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kcchongnz blog

Author: kcchongnz   |   Latest post: Sun, 26 Mar 2017, 06:31 PM

 

Confidence, optimism and critcal thinking in the stock market kcchongnz

Author: kcchongnz   |   Publish date: Fri, 23 Dec 2016, 08:43 PM


Dear readers, this article is a discussion about issues, nothing to do with any personality, although the issues could be linked to some personalities coincidentally, but it is not intentionally. Kcchong

 

In my last article in i3investor with the link below,

http://klse.i3investor.com/blogs/kcchongnz/111934.jsp

I received many good feedbacks, 157 comments so far for this article. Thank you very much for your comments, including my toughest critic, Mr. stockmanmy. Your posts and comments light up my life in i3investor. I like critical comments. I used to tell my course participants not to have a cult mentality in investing, like always looking for positive confirmation of the stocks you invest in. The cognitive behaviour of confirmation bias is deadly in investing. I had seen it numerous times before, and talked about it in i3investor before. I told my course participants to always look for constructive criticisms of opposite views, which would curb their cognitive bias of over-optimism, and its cousin, Mr. Over-confidence.

Mr. stockmanmy, sorry about that, this article somehow touches on your latest article in your stockman blog, coincidentally on your “secret recipe” of optimism, confidence and critical thinking ininvesting.

http://klse.i3investor.com/blogs/stockman/112322.jsp

But I guess it is good to have some opposite opinions on this, isn’t it?

Here are my opposite views on why do I advise on avoiding Mr. Over-optimism and Mr. Over-confidence when investing? I will provide some examples, but again, this is for sharing of knowledge and opinion, and it has nothing to do with personality.

 

The cognitive bias of over-optimism and overconfidence (OOOC)

Confidence is a quality personal trait for our career and whatever we do, well, almost all. When we have confidence, good results can be achieved easier. For example, if we are confident, we can do better in public speaking or networking and get things done easier. In investing, I believe one can do better too if he has the confidence to stand away from the crowd, provided he has the right experience, knowledge and the proper approach.

Overconfidence may be a healthy attribute too. It makes us feel good about ourselves, creating a positive framework with which to get through life's experiences. Unfortunately, being OOOC of our investment skills, but without critical thinking, can lead to some disastrous results in investing in the stock market, if what you have is just that “optimism” and “confidence”, and nothing else solid. Here are the reasons.

 

Marker uncertainty

The most fatal oversight is negligence of the uncertainty of the stock market, the commodity market, the foreign exchange and various macro-economic issues.  Take for example, palm oil price was high 3 years ago, and Jayatiasa had planted hectares of palm oil trees. Without even looking at its balance sheet, you are confident that its FFB would grow exponentially over the next few years, and that the palm oil price would continue to rise, and hence its earnings. You put in 50% of your investment into this company, some more with another 50% in borrowed money, and chased the share price all the way up to close to RM3.00 a share.

The share price of Jayatiasa closed at RM1.32 today on 23rd December 2016, for a loss of more than 50% in just 3 years, while the broad market is practically flat for the same period. Look how OOOC had serious detrimental effect on your investing outcome.

Instead, if someone possessed critical thinking, I mean the right way of critical thinking, he would have recognized the cyclical nature of commodity prices and the power of mean reverting, and would not had extrapolate the growth too optimistically. Ignoring the market uncertainty, the inherent risks in investing, the competitions from soya oil, and thinking that trees grow to the sky itself is a form of fatal OOOC.

Take for example XingQuan, another stock. It has a lot of cash in its balance sheet. Very good and persistent earnings. You have a relative who is an auditor of this company and told you nothing to worry, and you had visited its factories in China. Yet, it is selling at such a ridiculous price. So, you are confident, a little too over-confident by placing a huge stake with margin into this stock three four years ago. What happen to this OOOC?

However, if someone just bases on this OOOC, and without any knowledge of the business, and the language of business, how can he has critical thinking, the critical thinking on how to evaluate risk and return, based on its business?

 

Failure to diversify

Overconfidence also results in an investor feeling too bullish about a stock, or a sector and concentrate all his eggs in one basket. Consider these statements:

About 80% of my total investment is on the plantation sector. I have Kulim, FGV, SOP, TH Plantation and Jaya Tiasa and their closing prices are Rm 3.40, 4.46, 6.40, 2.00 and 2.75 respectively.]

I did write a piece on FGVB 7 months ago, when FGVB was at RM4.14. I am not sure if anyone took any heed on it. But if he had, and he had a lot of FGVB then, it would have saved him a lot of money.

http://klse.i3investor.com/blogs/kcchongnz/66355.jsp

These are the closing price of those plantation stocks today on 23rd December 2016. Kulim had been privatised, FGVB 1.53 (-66%), SOP 3.70 (-42%), THP 1.14 (-43%), and Jayatiasa 1.60 (-55%). On average, more than 50% of their value had evaporated.

This is despite that palm oil price has risen close to its price then in Ringgit term.

It really pays to diversify, a humility in investing, rather than OOOC. Don’t you agree? Or is it still wise to put 80% of one’s investment in just one sector? What is the cost of OOOC in investing?

Diversification is a main topic in finance and investing in the academic study. It is a maxim in investing too, sine decades ago which most fundamental value investors follow very closely; super investors like Walter Schloss, Joel Greenblatt, Mohnish Pabrai, Howard Marks, Seth Klarmen, etc. All these are billionaires from investing, and investing for their clients. They always tell those wannabe investors to guide against OOOC.

We regard investing as an arrogant act; an investor who buys is effectively saying that he or she knows more than the seller and the same or more than other prospective buyers. We counter this necessary arrogance (for indeed, a good investor must pull confidently on the trigger) with an offsetting dose of humility, always asking whether we have an apparent advantage over other market participants in any potential investment. If the answer is negative, we do not invest.” Seth Klarman

It is not an algorithm. It is a mindset. I think that we always try to stress the danger of overconfidence. I forget if I put it in the book, but it is better if you invest scared, if you worry about losing money, if you worry about being wrong, if you worry about being overconfident because these are the things you want to avoid. They should be foremost in your mind. The most dangerous thing is to think you got it figured out, or that you can’t make a mistake, or that your estimates are right because they are yours. You have to always recheck your information, bounce your ideas off yourself and others.” Howard Marks

 

The cost of overconfidence

We have seen that OOOC cause one to concentrate investments in a single stock or a single sector and fail to have a diversified portfolio of stocks in various sector in case he may be wrong as the investment world is full of uncertainties. OOOC causes one overly optimistic assessment of one’s knowledge and ability or control over a situation, and buying risky investments because he believes he will make big money, without looking at their risks.  OOOC also causes one to seek only evidence confirming his own views and ignore contradicting evidences, and worst of all ridicule others for giving some good contradictory opinions which may be good for him.

Worse still, the OOOC is accompanied by confirmation bias, and refuses to hear, and scorn opposite opinions, without the right critical thinking, and without the knowledge and hence the ability to do that.

 

Leverage, the fatal blow

What about if one combines OOOC with leverage, say 50% in margin finance, because it is perceived as a sure-win purchase? He will lose all his equity and still left with some debts to pay the investment banks.

http://klse.i3investor.com/blogs/kcchongnz/44344.jsp

When you combine OOOC and leverage, you get some pretty interesting results.

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious," explained Buffett in his 2010 shareholder letter.

 

"But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

 

Response to stockmanny

This is my response to the various comments of stockmanmy in my article below here which have been posted thousands of times by him in i3investor everywhere and in all his articles. This is as a mean of sharing my point of view:

http://klse.i3investor.com/blogs/kcchongnz/111934.jsp

[Posted by stockmanmy > Dec 18, 2016 09:50 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

KC
My guiding principles.....
I love the stock market....it is exciting and fills my life.
KYY has told the story of the CFA nephew who lost a lot of money in a short time.....after he became a CFA.
See the point?]

 

[Posted by stockmanmy > Dec 18, 2016 03:01 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

12 formulas and 20 accounting ratos do not make one a better investors.]

 

That person with CFA who has lost a lot on money in a short time as mentioned by stockmanny, is not because of the fact he has a CFA title. If he followed his CFA training, I am 100% sure he wouldn’t have lost a lot on money. Rather I wold think he would have avoided losing any money in the last few years. He lost a lot of money was not because he used “12 formulas and 20 accounting ratios”, because if he used that, like what Mohnish Pabrai, Guy Spier, and other super investors do, he would have made some money, instead of losing a lot of money. I only used two ratios in Magic formula, and I have shown with published records in i3investors that I have done well too as shown in this link below:

http://klse.i3investor.com/blogs/kcchongnz/98798.jsp

Joel Greenblatt of the Magic Formula did that too making billions for himself and his investors. Oh yes, Joel Greenblatt is not only a fund manager, he is a professor in finance too. Please be reminded, again.

Well, I have shown these published records many times, and I hope I don’t have to show you I must have made multi-million in investing, then only I can talk. I opine that that CFA lost a lot of money because of OOOC, for example thinking that he got so much insider information and bet big in a single or just a couple of stocks, hoping to gain big time, in the fastest way, far from the fundamental value investing (FVI) way, which he should had embarked on. Or he thought someone was so damn good in investing that he followed to buy all the stocks recommended by him, with all his money,without using his accountng knowledge.

Regarding your seeking of excitement in the stock market, this is my advice to the newbies and young investors, using the wisdom of Paul Samuelson,

Investing should be more like watching paint dry or watching grass grows. If you want excitement, take $800 and go to Las Vegas.”
– Paul Samuelson

 

Conclusions

In my opinion, it pays to have humility in investing, rather than OOOC. We must recognize our shortcoming that we are far from invincible and could be wrong, and get the free lunch in diversification, as a defence against uncertainties, because investing is full of uncertainties, something we can never foresee. Generating superior return is certainly an important aim, but safeguarding assets and protecting them from losses is just as crucial.

Critical thinking is of course required, or else you would just follow blindly; buy when others ask you to buy, and sell when others tell you so, and thus, lost money. I am sure you have learned your lesson too.

In order to have critical thinking in investing, one must have the knowledge of the business, as investing in a stock is akin to investing in a part business, not just a simplistic or rudimentary “golden rule”, vague “business sense”, or fuzzy “pivotal moment concept”. Otherwise, any Tom, Dick and Harry can be a multi-millionaire.

I sincerely hope this article is viewed in a positive light as a mean of learning from experience, for all of us. Seriously, I do hope newbies in investing take heed of what is written here.

Merry Christmas

 

KCChong

 

 


 

 

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  15 people like this.
 
rchi However,upon seeing how lansi the old man is,i proclaim KC to be the winner in EQ category.
Old man,you are rich ,so what?Go compete with Jack Ma n see where you stand.
24/12/2016 11:09
abangadik why jack? Can't even be top 10 in Malaysia, hengtai. :D hehehehehe.
24/12/2016 11:13
younginvestor92 Dear KC, since you are so good at investing, why you're unable to just be a substantial shareholder of a company, not even one?
24/12/2016 11:14
CharlesT How much is koon initial capital invested in stock mkt? Bear in mind he is oredi dam rich when he invested in stock mkt 30 years ago..
24/12/2016 11:21
CharlesT Lets say he started with rm50 million 30 years ago n now he owns rm500 million...if kc started with rm50k 30 years ago n now he owns rm1 million....who is more successful in stock mkt?
24/12/2016 11:24
CharlesT If u measure in absolute money terms certainly koon is no 1 in i3..
24/12/2016 11:26
sctan will kyy disclose all his transactions in stock market? I don't think so. he may only show his winning transactions, but not the rest. so what is the point for him to challenge ppl.
24/12/2016 11:27
rchi To me the old man is only sub standard.Period.
24/12/2016 11:27
CharlesT Anyway i doubt if other investors at his level will b so free to come to i3 to show off their wealth everyday
24/12/2016 11:27
CharlesT Just like a 18 years old adult goes to kindergarden to show off how tall he is....lol
24/12/2016 11:28
rchi Just learn a few basic kungfu techniques n come i3 to show off.You still hv a long way to go .
24/12/2016 11:29
CharlesT If oldman got balls lets hv a stock pick competition with kc for 2017, without the buying tips from otb. Everybody here knows u follow otb tips 100 percent since 2014...
24/12/2016 11:32
rchi That is what i just suggested.Let him show us how good he is.But i can guarantee you old man will play dirty..wakaka.
24/12/2016 11:34
rchi Come chrissyconn n challenge me first.
24/12/2016 11:35
rchi Dun worry,i will let him hv handicap.Lol.
24/12/2016 11:37
stockmanmy too much yang, time for yin to emerge
too much yin, time for yang to emerge

From the ivory towers comes the 20 formulas 20 ratios
But we all know that CFAs have not done better than gifted individuals with their business sense.

FA like rice
You need rice to survive
Too much rice makes one fat and lazy

TA like vitamin
You need vitamin to perform at your best
Too much vitamin is poison in the body

Engineers approach this thing like an engineering problem with his formulas
Accountants approach this thing with his 20 accounting ratios
But this is a behavior problem , a personality problem

So, I approach this thing by looking at the Man and the men making the decisions.


http://klse.i3investor.com/blogs/stockman/111929.jsp

super good re-adaptation and improvements
http://klse.i3investor.com/blogs/koonyewyinblog/112320.jsp


http://klse.i3investor.com/blogs/koonyewyinblog/111907.jsp



War is the best educator
Bring on the wars, bless the fallen
War is the best inventor and starts the fastest rate of human progress.
24/12/2016 11:41
CharlesT Rchi yr actual return is even better than kc...dont humilate oldman lah
24/12/2016 11:41
rchi I only lose to CharlesT...kikiki
24/12/2016 11:43
stockmanmy If one is so prevention focused, you may want to consider FDs and unit trusts.
The CFAs, the CPAs and the maintenance Engineers are principally prevention focused

Yet, if one wants the stock market to make a significant difference, then I suggest readers take seriously the wisdom from one of the best in the KLSE, over decades, not months. Make a difference. Approach this thing like an entrepreneur would.
24/12/2016 11:47
abangadik rchikor and Charles, give the old people a break la :D hehehehe... rich people mostly humble one, in fact afraid ppl know they are rich.
24/12/2016 12:16
abangadik From my observation, I think we know who makes the best return hehehehee.. Rchikor last year for a period of few months already 500% kikikikiki.. Richie rich
24/12/2016 12:18
rchi hengtai,not to boast but it is 500% in one month plus.
you remember in august 2015 china decided to float the renminbi,consequently klci drop frm 1700 to 1500,then rebounded frm 1500 to 1700 in a month.
i sapu fbmklci-hk when klci drop 200 pts,n sapu 3 different fbmklci c's on the 200 pts rebound.
forgot wat c d,but 2 r frm cimb n 1 frm kibb.
24/12/2016 12:46
rchi Did i ever say my method is the best?And wrote tons of articles?
No.Because everyday there are new things to be learnt.Even the humblest ppl can teach us something.
24/12/2016 12:50
timetokoon Ah Koon is the best....I never heard of Ah Chong before....so Ah Chong must be new
24/12/2016 13:04
abangadik Yes hengtai! Hence I really respect you!! :D and a lot others that are humble and less vocal in i3. I think I was right before this few months to stay silent and I shall return to silent in 2017.
24/12/2016 13:07
abangadik or be like Con just stay inside our cave hehehe..
24/12/2016 13:08
timetokoon Post removed. Why?
24/12/2016 13:13
pengembaraalam duel between orga and pendekar laut make i3 famous, very unique, make this place so havoc..
24/12/2016 13:20
yfchong 华 山 轮 剑 。 Who will crown the 江 湖 master
24/12/2016 13:25
itsart kyy disable comment section on his article... hahaha

anyone notice that? :p
24/12/2016 15:58
itsart http://klse.i3investor.com/blogs/koonyewyinblog/112415.jsp
24/12/2016 15:58
coolio This old man claimed that he is super investor, but just look at his 2016 stock pick competition, fail miserably at -15.4%, what a joke. I'm KC student, a small fry but managed to make 33%.

http://klse.i3investor.com/servlets/pfs/54015.jsp

http://klse.i3investor.com/servlets/pfs/54128.jsp
24/12/2016 17:47
tksw kakaka issart sifu, I am just about to say KYY dun even dare to let people comment.
25/12/2016 00:50
tksw help ppl to improve investment skill, laugh die me...
25/12/2016 00:54
stockmanmy tk

too old to learn or too full to learn?
25/12/2016 01:00
tksw before qtr results out, challenge ppl dare to buy Gadang, qtr results out, say Gadang should manipulate its results to show growing results, (so that comply so call golden rules), after that hinting ppl Gadang is still ok, but carelessly wrote that "I will buy back Gadang..." and few days latter said "wrong assessment on Gadang" but still protect his back side by saying "will buy back Gadang when the price is low" (how low?). After that, said who Gadang prospect is dim and who bought Gadang and not sell off Gadang is a stupid losser. When Gadang bounce back, he said bot back already... This is so call help people to improve investment skill? what skill? Follow Golden Rule is skill?
25/12/2016 01:05
tksw stockmanmy sifu, you veli strong, carry legs so long still can carry. salute.
25/12/2016 01:07
tksw we respect ppl not because how good he is in making money, but personality.
25/12/2016 01:09
tksw Secret society, Gangster head oso help people to make money, and they help those who have no hope in the society to make a living... what say you?
25/12/2016 01:11
tksw I tot ppl with thick skin can only be seen in movie, but now I know I am wrong...
25/12/2016 01:14
rainbowyen Kyy can scolds people when he think people never listen or want to argue with him. so any comments about him, is not allowed mah....a rich people always like that loh...they don't like people to talk back.... when they are poor, you can make friend with them... but when they are rich, nobody can insults them...
25/12/2016 01:21
stockmanmy if 83 years old man is not too old to learn, how old is TK?
25/12/2016 01:22
rainbowyen kyy is 83 years old, but have strong ego...his brain keep functioning like no tomorrow...die die must win in argument.....until die, also he won't allowed you to over step him...for kc, sorry lah....his age can't compared to kyy...so much difference...that's why kyy want to challenge kc to show proof who make more money?
25/12/2016 01:36
malaysiaku biar betul bro....kyy dah tua masih ada gaya hero...macam filem star kabali, yang dilakonkan oleh rajinikanth...kyy nak tunjuk lagak hero pada kita orang....siapa paling kaya kalau tidak kyy....sudah tentu tycoon kyy... apa lagi lu mau??? nak tunjuk rekod, dia cabar kc untuk tunjuk rekod.....wow, macam mana sifu yang lain??? bagi saya....tiada sesiapa yang harus memandang rendah terhadap orang lain disebabkan oleh kekayaan dan harta dunia..."merry christmas", bro.....
25/12/2016 02:04
rainbowyen merry christmas...nice day..monday off day...
25/12/2016 02:09
Sslee Dear all,
My wish that all can enjoy their popcorn and movie in the cinema together with their love one and family for this festive holiday sessions seem to be unfulfilled. Yes there are now a clash of Titans is this Forum between KYY and Kcchong. I always remind my people to be careful on what you wrote or said, write or say your message across clearly and politely then ever one will listen to your. But if you say it rudely or just want to score point or show off then surely you will get a rebuttal and worst you can never get thing done.
I had to admit that, I had just meet Mr. Koon Yee Yin recently, he proudly showed me a full library of all the Investment Guru Books and he had read them all. Mr. Koon is from my father generation where everything is on short supply thus he had to make things happen. Hence when opportunity knock he grab it with both hand with single minded to make it big. Of cause someone called it reckless but during that period opportunity is so rarely to come your way. He humbly term it his good luck but I had to say his good luck is 99% preparation meets 1% luck.
I said to him I like his political blog more than his investment blog for the reason his political blog is full with righteousness and calling out to our conscious to do something right to save our beloved Malaysia. As of his Gadang blog I told him, he should not keep contradict his recommendation in such a short period of time. I remember he reply he might have got the date wrong so I jokingly ask him how many grand children he has now. He started to count in his mind and earn a quick reprimand from his wife. I said to his wife, Mrs. Koon you should check thro’ his writing before he post it in his blog.
Yes when we get older sometime we get mix up with date, fact and figure if we do not keep a proper record. I only wish when I had reached his age my mind is still have the tenacity to keep learning daily and write daily.
It was a very pleasure meeting with such a great man and now we keep our contact through WhatsApp where we exchange interesting video and message.
Thank you Mr. Koon yew Yin, it an honor and privilege to meet both you and your wife.
You have inspired me to write my memoir update
1. Upholding integrity (which I will share in this post)
2. Doing the Right Thing Now (which I had share in this Forum view this morning)
Thank you.
As of Kcchong, I do not know him personally or meet him before but I know he mean good to protest the retail investor from losing money. Both of you are Great Sifu in I3 and I think the i3investor communities is big enough to welcome more Sifu to join in for the benefit of all. But let us all be mind full of the word we used.
It the spirit of this Merry Christmas let us pray to god for his blessing that we live a happy, healthy, and forgiving life and may year 2017 bring more prosperity to all. Amen.
Thank you
(Note: I had post this comment on KCC and KYY must Show proof yesterday repost here)
25/12/2016 12:40
Sslee Dear KCChoon,
If you had read Mr. Koon Yew Yin blog: “ Let’s find a solution” on 3 Dec 2016 where Mr. Koon had make a first move to make up to you for his previous blog and you accepted his apology full heartedly on your blog: “Thank you Mr. Koon and hello my “student” Buddyinvest on 4 Dec2016.
Your Blog: “Confidence, optimism and critical thinking in the stock market” on 23 De 23 2016 is inappropriate with unnecessary negative attack which you might unintentionally wrote it to stress your points but it is offensive.
This had provoked Mr. Koon an angry and strong worded respond: “KC Chong and KYY Must Show Proof of Marking Profit” dated 24 Dec 2016. Today he posts another Blog: “I3 investor Annual Competition Rule Must Change” He sounds a little bit sorry that he should have listen to his wife advice. Anyhow whatever done is done and now he is angry of those senseless comments on the I3 Investor Annual Competition Rule. He is definitely right. In war no-body will just standstill and become a sitting ducks or in everyday driving you just DO NOT drive straight. In life we need to maneuver the up and down, the curve and straight the traffic light stop and go in order to safely arrive at your destination. (I recommend everybody read the cnb.cx link.)

Dear Mr. KC Chong,
I think you are wrong this time, your Market blog: “Confidence, optimism and critical thinking in stock market” dated 23 Dec 2014 had hurt Mr. Koon feeling and will you been magnanimous and kind to make a first move to make up with Mr. Koon.
Both of you are Great SIFU in i3investor many people are looking up on you don’t let them down.
Thank you
Merry Christmas to all.
25/12/2016 17:11
kcchongnz Sslee,

You are a great man. Okay, I will try to avoid any of his topic. But it is hard, as we have totally different views on investing, and hence it is easy to get "crash" again if people are sensitive about it.

Merry Christmas to you.
25/12/2016 18:03
Sslee Thank you. Mr.KC Chong
25/12/2016 18:18
Lincoln Lincoln To KYY and KCChong, u 2 have been reading each other postings religiously. Dont stop loving each other and instead, make love. Merry Xmas !!
25/12/2016 19:41


 

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