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.