Tuesday, January 20, 2009

Paid lessons from the Market

A lot of things have changed for me since I switched from being a trader to an investor want-to-be. I must have mentioned it before, that in the past two years of being in the market, I've learned more about myself than I could have imagined possible. I thought I already know myself quite well....well, in the face of the markets (whether in bullish or bearish times), you'll also see yourself in a different light, I'm sure.

Here's some of the lessons that I've paid to Mr.Market to tutor me. I think the lessons are not unique, as I'm sure many of those who had been in the market long enough would have known. Not in any order of importance, here it goes:


1. It's important to realise if you're trading or investing. This is especially important to those hybrids or those trying to convert from one to another. The worst that can happen (to me that is ) is that when you're investing, you start to trade your positions and flip it like burgers in a fast food joint. Or when you're trading, you start to hold it like an investor. Both methods have different entry points - for investing, you do want to get the lowest price possible but for trading, you might have to buy while the trend is up, not neccessary at the lowest price.

Take my painful longcheer lessons. I thought I'm investing, but when the price drops below my buy price, I do not want to take the losses. I convinced myself that I'm in for the long haul and tried to find 'fundamental' news that China is going to roll out their new 3G network soon. Didn't Warren Buffett buy and hold too?

Bullocks.


2. Take people's advice with a pinch of salt, or not at all. The advice is free, but whether it is applicable to you, only you can tell. This applies to all sorts of advice, including but not limited to those from your relatives, your close friends, experts, TV personality, financial advisors, brokerage reports and analysts. I'm asking you to be skeptical but not cynical - and that's a huge difference. Part of being open-minded is to allow yourself to be in a position of doubt, to be uncertain of your own situation and yet not be confused.

When I started out, I tried to get my hands on all sorts of brokerage reports. I thought that since I'm a newbie, who am I to question the professionalism and expertise of those reports. I believed, I bought, I suffered. As for analysts, if you can change your positions as fast as they can change their target price, go ahead and listen to their recommendations.

By the way, my blog is also contributing to the noise level.




3. Do not be fooled by the certainty of numerical analysis. In valuation of a company, I'm all too quick to calculate this mysterious and elusive figure called intrinsic value. Why? As long as you buy below this intrinsic value by a certain level of margin, you're good. It can even help you find your returns into the future by projecting the dividends, PE, EPS and revenue etc.

Sorry to disappoint, but it's not easy at all. I learned that intrinsic value is such a misnomer. It should be more appropriately termed intrinsic-range-at-this-point-in-time. This holy grail in investing is a function of PE, EPS, future prospects, competitive advantages, macro-socio-economic situations, among others. The uncertainties attached to each of these inputs are unknown and each itself is a function of time. Hence, to be able to rationalise a value of a company up to 2 or 3 decimal points is really pushing it.

Numbers give the illusions of certainty, do not be fooled by it.


4. Spend more time on your career, it gives the best returns for most people. This is often not mentioned. Earning passive income from investing is all good and well, but where does the first drop of money comes from? It had to come from work itself. Spend more time earning as much as you happily can and savings as much as you can comfortably is the key to wealth.

The three pillars of financial management (at least for myself) is this: Savings, Protection, Investments. The order is chronologically and logically arranged. If you take your take-home pay and spend all that is necessary to keep your life in order, that is your savings. After amassing your savings, you need to protect it from unforeseen circumstances, hence you need insurance. Then AFTER all these, you can start looking at investments. Do not skip the order, e.g. invest before one is suitably insured.

9 comments :

millionairemind said...

La Pap,

Interesting piece of self evaluation. YOu are going thro' what I have gone thro' during the dot.com bubble when I lost a bundle. I realized back then that when the mkt drops, no matter how much home work I did, I would still lose money as long as the market trend is down.

I have a journal that I keep on Y I enter a investing/trading position and when I exit. Either thro' a loss or taking profit when the uptrend breaks.

Like you, I have lost faith in the analysts and now have found an investing/trading system (essentially trend following) that suits me to a T.

I only adopt strategies and learn from ppe. who are/were full time traders or speculators and depends on the market for a living, not someone drawing a salary, writing crap reports and no need to be accountable for its accuracy, or not.

Lets see if our good karma permits us to meet up for dinner after CNY. Would love to exchange pointers with you.

Good blog and good work.

Good cheers,
mm

PanzerGrenadier said...

Hi LP

Many good investment books will tell us that to invest well is also to understand ourselves well, i.e. what ultimately are our investment objectives. When these are clear, our actions in buy/sell/long/short will be congruent.

When our objectives are muddled, so will our results. I also personally ate some realised losses in 2008 because I was trading/investing/dun-know-what I'm doing for a number of counters.

Nowadays, I'm more a dividend guy and go for value blue chips and hold until my daughter turns 18 years old....hahahahh

Anonymous said...

Glad you realise that your blog the "Cbox" is contributing to the noise as well. Like you said, advise is free and is up to us to either accpet it or reject it, to me, i rather reject all the conservations made on the Cbox.

Dancerene said...

Path to Wealth
1. Stay healthy
2. Work dilligently
3. Save religiously
4. Insure adequately
5. Invest wisely
6. If still can't attain wealth, at least be happy =)

http://knowledge-deposits.blogspot.com/2008/12/dog-wow.html

la papillion said...

Hi mm,

Always good to see your reply. Hmm, I agree with you on the fact that those who make their money in the market are those that are really worth learning from.

Hey, may we have good karma to meet, haha :)

la papillion said...

PG,

Hey, my goals have shifted too. That's what I changed from trading to investing. But I feel a switch in my investment philosophy too. Not sure where to put a finger to it now - but it's getting clearer month by month that holding forever might not be the best way to compound my returns.

la papillion said...

Hi anonymous,

Yes, cbox is contributing to the noise. That, I honestly recognise. I did not use most of the things that pple chatted in the cbox, but I'm not sure if it'll affect me or not mentally.

Why have the cbox then? Hmm, it's no longer my decision as there's a lot more interested parties involved. I don't like to start something and stop it. Anyway, I think the best part about the cbox is the friendships made online but developed offline.

That's irreplaceable.

la papillion said...

Hi dancerene,

What can I say? Totally agree! But I stubbornly refuse to believe that if you follow out all those steps, I still can't get wealth :)

BL Trading Team said...

In 2008 I had warned many people not to touch stocks. This is my same advice for 2009.