Investment Nuggets

[kazukirai]

Anyway, from the few replies thus far, it can be seen who there are 2 sides to the coin. While I will delve into the technicalities of non-financial matters, there are others who are quite the opposite. Perhaps what can be drawn is that my life before now is a "deliberate" mental block to become a financial idiot. I believe in passion more than money. I always choose the job that interest me the most ignoring the fact that I'm way underpaid or there's little room for growth. Therefore, I somehow will not spend too much time into "first hand research".

While now I take more interests in financial issues and is starting to learn about investments, I still view investments as the "side" rather than the "main". Other than prudence and respect for my FT job, I think it's also the value of money in my heart.

I hope materialism would not get the better of me.

Hi bb88,

From your posting I sense that there's this dichotomy you face- job interest vs money. I'm not sure why it's a either/or thing you see it as but i'll explain later.

I think for most people, Investing will remain a "side". Perhaps until they retire or get retrenched. I'm not sure why you say things like "Passion before money" because I cannot think of anyone living life any other way. Money is just a means to an end and it should be.

Most of us into investing aren't in it just for the money. What are we going to do with all those digital zeroes? We're all in it either because a) we love the intellectual pursuit of investing and/or we love the things that we could obtain with that money (material objects, financial security and peace of mind etc.)

In fact, the way I see it is that if you really want to pursue your interests and feel that your career progression won't take you there, that's even more of a reason to invest no? I speak for myself when I say this but I suspect many others here have a similar experience- It's because I want to pursue my interests that's why I invest.

With successful investing comes the freedom to do what you want to as you don't have to worry about doing a job just for financial sustenance or the insecurity that comes with each economic downturn or policy changes.

I hope I haven't mis-interpreted your post in anyway but my point is I think your worry about career progression getting further from interests is even more of an impetus to invest.

[Musicwhiz]

Interesingly, I am into investing for both the passion and the rewards (i.e. the money lah). It's been very invigorating for me to convert from a passion for music/songs to one for investing, as it is a great intellectual exercise for me to analyze companies and I thoroughly enjoy it (this includes the numbers hehe). At the same time, investing properly can generate good rewards and a consistent return for the practitioner, which is even better!

I guess as d.o.g. says, investing for now it just a "side-line" as most of us are healthy enough to earn active income, and are gainfully employed. I will start to fret if I come close to retirement age (or rather, unemployable age of about 50). It's good to know I have a cushion of passive income from dividends.

Moving forward, yes I hope to increase my portfolio size further to increase the stream of dividends coming in, and this will ease my burden when I hit my twilight years.

[bb88]

Upon reading this what comes to my mind is Porter's 5 Forces Analysis and Gartner's Hype Cycle. When analysing a company, it would be perhaps meaningful to analyse the market space for their key products, understand the lifecycle, the product's positioning within the cycle, and the company's strategy to "escape" from the plateau or declining stages.

Immediately Apple stands out. Apple ensures a continuity by continuously rolling out improvements, new versions, etc. with their 18-month product lifecycle to ensure the continuity of sales. For a technology-based company where there are still plenty of room for innovation that is wise. But for a matured product say paper towel, other than occasional promotions, there really isn't much room for growth. Unfortunately I didn't know how to go about buying shares then when AAPL was $90. I would have made a nice capital gain if I had more sense to learn about investing. Despite my confidence in the company I just didn't give 2 hoots about buying in. Sigh...

On a bigger picture perspective, thinking about the hype cycle will provide a different perspective to rationalise the sustainability. At the company level, I think Gartner's Magic Quadrant concept is useful.

For example I would have placed Apple in the niche market segment player previously to now a market leader/visionary where they score high in terms of the ability to execute and their vision.

The value of a company selling a trendy product, such as television shopping, depends on the profitability of the product, the product life cycle, competitive barriers, and the ability of the company to replicate its current success. Investors are often overly optimistic about the sustainability of a trend, the ultimate degree of market penetration, and the size of profit margins. As a result, the stock market frequently attributes a Coca-Cola multiple to a Cabbage Patch concept. All market fads come to an end. Security prices eventually become too high, supply catches up with and then exceeds demand, the top is reached, and the downward slide ensues.

There will always be cycles of investment fashion and just as surely investors who are susceptible
to them. It is only fair to note that it is not easy to distinguish an investment fad from a real business trend. Indeed, many investment fads originate in real business trends, which deserve to be reflected in stock prices. The fad becomes dangerous, however, when share prices reach levels that are not supported by the conservatively appraised values of the underlying businesses.

[Image: nios2-lifecycle.jpg]

[Image: gartner_hype_cycle.jpg]

[Image: gartner-magic-quadrant-bi-2008.png]

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Any take on how to understand the big boys behaviour to help us make more informed decisions or analysis?

Today institutional investors dominate the financial markets, accounting for roughly three-fourths of stock exchange trading volume.2 All investors are affected by what the institutions do, owing to the impact of their enormous financial clout on security prices." Understanding their behavior is helpful in understanding why certain securities are overvalued while others are bargain priced and may enable investors to identify areas of potential opportunity.

[Musicwhiz]

Interesting, thanks. What you have posted is basically a PLC (Product Life Cycle Chart) and the Gartner Hype Cycle looks similar to the PLC too, but more applied to technology products and businesses.

Though I am not sure if Apple is in a niche market anymore. I think it used to be the case when MS Windows used to be the dominant platform around (with Linux being relegated to the "geek" domain), but now iMacs, iPods, iPhones and iPads are pretty common and is becoming increasingly more "mass market". So perhaps Apple is reinventing itself to become more mainstream, yet is able to churn out products fast enough to ensure attention is sustained. While no one doubts the success of the iPhone for example, it would require significant upgrades in terms of design or functions in order to sustain interest in changing/upgrading phones and fending off competition. Also, you never know, but smartphones may one day be replaced by something even more cool or advanced!

[bb88]

Interesting, thanks. What you have posted is basically a PLC (Product Life Cycle Chart) and the Gartner Hype Cycle looks similar to the PLC too, but more applied to technology products and businesses.

Though I am not sure if Apple is in a niche market anymore. I think it used to be the case when MS Windows used to be the dominant platform around (with Linux being relegated to the "geek" domain), but now iMacs, iPods, iPhones and iPads are pretty common and is becoming increasingly more "mass market". So perhaps Apple is reinventing itself to become more mainstream, yet is able to churn out products fast enough to ensure attention is sustained. While no one doubts the success of the iPhone for example, it would require significant upgrades in terms of design or functions in order to sustain interest in changing/upgrading phones and fending off competition. Also, you never know, but smartphones may one day be replaced by something even more cool or advanced!

Oops... I meant that I would have placed Apple in the niche market segment previously but now has evolved into a market leader/visionary.

While Gartner is involved in tech sectors, the hype cycle concept can be applied to elsewhere as well. Sellavision, MLM, REITs, Omega-3 products, smartphones, tablets, etc. are all subjected to the same cycle no?

PLC and hype cycle are similar but the focus differs. PLC illustrates the end-state. Hype cycle outlines the fundamental philosophy if I may on what underlies the product acceptance/evolution.

PLC does not show how products are accepted but hype cycle shows the considerations.

[Musicwhiz]

While Gartner is involved in tech sectors, the hype cycle concept can be applied to elsewhere as well. Sellavision, MLM, REITs, Omega-3 products, smartphones, tablets, etc. are all subjected to the same cycle no?

PLC and hype cycle are similar but the focus differs. PLC illustrates the end-state. Hype cycle outlines the fundamental philosophy if I may on what underlies the product acceptance/evolution.

PLC does not show how products are accepted but hype cycle shows the considerations.

Yep, all those products and services you mentioned are also subject to the same cycle.

Thanks too for explaining the differences in PLC and Hype Cycle. It's really a very useful tool.

[mikh]

Seriously: Gartner Hype Cycle - thanks for introducing the concept bb88, interesting indeed.
Less seriously: hope that concept's not just hype in itself!

[Musicwhiz]

Seriously: Gartner Hype Cycle - thanks for introducing the concept bb88, interesting indeed.
Less seriously: hope that concept's not just hype in itself!

Well, the problem with concepts is that it's all theory. In real life, things can be rather different and be ever-changing, which is why concepts and theories also undergo revision and modification periodically.

[bb88]

Today's market is largely ruled by the institutions, moving perhaps 3/4 of the entire market. Retail investors are subjected to their mercy. Institutions can move price up or down depending on their action.

Rather than "spotting" the institutional players (more on EMH later), perhaps value investors find their playground in smaller, "non-branded" counters where institutions are likely not involved?

Most of the major money management firms consider only large-capitalization securities for investment. These institutions cannot justify analyzing small and medium-sized companies in which only modest amounts could ever be invested. To illustrate this point, consider a manager at a very large institution who oversees a $1 billion portfolio. To achieve reasonable but not excessive diversification, the manager may have a policy of investing $50 million in each of twenty different stocks. To avoid owning illiquid positions, investments might be limited to no more than 5 percent of the outstanding shares of any one company.

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While Gartner is involved in tech sectors, the hype cycle concept can be applied to elsewhere as well. Sellavision, MLM, REITs, Omega-3 products, smartphones, tablets, etc. are all subjected to the same cycle no?

PLC and hype cycle are similar but the focus differs. PLC illustrates the end-state. Hype cycle outlines the fundamental philosophy if I may on what underlies the product acceptance/evolution.

PLC does not show how products are accepted but hype cycle shows the considerations.

Yep, all those products and services you mentioned are also subject to the same cycle.

Thanks too for explaining the differences in PLC and Hype Cycle. It's really a very useful tool.

Glad that you find use for the hype cycle. To answer mikh, the hype cycle is not really something new. Upon seeing it, it does appear to make lots of (common) sense that we all can relate to personally by observation even if it is not backed (to my lay knowledge) by academic theory or empirical data. Whether the hype cycle is a hype, it's just yet another tool to help us analyse. It may not be perfect, but so long as we use it accordingly, it's competent, agree?

I brought up the hype cycle as it reminds of the need to consider another perspective when trying to understand a company's product strategy. Just like PLC is a tool commonly used by marketers, other functions such as R&D and investors can use it alike for the insights it provides.

We can perhaps link the recent credit crunch to the same hype cycle. Credit swap notes is the new trigger. Everyone was (mis)led into the instrument as being safe while generating good returns. As more was sold, more hype grew around it. Banks and investors bought big time into it having great expectations. Then the bubble burst. Everyone realised the flaw in the instrument/system. People are now disillusioned with anything credit swap or minibond? Or perhaps there may come a time some years down the road that the instrument is redeemed and a "new and improved" version will come along to become a decent financial instrument?

Having gone through nearly half the book now, I can map the hype cycle to the several counts of financial innovations that was mentioned. Junk bonds, interest only, principle only, etc.

I think the value of the hype cycle to is exercise prudence and not get caught in the apparent web of deceit/expectations/marketing/etc.

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Any of you fell into the trappings of investing into something just to be more invested only for the "it's the best thing I can invest now although it did not really meet my criteria"? By definition, value investors are absolute-performance-oriented and would rather hold cash if there're no stock that meets their criteria, and would not readjust their criteria if only to buy in a stock.

The flexibility of institutional investors is frequently limited by a self-imposed requirement to be fully invested at all times. Many institutions interpret their task as stock picking, not market timing; they believe that their clients have made the market-timing decision and pay them to fully invest all funds under their management. Remaining fully invested at all times certainly simplifies the investment task. The investor simply chooses the best available investments. Relative attractiveness becomes the only investment yardstick; no absolute standard is to be met. Unfortunately the important criterion of investment merit is obscured or lost when substandard investments are acquired solely to remain fully invested. Such investments will at best generate mediocre returns; at worst they entail both a high opportunity cost—foregoing the next good opportunity to invest—and the risk of appreciable loss.
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Absolute-performance-oriented investors, by contrast, will buy only when investments meet absolute standards of value. They will choose to be fully invested only when available opportunities are both sufficient in number and compelling in attractiveness, preferring to remain less than fully invested when both conditions are not met. In investing, there are times when the best thing to do is nothing at all.