Ze compilation!!!!

Here is a compilation of some great investment lessons and mistakes posted in the Wallstraits forums:

(ps: If anyone wants to share their investment lessons, it would be really great if you could leave some comments)

(comments made in this color format denotes my usual mumbling and bumbling! :P)

(Oh... and this time.. i placed them new comments on the top instead at the bottom! )

last edited 8.34 pm, 8th Jan 2006

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There is no shame in making mistakes, only in failing to learn from them.

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On the other hand, the value investor believes that the market is often wrong in pricing a company and persists in averaging his initial stock purchase at lower prices at every turn. Often to his dismay, when the company reports the quarterly or interim results, he realises that actually, the company profits have taken a turn for the worse. What was bought on single digit PE assumption turns out to be double digit PE based on the new profit forecast.

So what does he do then? Sell or buy more assuming that this is only temporary setback in the business.

(how? Good issue, eh?)

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my key point is just "how does a value investor know he is wrong" before it is too late?

or how does one decide when the business is facing a temporary setback or a more serious detoriation in its business?

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I was fatally optimistic that the near future would look like the recent past. I forgot that the recent past is only a starting template, and that the final analysis must depend on current inputs - inputs which I sought and received, but failed to use properly.

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Dividends are important however don't be blinded by dividends either.

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Don't believe in hype

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When fundamentals deteriorate, sell NOW.

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Investment is very much psychological. No books can tell you what investment styles suit your personality. You can read as much as you can, ask as many questions as you can from the gurus but since everyone's personality and ability differs, what they practise may not be suitable for you. Basically, a newbie will have to learn from the school of hard knocks to discover himself and fine-tune the style that fits him.

* * * * * * * * * * * * * * *

( hmmm.... one of the best advice!!!!!!....

know urself is the most important thingy!

We can always aspire to be the greatest trader... the greatest investor....

but... butt.... buttttt.... sometimes.... life is never truly fair, isn't it?

Sooooooooo if we dun know ourselves... how to be the best we can be???? tiok boh? )

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It is quite right that sooner or later one is going to lose money. However, if for every losses, one can gain a lesson and it will be a fair bargain.

( How very true!!... but... butt... buttt..... most important.... one must be willing to learn from their mistakes! or else... da fool will keep on repeating their losses!!!.... and if it takes too long to admit our mistakes... how then? )

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the most difficult part about investing is "psychological"....yes, I believe for that you need to invest yourself to really learn about it. However, investing without learning from books, seminars, other people is simply by trial and error. You can keep on repeating mistakes without knowing it. So in order to speed up your learning process, everyone should read books, attend seminars, learn from others.

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Instead of blaming averaging down or not setting a loss/profit limit, try to analyse the mistake and learn a lesson from every mistake made.

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An investor needs to understand himself and be aware of his personal psychological weaknesses. Every now and then, investors will be hit by the same feelings of greed, hope and fear. Even experienced investors can fall prey to such moments of weaknesses, let alone newbies.

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If you don't know when to get out, don't go in.

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The margin of safety must be sufficient.

I learnt the hard way that the margin of safety can only be sufficient when there are multiple criteria for investment.

An excellent profit margin, an efficient management, stupendous growth potential, a good dividend policy and a low price are individually insufficient to justify an investment decision.

They should all be present to some degree, but more importantly, strength in one area cannot offset weakness in another.

( Ahhh... this one is so, sooooo important! Remember the key word is that they should ALL be present and that one area of strength cannot be used to offset the other!

Meaning to say, a company with a terror geng profit growth does not necessary equates to a MARGIN of SAFETY if the management cannot be trusted or perhaps the growth is achived via razor thin profit margins!!!!!)

It is difficult to make a good investment out of paying a high price for growth. Nor can efficient management replace a sound dividend policy, and certainly a low price is no panacea for a weak profit margin. Each investment criterion must in itself be satisfactory, and several should be more than satisfactory, before one can invest with the confidence that one's principal is appropriately protected, with a good potential for satisfactory returns

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Don't simply buy based on numbers - Margin of safety offered by numbers aren't everything.

A stock is partial ownership of a business.

Hence it is important to understand the business and its operating environment. Failed to adequately price in emerging market risks and it has since issued earnings alert due to tax slapped on by foreign authorities. A 20% drop in price ensured literally overnight and left one staring blankly at a gaping paper loss.

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Value Investing and Value Destruction?

Many... often fall prey to selling their value picks at the low in frustration and often selling their winning plays all too early because emotionally, it is easier to sell a winner.

... all to often, they (then) use the proceeds to average down a loser and then sell in frustration.

the average investor would be served well if he is taught to fear that his loss gets bigger and to hope that his gains get bigger!

When all the global markets start to rally in unison, and all stocks good or bad start to rise, did you make money because you were right in your fundamental assessment or is it because of a more fundamental reason ie. stocks rose because new money came into the markets and caused more demand for shares.

Simple economics - Increase in demand results in an increase in price.

..most value investor scoffs at technical analysis which in the simplest form is the measure of the demand and supply of a stock.

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You could try that if you have sufficient grounds to be so confident of your investment. But if you are just starting out as a newbie like me, please cut your losses and don't compound your mistake. You make a purchase, the share price goes down -> probably you made a mistake. Who are you, little junior, to argue against the market? If you are a newbie, assume you are an idiot waiting to pay school fees and don't average down. Cut your losses!!

( Excellent advice!!! Remember who we are. Sometimes, when a so called good share goes down after we purchase, we have to be realistic and ask ourselves a simple question: Did we screw up in our stock selection? And if u did, averaging down means u are buying more shares in a wrong investment! Doesn't make sense, does it? Remember CUT YOUR LOSSES!!!! )

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The first book that a investing newbie should read should be in the area of Personal Finance, not investment or accounting. He should analyze his personal financial situation first before analyzing any companies.

Imagine someone who had not done a prior analysis of his personal situation and continued to pump in his savings as stocks become cheaper or simply to bet big to recover earlier losses. So what even if he turns out to be right? Before the stocks recovered, he might be forced to sell out at a loss if he suddenly needs money due to loss of job or health. An investor should understand his personal finances better than the finances of any company that he invests in.

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I think the need for commonsense is the lesson that was drummed into me again this year.

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I overrode my commonsense caution in (a) purchasing against my contrarian instincts when the stock was more at a high than a low (and China stocks were the rage), and (b) continuing to average down on the basis of the stock's apparent cheapness on all metrics and latterly the expectation of a cyclical turnaround.

In other words I didn't factor in sufficiently the risks associated with "China" stocks and the requirement to get such stocks at very significantly cheaper prices than one would normally anticipate. And I disregarded commonsense largely entirely in building a more risky Chinese share unifood into a larger than appropriate proportion of my portifolio.

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So - think for yourself - and use commonsense.

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The warning signs were insider selling by multiple substantial shareholders of substantial portions of their shareholdings around the same period.

Although major shareholders can sell for whatever personal reasons, how can multiple shareholders have personal reasons to sell at around the same time? Also, each of them were selling significant portions of their shareholdings. Isn't it too coincidental that all of them need so much money at the same time?

Why didn't I sell then? For the same usual reasons that have been repeated throughout human history since time immemorial - overconfidence, greed, ego ...

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The basic idea is that you do not want to be wiped out by any single decision and there should always be a limit to how much exposure we have to any company, no matter how save the investment appears or how low its price.

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But for many of us we have not even seen the products they manufacture. Nor do we understand the Chinese business environment the companies operate in. How then can we claim to have sufficient understanding of the company to justify a significant allocation of funds.

( Another good advice! How well do we really understand the business of the company that we want to invest in? )

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Few know how to lose. Yet the secret to making money in the market is knowing how to lose. How to control your losses.