of the rain hitting my umbrella that I thought a little more deeply about this.

Let's give a scenario to this. I researched in company X and after months of research, I finally bought into company X at a price that I deemed attractive. The price of company X subsequently dropped to 50% of my buy price. If you've been in the stock market for some time, you'll realise that people always have opinions about the stock you're holding. It's good, it's dangerous, there's better buys, sell now, hold first, reaching support, touching resistance...those sort of opinions. Now what if some dear friend of mine told me to sell company X and I refused?

Am I stubborn or am I fully convinced of my investing prowess?




If there's a short answer, I'll say it depends. It depends on the timeframe that one is talking about and the outcome. In the short run, I might have lost 50% of my capital when the price sank 50% from my buying price, but who dares to say that the stock will never become a double or triple bagger in the future? Conversely, who dares to say that the stock will never go belly up and I'll lose 100% of my capital?

I think if the outcome of my investment goes in my favour, I'm not stubborn, I'm a person with strong views and conviction and not easily swayed by noises. But if the outcome goes against me, I'm just a stubborn fool and I could have cut losses when I could. Just think about Warren Buffett when he missed the whole bandwagon of dot.com and internet stocks. Nay-sayers are talking about him losing his 'midas' touch and is too conservative for his own good. Did you notice they said that when internet stocks went rocketing upwards while his berkshire hathaway went downwards? When the ensuing dot.com bubble burst, people started talking about Buffett as a person who knows what he is doing, and investing within his circle of competence. Blah blah.

If I learnt anything important in my 2 yrs of being in the market, it is this:

1. Don't be too quick to judge. Be careful when you say 'never', because never is a long time.

2. Don't try to rationalise too much. It's like seeing dark clouds in the sky and saying that it will rain. When it didn't, you say that the humidity isn't high enough to precipitate the water vapour, so it didn't rain. When it did rain, you say you're right because you saw the dark clouds and it always precedes rain. There are million reasons why something happens, so why choose a few to explain?

9 comments :

patrick ho said...

Hi LP,
interesting article. just wanted to say that, if u're very sure of what you're doing, go ahead. a drop in 50%: if it's underperforming the market, might want to find out what reason? I think sometimes, what we're trying to do might be a bit too complicated, I'm saying this for myself. A lot of things that we happen to think is right might not be, and vice-versa. What's most important is to minimise mistakes by sticking within our circle of competence. If we feel we aren't up to the mark, do not try to analyse that business. I find myself making this mistake lots of times. There's no need to be precisely accurate, as we normally fail to do that, but rather it might be better to be roughly accurate.

For example, for those who have invested in the oil and gas or offshore marine sector, what do we know about the business?if everyone is in it, why is SMM and KepCorp the leaders, where does the competitive advantage lie? What are the things that might affect the delivery of the semi-submersibles and the jackup rigs? what are the main problems that will be faced by these companies? What do the companies do when orders start to dry up, are there are other forms of revenue and what else can affect them?Why are they awarded contracts in the first place and not other shipyards like Cosco or YZJ?

There are many answers there that I can't seem to answer, which explains why I have steered clear of the industry as a whole, plus other reasons as well. Seems like a whole load of rubbish I typed here.Some might think, why spend so much time looking at the companies? if u missed out on one teeny-weny bit of info and get ur analysis wrong, then have u not wasted ur time? I don't think so, the purpose of investing might be to really understand bits of the business and try as far as possible to project earnings. If a simple business has a good brand,commands good margins and consistently sees cash flow into the company for 5 years, there's a good chance that it might continue this trend for the next 5 years even though it might have 1-2 years of breaks along the way(which explains the beaten down valuations), using history to project the future. The history can't be too wrong.A few hiccups here and there in earnings might not be a problem, what's most important is that we indentify that these are really hiccups and not something more dangerous in the making.

Anyhow, I also feel that good investments are the ones where good companies are bought at good prices as well. So, for now, what I'm trying to do is to find out how much the markets are pricing in for a drop as far as possible, then make my own rational judgement on whether this is reasonable or not. If there is still some optimism in the stock and the bad news is not yet priced in, a good company might be selling at bad valuations, which means a bad investment.like i said, we don't need to be very accurate, we just need to be roughly accurate, and we do this by applying a MOS.;)

PanzerGrenadier said...

Hi LP

Cannot resist adding a comment about how "Fooled by Randomness" we all are and how we underestimate how "Black Swans" will hit us.

All of us have a capacity to rationalise everything and anything. My spouse can rationalise how opening/closing the window by another 5 degrees angle would increase/decrease airflow sufficiently that makes my daughter warmer/colder in her cot!!!

Did any of the analysts, politicians, civil servants, forecasters, economists, financial theorists, fortune tellers predict about the global financial meltdown that has resulted in the start of a global recession???

Things happen, and mostly it's because of random factors we cannot possibly fathom but with hindsight we will assign 1001 reasons WHY reasons A, B and C, 'caused' Company X, Y and Z's share price to go up/down. Yes, one of the reasons may be on the mark but more often than not, it's hindsight. Looking forward from the present, those who can predict or bet accurately would be rich enough to live so well as not to be interested in share prices as their net worth in treasuries and cash would be more than enough to live on.

Be well and prosper!

la papillion said...

Hi patrick,

What a long comment you've made :) This is what I always think about circle of competence. When we started out investing, we have zero circle of competence because basically we don't know anything abut anything. But when we started to find out more in the areas that we do understand and had researched, we grew in confidence. When we say that something is outside our circle, does it mean that we haven't researched enough, haven't read enough? Or that we've read, but didn't understand?

You get my point?

In your short comments, you already posted the gist of value investing :) Good student of graham and buffett :P haha

la papillion said...

Hi PG,

It seems you're deeply affected by Nassim Taleb's book :)

I agree with what you've mentioned. I've learnt not to rationalise so much things. Life is meant to be lived forwards but explained backwards :)

PanzerGrenadier said...

Hi LP

Nassim Nicholas Taleb is the current author of the month(s) as far as I'm concerned as I'm currently reading "Fooled by Randomness".

What I like about Taleb is his irreverant style that is coated over his massive intellect.

I guess he says things that most of us are thinking at some point or another, e.g. economists and analysts are mostly (or almost all) bullshitting 99.99% of the time!

On a deeper level, his ability to rip apart and show us how the human being has this vicious capacity to rationalise everything and anything. That sinks in personally because I am living with a spouse that is a daily reminder of man (or woman's) ability to rationalise EVERYTHING. And I mean EVERYTHING!

la papillion said...

Hi PG,

Haha, my gf explains everything too :) I asked her why this why that, she can always come up with logical sounding reasons. Then I ask her why does she know everything? Hoho!

Remember, remember, twenty-second of novemeber - today's our anniversary :P

patrick ho said...

Hi LP,
yep i understd! i guess it means that u can and will be able to understand. sometimes,thr are bound to be some industries which you might not be able to understand, for eg, the competitive advantages. I'm not trying to mimic Buffett here but tech companies are not something i'll understand as well too. I'm just simply someone who's a technophobe, I've been using my handphone for 3 years already without trying something else new, and my blog's so simple u'd guess i noe nuts about HTML. I guess there are some companies that you can read up more AND understand too;)

Anonymous said...

Hello LP.

This conviction/stubborness thing is interesting. I saw the thread when I visited WS last week.

I guess from my point of view, is when mkt offers you a very good profit and when the trend turns, one is just being the stubborn idiot not to take that profit and just claim "I invest for the long term". Same goes with "I don't worry about the stock going down, I invest for the long term".

I know, many ppe. will turn around and say Timing The Mkt is impossible and all the usual reasons. To each his own I guess. Too many misconceptions of timing the mkt. Too many ppe. think timing the mkt is trying to catch the bottom - nothing is further from the truth. :)

Anyway, it all depends on your time horizon. This bear mkt is kind of once every 10years and alot of money to be made or LOST. To be made cos' if you have timed the mkt and was not being stubborn, you could have taken the profit and waited for it to come down. To be lost is alot of companies will never see their new highs again for years to come and if you are stuck there without cutting losses, then one is really screwed.. :P

Too much babbling... with nothing much said.. haha...

YOu have an interesting blog. I will try to come back here every couple of weeks.

Cheers,
mm

la papillion said...

Hi MM,

Haha, thks for visiting :)