Investment Nuggets

[bb88]

I am starting to read this book "Margin of Safety" (hopefully can finish the book). Thought that might as well post some thought nuggets for discussion.

We all know people who act who act responsibly and deliberately most of the time but go berserk when investing money. It may take them many months, even years, of hard work and disciplined saving to accumulate the money but only a few minutes to invest it. The same people would read several consumer publications and visit numerous stores before purchasing a stereo or camera yet spend little or no time investigating the stock they just heard about from a friend. Rationality that is applied to the purchase of electronic or photo-graphic equipment is absent when it comes to investing.

I am guilty of this. I'm the kind of person that must get my hands dirty be it buying a new electronic gadget, understanding about car engines, etc. I seldom dive into buying a piece of gadget or machine without doing considerable research on technical specs and reviews.

However, the same cannot be said for investment. Actually, I do not really "invest". I have so far only took up NCPS and IPOs. And total count of perhaps 5 or 6. Except for the very first time I bought into SGS, I read up as much as I could. Then when I progressed into NCPS, I only sought general feedback and never really read the prospectus. Recently I bought into 2 IPOs based purely on gut and general sentiments.

Is this due to me not being a financial person, not caring too much about money not earned through the "traditional way", or there's some "trap" that people get into when it comes to investments?

[kazukirai]

Hi bb88,

While the analogy may hold some truth to it, I believe human nature presents its own set of problems.

Case in point? I'm the other way round from you when it comes to buying gadgets. I don't get hands-on nor do I read up much on the technical aspects of the gadget. Instead, what do I do? I ask my tech, gadget-savvy friends for their opinions and place quite a strong weighting on what opinions of people I know are much more savvy when it comes to these matters.

Whereas when it comes to investing, I've actually trained myself (sort of) to read financial statements. While I have a long way to go when it comes to interpreting financial statements, it's less painful to me than having to read technical reviews or manuals of electronic gadgets. This is despite electronic gadgets being in my life for a much longer time than financial statements have. And when it comes to investing, financial statements are just scratching the surface. We haven't even gone down into scuttle-butting, industry analysis, macro-environment factors and the likes.

Hence while I believe that the analogy holds, I'm not very sure if everyone can go as in depth into their investments as they ideally like to. Kind of like learning Mandarin.

[Musicwhiz]

Is this due to me not being a financial person, not caring too much about money not earned through the "traditional way", or there's some "trap" that people get into when it comes to investments?

Haha interesting thread and topic!

For me I think I am guilty of the opposite - researching a lot and doing a lot of "dirty" work on companies before I invest in them; yet not really doing a lot of research and reading up when I buy gadgets or other items. In fact, for such capex I mostly go on price and brand and do not bother excessively over features. Hence, I guess I am a detailed person when it comes to investments, but not so detailed when it comes to consumption items.

Perhaps this is because of my perception that investments are assets which generate cash inflows, hence more time/effort needs to be spent. Consumption items are expenses and so I do not bother too much about them, as long as it suits my purposes. Hence, I use a very old phone and a very old digitial camera as well, all obtained fairly cheaply.

[yeokiwi]

I am starting to read this book "Margin of Safety Risk" (hopefully can finish the book). Thought that might as well post some though nuggets for discussion.

I am guilty of this. I'm the kind of person that must get my hands dirty be it buying a new electronic gadget, understanding about car engines, etc. I seldom dive into buying a piece of gadget or machine without doing considerable research on technical specs and reviews.

However, the same cannot be said for investment. Actually, I do not really "invest". I have so far only took up NCPS and IPOs. And total count of perhaps 5 or 6. Except for the very first time I bought into SGS, I read up as much as I could. Then when I progressed into NCPS, I only sought general feedback and never really read the prospectus. Recently I bought into 2 IPOs based purely on gut and general sentiments.

Is this due to me not being a financial person, not caring too much about money not earned through the "traditional way", or there's some "trap" that people get into when it comes to investments?

I think all the financial jargons and figures are quite terrible for those that are not trained in accounting and business.
The financial statement is actually rather difficult to read for layman.(at least in my case).

Basically, in order to get hook on stock selection and analysis, there is a need to do it personally and achieve reasonable dividend gains or/and capital appreciation in the process.

Anyway, simple computations and understanding of stocks' financial ratios are not beyond most people that pass their O level 'A' math.

Actually, I had told some of my friends that are highly technical in their respective fields. If they can understand those chim chim physics and engineering concepts that they use in their daily work, they should not have any problem understanding financial statements and ratios if they want to put their effort into it.

Frankly speaking, compare to those chim chim physics and mathematical theories and laws that I had come across, those financial jargons and concepts are really no where in comparison.

But, in current world, understanding these chim chim theories do not bring much monetary rewards nor much respects

[Musicwhiz]

Anyway, simple computations and understanding of stocks' financial ratios are not beyond most people that pass their O level 'A' math.

Frankly speaking, compare to those chim chim physics and mathematical theories and laws that I had come across, those financial jargons and concepts are really no where in comparison.

Hmm, I realize the value of financial knowledge is not just in the knowing, but also being able to discipline yourself psychologically to follow through with what you have learnt or know.

There is an amazing amount of psychology involved when it comes to money, especially so when managing your own! For other fields such as IT and Engineering, it tends to be more "neutral" in that it does not evoke strong emotions.

So even though financial concepts may be "easier" in that sense, the psychology portion needs a lot more self-control and is the tough part to master, IMHO.

[yeokiwi]

Anyway, simple computations and understanding of stocks' financial ratios are not beyond most people that pass their O level 'A' math.

Frankly speaking, compare to those chim chim physics and mathematical theories and laws that I had come across, those financial jargons and concepts are really no where in comparison.

Hmm, I realize the value of financial knowledge is not just in the knowing, but also being able to discipline yourself psychologically to follow through with what you have learnt or know.

There is an amazing amount of psychology involved when it comes to money, especially so when managing your own! For other fields such as IT and Engineering, it tends to be more "neutral" in that it does not evoke strong emotions.

So even though financial concepts may be "easier" in that sense, the psychology portion needs a lot more self-control and is the tough part to master, IMHO.

I thought emotionless investment should be the best. I realised that I can perform better if I just treat my investment amount as pure mathematical numbers. Any emotion feeling towards daily, weekly or monthly changes in the portfolio will somehow skew my judgements.

During the last financial crisis, most emotionless investors holding good stocks would probably tide through the crisis and add more during the bargain period.
The pain of watching the portfolio shrunk would have prompted many investors to dump their stocks during the darkest hours.
Most emotionless investor will not hold stocks that are above valuation too.

It is easier said than done though

[Musicwhiz]

Oh yes yeokiwi, I agree with you.

Just to clarify that what I was trying to say is that investment and managing money SHOULD be emotional-less, but these activities frequently evoke strong emotions in us because they concern $$. This is why it is difficult to invest.

As for those who manage to control their emotions, over the long-run I believe they will be much better off financially.

[d.o.g.]

Is this due to me not being a financial person, not caring too much about money not earned through the "traditional way", or there's some "trap" that people get into when it comes to investments?

Some people do have a prejudice that money earned through investments is not "real" or "deserved" so investments are not given much attention and viewed merely as a punt. Since you recognize this issue, that is the first step to overcoming it.

Remember that in your old age your investments will be all that you have, because you are unlikely to be working for money when you are 70. At that time the income from the investments will be very real indeed. But it will be too late to worry about the investments then. The time to worry is now.

Money is fungible. It doesn't matter how it is derived - a salary, a gift, a lottery, dividends, interest or capital gains. It all boils down to the same thing: money is stored purchasing power.

So get your concepts straight. If you can obtain money from investments IN ADDITION to getting it from a job, why turn down the chance? And in future you WILL need your investments to retire, so all the more reason to develop your investing skills now, while you can still work and thus replace the inevitable early losses.

Aim for your investing skills to develop in parallel with your career, so that as you earn more money you can also invest it better. Ideally, you reach your peak earning power at a time when your investment skills are already fully developed.

People avoid learning about investing for a number of reasons. Their parents never talked about money, they are too busy at work, they don't have much savings to invest etc. But investing is like planting a tree. The best time was 20 years ago. The next best time is now.

Investing is a process that can take years to bear fruit. In the early years the investment returns in dollar terms are laughable - getting 20% a year is great, but on $1,000 that's only $200, not worth the hours you put in. But these hours pay off many years down the road when the same (or fewer) hours generate 20% on $100,000 or even $1m. Then suddenly investing looks a lot more efficient than working at a job. But to get there you have to go through the early years when your dollar returns are small, just like you have to wait for the tree to mature before it can bear fruit.

[Nick]

Thank you d.o.g. for the very encouraging words

[bb88]

Don't be mistaken, I'm not prejudice against money made through investment.

The point I'm trying to bring across is I believe most people like me in the early stages chose their education and career based on their interest until such a time when perhaps the technicalities of a job conflicts development of interest and when interest is best relegated to hobby and a job to life sustenance.

I am still rather passionate about my trade and seriously even now when my career takes me further from my real interests, that is the only thing now that can really excite me or make me forget about time when I'm on it.

However as people progress in life as in my case, there is this tendency that passionate obstinacy give way to practicalities of life, a career becomes a job that brings in cold hard cash for the finer things in life.

I dread the day when I take my FT job as a mere chore and money as nothing more than stored purchasing power as d.o.g. put it. Perhaps in the last decade of my work life but now? What else will life hold for me? Perhaps having a family will change my perception?

I do agree that the real fruits bear in late stages. Just like investments will only be "meaingful" when there's substantial capital to make the percentage value "worth the effort", I believe the same can be said for the FT job.

I have put in my nights and weekends and whatever freetime to hone my craft so that I am prepared for most scenarios within my job scope. I would say my returns thus far is decent by my standards. Although I have always gotten a pay cut with each switch, it's a "1 step back, 2 steps forward" situation. YoY, the largest annual increment I had was close to 50%, with a few years in the range of 30%.

Of course this is much easier when my starting was real pathetic to speak of. Evidently when my basic goes to a certain figure, the annual increment and job switching "premium" is not some "negligible" figure.

My other peers who started investing many years back only see me bypass in terms of career progression. Of course, there is a very real ceiling on career development for the lesser mortal like me. In investments however, the percentage is boundless. Who knows if they have a much higher net worth than me despite me further ahead in the career ladder.

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.

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I guess this is a commonly known fact but I still do hear about people being rather influenced by research reports. On related notes, there are also quite a few who are bullish due to how AR are being presented and conveniently ignoring possible risks.

I think it would be wise and prudent for investors to give research reports and calls for buy/sell scant value. Afterall, those reports are written by people who are somehow vested. Readers must always remember to pull themselves back and make an independent assessment.

I admit that I am quite easily influenced by what is written on the ARs (so far read only 2 :p). Luckily I regained objectivity by making it a point that they are for reference and my own view is more important.

The bullish bias of Wall Street manifests itself in many ways. Wall Street research is strongly oriented toward buy rather than sell recommendations, for example. Perhaps this is the case because anyone with money is a candidate to buy a stock or bond, while only those who own are candidates to sell. In other words, there is more brokerage business to be done by issuing an optimistic research report than by writing a pessimistic one.

In addition, Wall Street analysts are unlikely to issue sell recommendations due to an
understandable reluctance to say negative things, however truthful they may be, about the companies they follow. This is especially true when these companies are corporate-finance clients of the firm.

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What circuit breakers are relevant in SGX?

Two New York Stock Exchange circuit breakers apply only to market declines. If the Dow
Jones Industrial Average falls 250 points below the previous day's close, trading is stopped for one
hour. If stocks fall another 150 points after trading resumes, there will be an additional two-hour
halt. It is noteworthy that there is no similar provision regarding upward price movements,
regardless of magnitude. This is another example of how tjhe rules favor bulls over bears and
militate toward higher stock prices.