Sunday, 3 August 2014

Confessions of a Serious Investor

Investing is a fascinating subject. It has the ability to captivate millions of investors and make them willing to watch stock prices on monitor screens for long hours. It also has the powers to galvanise investors to comb through long pages of financial statements filled with financial jargons without getting tired. You could be investing for 30 years and still not get sick of it. Yet, this passion for investing could present both joys and heartaches for many investors in their investment journeys.

The Awakening Moment

I cannot speak for all investors, but I think some investors will have early in their investment journeys a moment when they realise that the stock market was destined to be a part of their lives. I call this the "awakening moment", similar to the moment when Neo, the main character in the movie "Matrix", was told that he had all along lived in a world different from what he had known. It could be the moment when you struck your first Initial Public Offering (IPO) lottery, or made your first pot of gold on the stock market. For me, the awakening moment was on 20 Oct 1987, the day after the stock market crashed in US in 1987.

At that time, my father had just started investing about a year ago and I was 12 years old then, helping him to monitor stock prices when he was away at work. Perhaps because of ignorance, confidence and/or delays in communications, stock prices on the Singapore stock market opened as they had closed the day before, unaware that the US stock market had crashed by 22.6% overnight. It was not until after the lunch break that the crash on the Singapore stock market began. I remembered vividly there was a particular stock we were monitoring which normally traded at around $0.60 during that period. Before the lunch break, it was still trading at around $0.60. After the lunch break, the buyers started to withdraw their morning bids and submitted much lower bids at $0.40 while the sellers continued to offer at $0.60. I thought to myself that it was probably an entry error and very soon, the bid price would return to where it was before the lunch break. Yet, instead of converging back to the offer price, similar large gaps between the bid and offer prices appeared on other stocks. Soon, the prices started to transact at the much lower bid prices. The stock market had crashed. It was a sight that I had never seen before. At that moment, I realised that the stock market was no longer a child's play but a serious business where fortunes could be made or broken. From that moment, I knew that the stock market was destined to be a part of my life.

The Search for a Winning Formula

Once the stock market becomes a part of your life, it is very difficult to shake it off. You would spend a lot of time on it and do a lot of things to improve your investment skills and returns. The "Money" section of the newspaper becomes the first few sections that you would read everyday without fail, hoping to understand what is happening to the stock market, the economy and individual companies. You would google for the latest developments whenever your stocks have unusual price movements. Your ears would straighten up whenever you overhear any conversations on the stock market. You would learn to read all the financial jargons in financial statements and/or cryptic technical charts in the hope of finding the next winners.

I actually did not spend much time brushing up on my investment skills from 1987 till 1998, as I was still studying then. But I had time to experience the crash of 1989 (crash for no good reasons), 1990 (Iraqi invasion of Kuwait), 1997/98 (Asian Financial Crisis) and between them, the super bull run of 1993/94 (Singtel IPO).

In Jun 2001, about 3 years after I graduated from the university and was investing in the stock market with my own money, I had picked up a second-hand investment book titled "Buffettology" from a book fair by sheer luck. It was written by the former daughter-in-law of Warren Buffett and described the methods Warren Buffett used to analyse stocks. The methods in the book became the model that I used to analyse stocks to this date. Equally importantly, the book triggered my thirst for investment knowledge. I became a regular visitor to the investment section of the National Library, reading investment books ranging from time-tested ones like "The Intelligent Investor" to more contemporary ones carrying fascinating titles like "Dow 40,000", "Dow 100,000", etc. It was like Forrest Gump who kept on running non-stop while I kept on reading. Eventually, I stopped reading. But by the time I stopped, I estimated that I had probably read half of the equities investment books in the National Library. As for the other half, I had read the summary on the back covers and figured out that the content was similar to the half that I had read.

Along the way, I tested my new-found stock analysis model. The first stock that I had bought based on value investing was ASA Group, which has since been delisted from the Singapore Exchange (SGX). It was in the business of producing ceramics in China and was virtually unknown in the stock market. It was a great leap of faith into value investing by buying into a virtually unknown company. I bought it at an average price of $0.227 in Jan 2002 and sold it at $0.295 in Aug 2003 for a 30% profit. It was a small profit, but it was enough to know that value investing worked. Value investing became my winning formula.

The First Pot of Gold

Once you have tested, fine-tuned and kept faith with your winning formula, you will eventually make your first pot of gold. For investors who invest for capital gains rather than dividends, some of you might, like myself, wonder whether you would make a very good fund manager, making loads of money for your clients. You might also wonder whether you could write a best-selling investment book for the investing public. You might also want to challenge yourself and sit for the Chartered Financial Analyst (CFA) examinations.

In early 2004, I made my first pot of gold with my winning formula, generating a realised return of 33% on my invested capital. Using part of that profits, I enrolled myself in a part-time course in Masters in Applied Finance, graduating a year later. I also sat for the CFA examinations, passing all 3 levels in 2006. It was actually quite fun studying, since I was studying to improve my investment knowledge rather than for the degree to enter into the financial industry. The things that mattered were not the grades on my transcript, but how could I apply what I had learnt to make more money from investments. In any case, I became too old at the age of 30 to enter the financial industry.

The Unravelling of the Winning Formula

The problem with winning formulas is that they do not always work. Value investing was a time-tested winning formula, producing many famous investors such as Warren Buffett and Walter Schloss. For me, it had produced 18 multi-baggers over the 16 years since I started investing with my own money. But it also produced 3 wipe-outs and 8 write-offs (collectively called the "salted fishes"). It is sobering to note that I had 18 chances of doubling my money, yet, how many salted fishes do I need to encounter to lose it all had I steadfastly held on to my "winning" formula, averaging down as the share price dropped? Just one. And there were 11 of them! 

Many years later, when I looked back at this period of time, I realised that the pot of gold was probably a result of a rising tide lifting all boats rather than some truly "winning" formula that I had. At that time when you were winning in the stock market, you would feel that your "winning" formula was working well, not realising that there was probably a greater force at work. Occasionally, it is important suspend your belief in your "winning" formula and let risk management measures take over. It is no shame to make mistakes and learn from them. Many famous investors have recovered from mistakes early in their investment journeys and become stronger as a result. It would be truly wasted if you got burnt so badly that you stop believing in investing.

The Bailout

If you got burnt too badly, you would need a bailout from your parents, which I hope will not happen to anyone. For me, the bailout was a virtual one, happening before I started investing with my own money. It was during the Asian Financial Crisis in 1997, and I was one year away from graduating. Being the "smart" guy in the family, I recommended to my father to buy a financial stock that had fallen from $3 to $0.75. Unfortunately, we never saw the money on this stock again. I never mentioned about the stock again, and he never reprimanded me for it.

The problem with regrets is that they do not hit you straight away. Many years later, when the incident has long passed and you are in the comfort of your zone, you begin to wonder how did your parents managed to find the money to bail you out. Did they have to eat the humble pie and seek help from relatives and friends? As a son, you would want to do everything you could to provide them with a comfortable retirement, yet, instead of contributing to their retirement, you had to take away a part of their retirement nest-egg and/or make them suffer the humiliation of seeking help from others for your investment mistakes. You wished that your parents had reprimanded you harshly or beaten you. No, they did not. They did not grumbled nor barred me from investing further. They took it on their chins and moved on, as if the investment mistake was theirs and not mine to begin with. If ever there was any take-away from this blog post, it is this: Never, ever, put yourself in a position where you might need a bailout from your parents, no matter how good you are now in the game of investing.

Conclusion

You might be wondering why are you listening to rumblings from an investing old-timer who is probably jealous of your investment success. This is written for those who are willing to listen to the heartaches I have encountered so that you could avoid them. After 28 years of investing (including the 12 years I was monitoring stock prices for my father), I have been through the excitement of reading practically all the equities investment books worth reading in the library, dreamt the fantasies of becoming a successful fund manager and writing an investment best-seller, and gone through the regrets of requiring a bailout from my father. I am now just a boring investor.


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22 comments:

  1. Interesting recount of your journey.

    12 years old!!!???

    Wow! Talk about head-start!

    When we have survived at least 2 market cycles, we appreciate what the market gives; the market can take back too.

    Multi-baggers go hand in hand with "salted fishes".

    How to find that multi-bagger? By discovering 99 others that aren't!

    LOL!

    ReplyDelete
    Replies
    1. Yes, what goes up must come down. That's the law of nature.

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  2. Your father is a great guy.

    Other local investment blogs are full of decipher words and sentences. But yours are straight to the points and are real life experiences. .So please ... do continue with your rumblings.

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    Replies
    1. Yes, he is a great father. We children will never appreciate what our parents have done for us until many years later.

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  3. Hi,

    Enjoyed the sharing from you. =)

    Can empathise with you as I once received a bailout from my Mum after incurring some heavy losses on soccer betting back when I was 18. No scolding even though money was tight. Guess I learnt the lesson better that way.

    This is also why I will stay far away from leverage as I never want anyone to bail me out for my "mistakes" again.

    Regards,
    My 15HWW

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    Replies
    1. Yes, one bailout is one too many. We should make sure we will never need a bailout again.

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  4. great post. i like this best:

    Many years later, when I looked back at this period of time, I realised that the pot of gold was probably a result of a rising tide lifting all boats rather than some truly "winning" formula that I had. At that time when you were winning in the stock market, you would feel that your "winning" formula was working well, not realising that there was probably a greater force at work. Occasionally, it is important suspend your belief in your "winning" formula and let risk management measures take over. It is no shame to make mistakes and learn from them. Many famous investors have recovered from mistakes early in their investment journeys and become stronger as a result. It would be truly wasted if you got burnt so badly that you stop believing in investing.

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  5. This is one of the longest blog post that I've read completely (ie till the end), you see, I have a short attention span ;-)

    Thanks for sharing your interesting investing journey

    ReplyDelete
    Replies
    1. Old-timers tend to be a bit more long-winded ;) Glad that you liked the post.

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    2. You are my preferred reader. You know why. Right? LOL!

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    3. Thanks for your continued support :)

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  6. As retail investors we should measure our investing performance over one or two decades across a few market cycles.

    Whatever winning we have can lose them back and more.

    Whatever losses we have we can recover back all and more.

    That is the truth in investing over market cycles. Beware of these cycles and seek opportunities to ride on these cycles to reach our investing goals.



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  7. Great post!

    Above all things, I love reading the experiences by bloggers. It's through stories like these that we learn something and hopefully, apply to our lives. Keep it up!

    ReplyDelete
    Replies
    1. Thanks. Glad that you liked this post :)

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  8. i like this. very useful to all of us here who do not have the same experience. we are all ears.

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    Replies
    1. Thanks. Glad to know it is useful to you :)

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  9. Hi Chin Wai

    I also enjoy this post. Thanks for sharing :)

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  10. Great sharing. Thanks mate. I have 10 years only, much to learn :)

    ReplyDelete