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.