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Author: kcchongnz   |   Latest post: Wed, 4 Dec 2019, 6:48 PM

 

Want to pick stocks? kcchongnz

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Want to pick stocks? kcchongnz

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative”         Benjamin Graham

 

Many readers have the wrong impression that I discouraged investors investing in Malaysian unit trusts. That isn’t true as on average, unit trusts generally have been providing good long-term risk-adjusted real return (return after adjusted for fees, tax, inflation etc), higher than the fixed income as shown in my appended post below.

http://klse.i3investor.com/blogs/kcchongnz/75466.jsp

I have to qualify here that comparing with EPF and ASB, this may not be true as these instruments have much lower risk and hence the risk-adjusted returns of unit trust may not be superior to EPF and ASB.

However, there is no free lunch in this world. It was shown in the above article that on average, the unit trust funds underperformed the market, at about the cost of upfront fees, annual total management expense etc. This total leakage can amount to 4% a year as described in this article here.

http://klse.i3investor.com/blogs/kcchongnz/75376.jsp

And how do you like putting your money in a fund where the fund manager places a large amount into fixed income and doing nothing for years, extracting large amount of annual fees and expenses, and your fund severely underperformed the market?

So you get fed up and decide to invest your money by yourself! But before that let us see how retail investors have been doing investing on their own.

 

The performance of individual investor

Below is an email I just received today from a reader here.

[Hi KC,

Been seeing your posts and thoughts on I3Investor, would like to acquire more info on value investing.

I am 28, been in the stock market since 4 years ago, with a total net loss, as i've made many stupid mistakes (margin, contra/intra, sell at loss, etc....), until recently have come across the real meaning of 'investing'. However, it is still very unclear for me to see those financial figures and how to utilize them to help in intrinsic value's calculation.]

 

This is what I called humility, recognizing that one has made mistakes and taking steps to correct them. Humility in investing can lead you to higher probability of success, unlike arrogance as below. Arrogance in investing is very dangerous.

 

[Posted by blank > Sep 24, 2013 06:18 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

Sorry fundamentals not my style haha. I'm more of a trader, using technicals and behavioural finance. I made 700% last year.]

 

[Posted by blank > Sep 24, 2013 07:15 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

Haha kcchongz u can say whatever you want. I just know I have all the profits in my bank now :). Btw just to let you know. I'm vested 6 digits in mpcorp at an average price of 0.33. Excluding warrants. Cheers]

 

MPCorp closed at 20 sen on 24th April 2015, compared with about 55 sen when the above comments were made. By the way, I am here to discuss an issue, and not a personal attack.

 

Brad M. Barber and Terrance Odean in their paper “The behaviour of individual investors” in the link below shows that collectively individual investors trading on their own under-performed the market. However, this average performance of individual investors masks tremendous variation in performance across individuals. The underperformance was due to information asymmetry, overconfidence, sensation seeking and action chasing, failure to diversify, easily influenced by rumours, tips, media and internet forums etc.

http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf

Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets.

 

 

Based on their analysis, the average investor had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the market return of 8.4% during the same period. To put that into perspective, an investor invested $100,000 in the S&P500 20 years ago would today have a total portfolio of around $502,000-compared with only $156,000 for the average investor. This return is not even enough to beat inflation and the total money left today can’t buy the things one could buy 20 years ago. It would be worse if one borrowed money to invest and get what an average investor does, his portfolio will shrink to less than $50,000 now and he now owes the bank more than $50000. Of course he will claim that he is not an average investor, but a super investor and this predicament won’t happen to him.

 

Why do individual investors perform so poorly?

The main reason why individual investors perform poorly is because in the stock market, the odds are leaning heavily against them in an uneven playing field. In Bursa, most retail market players are traders and speculators, rather as investors. If you are a regular reader in public forums on investing, it is hard to dispel that notion. Trading and speculating, unlike investing, is a zero-sum game, no doubt about that. It is not difficult to guess who the winners and the losers are in this type of game. No prize for the correct guess. The problems actually go deeper than that. The herd mentality and psychology of fear and greed, overconfidence, sensation seeking etc also play a very important role in the outcome of investing experience of individual investors.

 

Market efficiency

As much as one disagrees, the stock market is somewhat efficient, especially in the long-term. There are thousands of well qualified and experienced professionals watching over the market every minute and every hour. As a consequence, any market mispricing generally would have been quickly arbitraged away by eagle-eyed professionals most of the time; low price stocks bidden up, and high price stocks sold down. Hence in an efficient market, it is hard to find bargain stocks and harder for anyone to outperform.  It is not easy even for professional, what else can you say about retail investors. The problem is exaggerated by the inherent problem of the impossibility of forecasting the future as investing is about the future, not the past.

 

The odds are against retail investors

Bursa is dominated by 60% of fund managers and institutional investors, local and foreign. The investment bankers and fund managers especially have all the financial, human and computer power and all kind of resources at their disposal. Furthermore there are syndicate players, insiders who can easily manipulate the market at the expense of retail investors. They can move the market where retail investors dwell.

If you think charts alone can provide all the information for you to make money, think about it again. Even if a chart can predict human behavior correctly, when there is a “breakout” or going to be one, or something else, who will spot it first? Who have the resources and computer power to do all the charting fast and furious before you see it? Hack, syndicates and insiders can just build the nice charts to deceive you, without blinking their eyes.

It is really a jungle out there for retail investors. They as a whole have little chance, unless he is the “chosen one”. It is a loser’s game for retail investor.

 

Human Psychology

Retail investors are greatly influenced by emotions when making investment decisions. It is part of who they are as human beings. They tend to exhibit herd’s mentality. You buy, I buy. What business does the company do? Are they making money? I don’t know and I don’t care. They chase hot stocks, tips, hypes and fads from interested parties when their prices have gone up sky high. Well it is ok to buy high as there will be others who will buy higher from us; the greater fool theory and the “me too” lemming investing strategy. You make a lot of money, I want to make more, and so many people run, I run too; why? I don’t know and I don’t care; greed and fear.

 

When a stock is going up, everyone gets excited and start to join in the party, only to experience the power of mean reverting shortly after that. The cognitive bias of loss aversion prevents them from selling when they realize that they are wrong in their judgment, only to sell close to its bottom when they then need money to chase other hot stocks or suddenly remember this strategy of cut-loss thingy. So the buy high and sell low strategy. This is one of the biggest reasons why so many people lose money when they invest, in spite of the fact that the general trend of the market is up.

Even professional fund managers are not spared of this fear and greed cognitive bias. Most funds are fully invested at market peaks and heavy in cash when market bottoms. See how icap.biz has been with so much cash so many years ago when the broad KLCI was half its value then compared to now.

Overconfidence of individual investors also explain their relatively high turnover rates causing high transaction costs and poor performance. Men, who are more prone to be overconfident than woman, trade more and perform worse than woman. Are you a man?

Many people treats investing as entertainment, like many people like to gamble. This sensation seeking activities lead to high trading activities in hot stocks, hypes and fads with high volume, going in and out for fun, action chasing and ultimately incurring high transaction costs and leading to huge losses and detrimental to their investments outcome.

 

If the odds are against me investing successfully, what should an investor do?

It should be clear that individual investors are, on average, not good at investing. What are the options available for them?

There is no variety of exchange traded funds in Bursa. Many unit trust underperformed the market the last five years and you don’t like to pay fees for some meager return. So what to do? Want to invest yourself in individual stocks?

Is there any chance that you can earn better return from the unit trust funds without having to spend too much time and effort?

Yes, I believe individual investors have good chance of earning better returns. You don’t need to be a finance and accounting professional. Neither do you need to know complex financial theories. But you do need to learn the basics of the language of business, after all investing in a stock is investing in a small piece of a business, and knowing the language of a business, which is not difficult, is a prerequisite if you want to be successful in investing. It is just logic. The other important thing you will learn is the psychology of investing, having a proper mind set when investing, and some useful philosophies of investing.

With the prerequisite knowledge and experience, a proper mind set, play your own game, and not dancing to the tunes of institutional investors, the syndicated, manipulators and insiders, your chance of success in investing is certainly much higher than other retail investors. This has been convincingly proven so in the past.

Remember what the research of Brad M. Barber and Terrance Odean in their paper “The behaviour of individual investors” above concludes?

“this average (poor) performance of individual investors masks tremendous variation in performance across individuals.”

I will deliberate why this has a higher probability that it will work. After all Charles Munger said,

"When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'"

For enquiry, please contact me at

ckc15training2@gmail.com

 

K C Chong (25th April 2015)

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  6 people like this.
 
probability all retailers should print this and place it on their wall behind the computer screen...

(1) 'Trading and speculating, unlike investing, is a zero-sum game, no doubt about that'.

(2) "When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'"
25/04/2015 9:30 PM
Chinchiasong Hi KC, wht is ur stock pick Ah? Solli I slow a bit but hope you can share moving forward pick
25/04/2015 11:52 PM
Kevin Wong Happy and prosperous investing everybody!
26/04/2015 8:52 AM
kcchongnz Posted by Chinchiasong > Apr 25, 2015 11:52 PM | Report Abuse

Hi KC, wht is ur stock pick Ah? Solli I slow a bit but hope you can share moving forward pick


If you can follow the stock picks from public forums and make money, ching chia song loh.

soli, I can't give stock pick for you to make money. I don't even know I can make money or not, in the short term, for those stocks I wrote about.

But bear in mind, no such thing as free lunch in this world.
26/04/2015 9:21 AM
jason KC, Thank you for sharing the chart. You have proven an investment in knowledge provides the best return.
26/04/2015 9:37 AM
chyokh if you think fundamental analysis can solve the problem of low returns, just look at icap.biz. Underperforming because fund manager thinks market is overvalued after performing lots of analysis. Has lots of cash now but "nothing to buy". Waiting for years for market to crash but market keeps going up. FA can also be suicidal in a market crash because it makes the investor overconfident that the stocks he/she have selected can withstand a market crash instead of cutting losses. A good example is icap.biz holding onto Parkson. Parkson went above $10 a few years ago but fund manager did not sell because he thinks it is still undervalued. Now Parkson is trading at 2.10. I rest my case.
26/04/2015 12:10 PM
plumberii Where are we now on the greed-fear chart above?
26/04/2015 12:12 PM
kcchongnz Posted by plumberii > Apr 26, 2015 12:12 PM | Report Abuse

Where are we now on the greed-fear chart above?



"Those who have knowledge, don't predict. Those who predict, don't have knowledge."
Lao Tzu


So some rules here:

1) Don't lose money, or try not to lose too much. Cut loss when you think you may be wrong is a good idea. But if you check and check and find nothing wrong, then it may be a different story.

2) Adhere to the 8 wonder of the world, the power of compounding. It works

3) Look for values.

If you pay half the price to buy something, even it goes doen in price, it is unlikely you lose much.
26/04/2015 12:50 PM
contemplator Mr KC, when u read through the comments in i3, you will find that 80% of them cares only the stock price of tmr or next week. Only a minority care about intrinsic value of the business... Efficient market won't exist due to some typical human behaviour
26/04/2015 12:50 PM
contemplator All value and prudent investors should read Charlie Munger's The Psychology of Human Misjudgement... Tell me where i am going to die and i will never go there.
26/04/2015 12:52 PM
bintang21 the truth behind the share investment :not sure win better chance of winning than betting on odd or even in the russian roulette game.

your remisier that provides you tips to buy won't guarantee your bet is sure win. OTB also won't guarantee you sure laughing all the way to the bank if you subscribe to his program

but not sure win does not mean can not win.

then how to win?

very simple,

just 1 or 2 thing you must bear in mind

1. prerequisite condition:
- you must not scare to lose because money any time can be earned back
- listen to kcchong advice do not borrow to invest
- if you can not win big then you are going to lose big . remember DOWN is always faster than UP

2. do it right: right stock , right time and right price

how?

very simple

I know but i do not want to share

BUT

just join for KCCHONG online course,then you need not have to beg me to share with you


friends,

saya cakap main-main saja,

do not take it seriously, life shouldn't be that rigid, should be full of funs and joys. you are free to bantai me if I caused you any dislike , may be I can recommend one apa nama perempuan to you , she is very good in investment and also entertaiment.


play-play main-main saja. no intention to offend anyone because I did not ask you to read.

read at you own will, invest at your own risk

thank you / sorry


hahaha.......
26/04/2015 12:59 PM
chyokh You can analyse until you are paralyse or you can just go with the flow. Join the party but remember to leave before it is over.
26/04/2015 1:27 PM
plumberii "Those who have knowledge, don't predict. Those who predict, don't have knowledge."
Lao Tzu


So some rules here:

1) Don't lose money, or try not to lose too much. Cut loss when you think you may be wrong is a good idea. But if you check and check and find nothing wrong, then it may be a different story.

2) Adhere to the 8 wonder of the world, the power of compounding. It works

3) Look for values.

If you pay half the price to buy something, even it goes doen in price, it is unlikely you lose much.
------------------------------------------------------
Sorry, no disrespect to my ancestor Lao Tzu. He could be wrong too. Ha.

I am not trying to predict. If we are now on the downward trend, it will be senseless & foolish of me to go out and invest 99% of my wealth in shares, properties, etc etc. Knowing what is happening, analyse it and then decide on your next step.

I have mentioned it before somewhere, big companies like Shell use their knowledge in their look ahead scenario business studies. I am pretty sure they don't get them all right all the time. To me, some look ahead & planning will put one in a better boat than the other one. Maybe Lao Tzu did not know of this - failing to plan is planning to fail. Ha.

Cheerio.
26/04/2015 1:55 PM
NOBY chyokh if you think fundamental analysis can solve the problem of low returns, just look at icap.biz. Underperforming because fund manager thinks market is overvalued after performing lots of analysis. Has lots of cash now but "nothing to buy". Waiting for years for market to crash but market keeps going up. FA can also be suicidal in a market crash because it makes the investor overconfident that the stocks he/she have selected can withstand a market crash instead of cutting losses. A good example is icap.biz holding onto Parkson. Parkson went above $10 a few years ago but fund manager did not sell because he thinks it is still undervalued. Now Parkson is trading at 2.10. I rest my case.
26/04/2015 12:10

I think you mix up between true value investing vs market timers like Tan Teng Boo. A true value investor would have found many bargains to buy post 2008 financial crisis.
26/04/2015 4:25 PM
kcchongnz Posted by contemplator > Apr 26, 2015 12:50 PM | Report Abuse
Mr KC, when u read through the comments in i3, you will find that 80% of them cares only the stock price of tmr or next week. Only a minority care about intrinsic value of the business... Efficient market won't exist due to some typical human behaviour

Contemplator, kind of agree with you.
26/04/2015 6:22 PM
Kevin Wong Over the long term, ""anytime is a good time to invest"".
26/04/2015 6:34 PM
kcchongnz Posted by plumberii > Apr 26, 2015 01:55 PM | Report Abuse
"Those who have knowledge, don't predict. Those who predict, don't have knowledge."
Lao Tzu

Sorry, no disrespect to my ancestor Lao Tzu. He could be wrong too. Ha.

I am not trying to predict. If we are now on the downward trend, it will be senseless & foolish of me to go out and invest 99% of my wealth in shares, properties, etc etc. Knowing what is happening, analyse it and then decide on your next step.

I have mentioned it before somewhere, big companies like Shell use their knowledge in their look ahead scenario business studies. I am pretty sure they don't get them all right all the time. To me, some look ahead & planning will put one in a better boat than the other one. Maybe Lao Tzu did not know of this - failing to plan is planning to fail. Ha.


Lao Tzu is well respected philosopher, even today. Respect was earned, especially his.

Certain principle or philosophy is evergreen, whether it was thousands of years ago, or now.

Anyway we are not talking about investing 99% of your money, one should never do that even in an upmarket, because an upmarket can just turn into a down market, sometimes abruptly.

We are talking about predicting the market, not about planning. Planning is done by most companies every year, I believe, not only Shell.

By the way, why do you think the market is in a down trend now?
26/04/2015 6:39 PM
kcchongnz Posted by Kevin Wong > Apr 26, 2015 06:34 PM | Report Abuse
Over the long term, ""anytime is a good time to invest"".

Kevin is a great compounder. Compounding is the eight wonder of the world. Hard to go wrong with that.
26/04/2015 7:16 PM
lextcs my experience in disciplined regular/monthly auto standing instruction via bank buying into unit trust funds have yielded tremendous results. Not only its an additional savings I do get better than average returns. Small money does accumulate into large amounts
27/04/2015 8:46 AM
Raymond Tiruchelvam to answer charles munger's question..... Coz God chose me :-) heeee
27/04/2015 12:07 PM
Ricky Yeo chyokh someone forgot to tell you everyone in the party wants to leave before it is over, just that the clock at the party has no hands lol
27/04/2015 12:52 PM
gungho92 traders, speculators, technicals, valuerers, syndicates... everyone is welcome to trade at their own style! it is because of people like these that open the doors to opportunities ! Thus the market is inefficient as it is, we learn to love it for his flaws.
27/04/2015 2:59 PM
Haan "Those who have knowledge, don't predict. Those who predict, don't have knowledge."

To put this in an investor perspective, if you know what you are doing with thorough understanding while managing the associated risk then by all mean go ahead and let the things runs it course. Essentially when you start to "predict" the exact time frame it will rise or drop then you have stop being an investor but being a speculator.

And this quote uses "predict" instead of "plan". The difference being the essence of "time". We are mere humans and yet we have the courage to look into the future. Things that work for an individual the first, the second and the N th doesn't mean it will work for the rest of the humanity. To the speculator who nailed it, revel. Individuals who can't risk it, invest. Nothing right and nothing wrong it is just managing our own "knowledge" and ones own risks.

看山是山,看水是水,看山不是山,看水不是水,看山仍然是山,看水仍然是水。
27/04/2015 3:36 PM


 

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