Want to pick stocks? kcchongnz
Want to pick stocks? kcchongnz
“An investment operation is one which, upon thorough analysis,
promises safety of principal and a satisfactory return. Operation not
meeting these requirements are speculative” Benjamin Graham
Many readers have the wrong impression that I discouraged investors
investing in Malaysian unit trusts. That isn’t true as on average, unit
trusts generally have been providing good long-term risk-adjusted real
return (return after adjusted for fees, tax, inflation etc), higher than
the fixed income as shown in my appended post below.
I have to qualify here that comparing with EPF and ASB, this may not be
true as these instruments have much lower risk and hence the
risk-adjusted returns of unit trust may not be superior to EPF and ASB.
However, there is no free lunch in this world. It was shown in the above
article that on average, the unit trust funds underperformed the
market, at about the cost of upfront fees, annual total management
expense etc. This total leakage can amount to 4% a year as described in
this article here.
And how do you like putting your money in a fund where the fund manager
places a large amount into fixed income and doing nothing for years,
extracting large amount of annual fees and expenses, and your fund
severely underperformed the market?
So you get fed up and decide to invest your money by yourself! But
before that let us see how retail investors have been doing investing on
their own.
The performance of individual investor
Below is an email I just received today from a reader here.
[Hi KC,
Been seeing your posts and thoughts on I3Investor, would like to acquire more info on value investing.
I am 28, been in the stock market since 4 years ago, with a total
net loss, as i've made many stupid mistakes (margin, contra/intra, sell
at loss, etc....), until recently have come across the real meaning of
'investing'. However, it is still very unclear for me to see those
financial figures and how to utilize them to help in intrinsic value's
calculation.]
This is what I called humility, recognizing that one has made mistakes
and taking steps to correct them. Humility in investing can lead you to
higher probability of success, unlike arrogance as below. Arrogance in
investing is very dangerous.
[Posted by blank > Sep 24, 2013 06:18 PM | Report Abuse 
Sorry fundamentals not my style haha. I'm more of a trader, using technicals and behavioural finance. I made 700% last year.]
[Posted by blank > Sep 24, 2013 07:15 PM | Report Abuse
Haha kcchongz u can say whatever you want. I just know I have all
the profits in my bank now :). Btw just to let you know. I'm vested 6
digits in mpcorp at an average price of 0.33. Excluding warrants.
Cheers]
MPCorp closed at 20 sen on 24th April 2015, compared with
about 55 sen when the above comments were made. By the way, I am here to
discuss an issue, and not a personal attack.
Brad M. Barber and Terrance Odean in their paper “The behaviour of
individual investors” in the link below shows that collectively
individual investors trading on their own under-performed the market.
However, this average performance of individual investors masks
tremendous variation in performance across individuals. The
underperformance was due to information asymmetry, overconfidence,
sensation seeking and action chasing, failure to diversify, easily
influenced by rumours, tips, media and internet forums etc.
Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets.
Based on their analysis, the average investor had a 2.3% annualized
return over the 20 years from 1993 to 2012, way underperformed the
market return of 8.4% during the same period. To put that into
perspective, an investor invested $100,000 in the S&P500 20 years
ago would today have a total portfolio of around $502,000-compared with
only $156,000 for the average investor. This return is not even enough
to beat inflation and the total money left today can’t buy the things
one could buy 20 years ago. It would be worse if one borrowed money to
invest and get what an average investor does, his portfolio will shrink
to less than $50,000 now and he now owes the bank more than $50000. Of
course he will claim that he is not an average investor, but a super
investor and this predicament won’t happen to him.
Why do individual investors perform so poorly?
The main reason why individual investors perform poorly is because in
the stock market, the odds are leaning heavily against them in an uneven
playing field. In Bursa, most retail market players are traders and
speculators, rather as investors. If you are a regular reader in public
forums on investing, it is hard to dispel that notion. Trading and
speculating, unlike investing, is a zero-sum game, no doubt about that.
It is not difficult to guess who the winners and the losers are in this
type of game. No prize for the correct guess. The problems actually go
deeper than that. The herd mentality and psychology of fear and greed,
overconfidence, sensation seeking etc also play a very important role in
the outcome of investing experience of individual investors.
Market efficiency
As much as one disagrees, the stock market is somewhat efficient,
especially in the long-term. There are thousands of well qualified and
experienced professionals watching over the market every minute and
every hour. As a consequence, any market mispricing generally would have
been quickly arbitraged away by eagle-eyed professionals most of the
time; low price stocks bidden up, and high price stocks sold down. Hence
in an efficient market, it is hard to find bargain stocks and harder
for anyone to outperform. It is not easy even for professional, what
else can you say about retail investors. The problem is exaggerated by
the inherent problem of the impossibility of forecasting the future as
investing is about the future, not the past.
The odds are against retail investors
Bursa is dominated by 60% of fund managers and institutional investors,
local and foreign. The investment bankers and fund managers especially
have all the financial, human and computer power and all kind of
resources at their disposal. Furthermore there are syndicate players,
insiders who can easily manipulate the market at the expense of retail
investors. They can move the market where retail investors dwell.
If you think charts alone can provide all the information for you to
make money, think about it again. Even if a chart can predict human
behavior correctly, when there is a “breakout” or going to be one, or
something else, who will spot it first? Who have the resources and
computer power to do all the charting fast and furious before you see
it? Hack, syndicates and insiders can just build the nice charts to
deceive you, without blinking their eyes.
It is really a jungle out there for retail investors. They as a whole
have little chance, unless he is the “chosen one”. It is a loser’s game
for retail investor.
Human Psychology
Retail investors are greatly influenced by emotions when making
investment decisions. It is part of who they are as human beings. They
tend to exhibit herd’s mentality. You buy, I buy. What business does the
company do? Are they making money? I don’t know and I don’t care. They
chase hot stocks, tips, hypes and fads from interested parties when
their prices have gone up sky high. Well it is ok to buy high as there
will be others who will buy higher from us; the greater fool theory and
the “me too” lemming investing strategy. You make a lot of money, I want
to make more, and so many people run, I run too; why? I don’t know and I
don’t care; greed and fear.
When a stock is going up, everyone gets excited and start to join in the
party, only to experience the power of mean reverting shortly after
that. The cognitive bias of loss aversion prevents them from selling
when they realize that they are wrong in their judgment, only to sell
close to its bottom when they then need money to chase other hot stocks
or suddenly remember this strategy of cut-loss thingy. So the buy high
and sell low strategy. This is one of the biggest reasons why so many
people lose money when they invest, in spite of the fact that the
general trend of the market is up.
Even professional fund managers are not spared of this fear and greed
cognitive bias. Most funds are fully invested at market peaks and heavy
in cash when market bottoms. See how icap.biz has been with so much cash
so many years ago when the broad KLCI was half its value then compared
to now.
Overconfidence of individual investors also explain their relatively
high turnover rates causing high transaction costs and poor performance.
Men, who are more prone to be overconfident than woman, trade more and
perform worse than woman. Are you a man?
Many people treats investing as entertainment, like many people like to
gamble. This sensation seeking activities lead to high trading
activities in hot stocks, hypes and fads with high volume, going in and
out for fun, action chasing and ultimately incurring high transaction
costs and leading to huge losses and detrimental to their investments
outcome.
If the odds are against me investing successfully, what should an investor do?
It should be clear that individual investors are, on average, not good at investing. What are the options available for them?
There is no variety of exchange traded funds in Bursa. Many unit trust
underperformed the market the last five years and you don’t like to pay
fees for some meager return. So what to do? Want to invest yourself in
individual stocks?
Is there any chance that you can earn better return from the unit trust funds without having to spend too much time and effort?
Yes, I believe individual investors have good chance of earning better
returns. You don’t need to be a finance and accounting professional.
Neither do you need to know complex financial theories. But you do need
to learn the basics of the language of business, after all investing in a
stock is investing in a small piece of a business, and knowing the
language of a business, which is not difficult, is a prerequisite if you
want to be successful in investing. It is just logic. The other
important thing you will learn is the psychology of investing, having a
proper mind set when investing, and some useful philosophies of
investing.
With the prerequisite knowledge and experience, a proper mind set, play
your own game, and not dancing to the tunes of institutional investors,
the syndicated, manipulators and insiders, your chance of success in
investing is certainly much higher than other retail investors. This has
been convincingly proven so in the past.
Remember what the research of Brad M. Barber and Terrance Odean in their
paper “The behaviour of individual investors” above concludes?
“this average (poor) performance of individual investors masks tremendous variation in performance across individuals.”
I will deliberate why this has a higher probability that it will work. After all Charles Munger said,
"When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'"
For enquiry, please contact me at
K C Chong (25th April 2015)
i3investor.com
