Sunday, November 04, 2012

THAT which is sacrificed to the god of Aphorism

As work begins to wind down, I started reflecting more on the articles that I read on other blogs. One of the articles struck me as worthy of further reflection, and so I mused more on it. The article talks about how compounding can be magical in the way that a seemingly small sum of money that is put aside will grow into a gigantic sum over a long period of time. There's a story of this lady Grace Groner who, shall I say passively, put a small sum of hundreds into the shares of a company that she worked for. Without taking anything out and throwing in an exciting mix of  bonuses, dividends and splits plus the most important ingredient of all, time (all 75 yrs of it), into the mixture, you'll hear a BOOMZ and out comes the magically surreal sum of 7 million.



While this story of an unknowing young lady blossoming into richness is pretty inspiring, I wonder whether the moral of the story can be as simple or as magical as "Compounding makes you Rich". I think the gadget called 'Compounding' isn't just a black boxed machine that churns out money after you add in the raw materials of time, interest rate and a principal sum of money. While these raw materials are necessary, they are not sufficient. In life, the things that are not seen are usually the most important. 



Grace Groner - the above said lady who is a closet millionaire that you would never suspect



I think the important unseen ingredient here is picking the right stock. But 'right' is so vague, so unspecific. In a general world of things, drawing a random line down the middle will divide all the things into two parts. Those that are not on the left side is on the right side, and we are none the wiser what constitutes the right side. Alright, bad pun aside, being right on a stock consists of many things. I'll try to list down some of them:


1. At the right time

2. At the right price

3. At the right amount

4. At the right industry


There are possibly many more 'rights' but my nutrient starved brain and sleep deprived body can't think of much at this moment. Ultimately, we know we're right when the market price eventually rises higher than our purchase price. It might rise slowly over a long period of time or immediately within the next few days, but we know it's going to be right when the market price rises higher than the purchase price. 



But that's the problem isn't it? Prices don't go up all in a straight line, neither do they fall linearly. When the price goes down, do we say that it's no longer right? What's the threshold that you are going to take before you call it quits? If you have a high threshold of pain, then you'll be accused of buying and holding a wrong stock and the magic of compounding becomes the curse of compounding, working against you instead of for you. I'm sure there are  many captains who went down together with the ship when their Titanic stocks hit an iceberg and starts sinking. But every once a while, you'll see cases when a seemingly sinking ship rises to the surface and soars to the sky. Are you going to be kicking yourself because you called it quits and throw down your shovel when you're only 1 inch away from striking gold?



I'll share with you this example. I bought HSBC shares in 2007 at a price of 137. When the financial crisis hit, the prices of all bank stocks plummeted and I seized the opportunity to get more of it at 28. My average price is around 75 but it keeps going lower because I participated in the scrip dividend program, where all the dividends that I get quarterly are channeled to buy more shares lesser than the allocated lot size. The year now is 2012 and 5 years had since gone by. I'm still making a loss of around 10% (there's many factors for that, one of them being the exchange rate, but that's another story another time) after 5 yrs. So what am I going to do? Am I going to be buy and hold or be right and hold? If I sell it, am I going to kick myself when HSBC soars up, say after 30 yrs, when my initial investment blossoms into a princely sum of millions? Or am I going to hold it, thinking that the magic of compounding will work its magic over time but ultimately letting my money sit on an old horse lagging behind all the thoroughbreds? 



I gave this example, not to seek advice on what to do, but to illustrate the difficulty of following market wisdom. For every market wisdom out there that extols the virtues of holding stocks for the long term and letting the magic of compounding do its magic, there'll be another one saying quite the opposite. Does it mean that only one of them is correct? Not necessarily. More and more, I think they are cosmic twins, the yin and yang of the stock market where there are no opposites but simply complementary pair. The real wisdom in reading market wisdom is to distill all the good advice and see which advice to follow and WHEN to follow. I stress the word 'WHEN' because I think all good advice has its place and while it doesn't take much intelligence to understand what a particular advice means, it does take a lot of wisdom to know when the advice is applicable and when the complementary pair is a more appropriate fit at the point in time in that particular situation. Market wisdom are supposed to be simplified reality squeezed into easy to remember sound bites. However, in the process of simplification, certain details such as the circumstances in which the advice is valid, becomes sacrificed to the god of Aphorism.



Perhaps in a parallel universe, there is this same lady who did all the same things but instead of getting 7 million, she found out that the stock she had invested went into trouble and all her money is gone with the wind. I wonder what sort of advice and moral will it be now? 

9 comments :

Singapore Man Of Leisure said...

Ah! The art of cherry-picking and data mining ;)

I recently read an article from Vanguard group that their research shows dollar-cost-averaging works against investor versus all-in lump sum investment? Huh?

It's a bit like the investment community "selling" the wisdom of buy-and-hold and then 30 years later say buy-and-hold is dead...

Or like for coffee. For every medical report that says its good for you, there's another that says otherwise.

Flavour of the decade "advice". Financial and medical.

Looking at the sorry state of once upon a time titan Japanese companies now - Sony, Sharp, Panasonic - try explaining why buy-and-hold compounded returns is not working so well to those patient investors who bought 30 years ago...

We very sure DBS and OCBC will never be like UBS or Citibank 30 years down the road?

It reminded me of the recent taxi-driver salary case. Take 1 or 2 samples and we've got our cherry pick for whatever we want to spin!

la papillion said...

Hi SMOL,

Ya lah, last time they say eat this is good for health, then after eating it for a decade, then another report came out to say eat it is bad for health. Make up your mind! People's health is at stake here! lol

CreateWealth8888 said...

Multi-bagger and Zero-bagger are Yin and Yang brother waiting for those buy-and-hold long-term investors at the end of their own party.







la papillion said...

Hi bro8888,

Can't disagree on that, on principle. But we won't know in advance which would turn out to be multi-baggers or zero baggers in advance, do we? haha

CreateWealth8888 said...

At the end of one own's party , we will know.

la papillion said...

Hi bro8888,

Then it'll be a case of too late to invest more (if multibagger) and too late to reduce the investment (if zero-bagger).

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Anonymous said...

Hi LP,

Made a recent small switch to chinese etf (badly battered too n hkd based). Dividend yield is 1.7% much lesser than hsbc though.

You are right about the "right" .... but who can really tell..

see you soon LP!

hh

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