Why Do Clever Investors Make Big Money Mistakes : Khoo Yew Yin

Statistics show that more than 75% of equity investors including professionals cannot beat the stock index. Studies have also shown that more than 75% of day traders lose money mainly due to transaction costs. There are several reasons for their poor performance but the most frequent mistake is 'loss aversion'. This is a psychological obstacle which has been consistently affecting their performance, especially in view of the ups and downs that is the normal behaviour of the stock market.

TEH : Yup, the statistic won't lie ... MAJORITY in markets losing money. If you have been consistently profitting from markets, congrats ... my first lesson to my tratles is MAJORITY are losing money in markets. DO NOT be one of them. By not losing money, you are the MINORITY around. Believe it or not.

The single most important criterion in selecting shares to buy is 'good profit growth prospect'. I will not buy a stock which does not have this quality. In other words''buy on solid evidence of growth and profit not on the basis of speculation or hot tips! After you have bought some stock that you think can perform well, you will have to decide when and which stock to sell.

TEH : We all know that we should buy good fundamental stocks but WHY are there so many punters buying into some speculative hot tips, news from forum ... from ANYWHERE except themselves!! Imagine the stupidy of the crowds talking about Harvest, for example. Perhaps you do remember KBunai or Tricubes!! Anything to excite them ... now, do you know why there are more LOSERS in markets? Think. It is ONE of my criteria in my tratles group. I put it strictly that DO NOT talk about HWGB or some DVM you are punting into. Even KNM is not being discussed. THINK ... I do not want that them to have BAD habits from those LOSERS out there. Serious issue.

Often many investors make the mistake of selling the good ones to lock in profit early but retain those that are not performing because of their aversion to taking losses on these. Some regret their action later and may even jump back into the market to buy the same stock that they had just sold but at a higher price. Most of them do not jump back into the market for the stock and they can only watch the stock go higher and higher.

TEH : Agreed and guilty of such. But, I do not keep bad ones for long in my holdings, just that I do sell for profits too early in many of my trades!! Some I have moved nicely into another moving wagons ... but at times, I moved into a stationary wagon. That is the time I have to move out at cost price. I do not regret in trading. It is a sap of energy or a waste of my time to regret. I will move on ... and reflect on my trades during weekends.

Some investors may object to the implication that loss aversion is a bad thing. After all, it is a very natural behaviour. They might justifiably point out that the tendency to weigh losses more heavily than gains is a net positive attitude. Investors who care too much about possible gains and too little about potential losses run a great risk that can threaten their portfolios. It may appear better to care more about the share price falling than hoping for it to climb higher. True enough; loss aversion can be helpful and is part of a conservative strategy. But an over sensitivity to loss can also have negative consequences.

TEH :  Yes, more time to be spent in managing risk and on those stocks not performing in our portfolio. I will prefer to ride on the winning stock and cut off some non-performing ones. Cut-loss is NOT commonly used in many of traders as they are loss-averse. I have no problem of cutting ... but I took profits too early. Need to learn to be more patience. Agreed.

One of the most obvious and most important areas in which loss aversion skews judgment is in selling too early and missing the additional profit if you dare to hold it longer.


Very often even clever investors who are well versed in stock selection cannot overcome this psychological fear. What is tricky about this concept of loss aversion is that it can often lead us in the opposite direction' to hold on to a losing investment for longer than we should.


I asked one of my friends why he sold a particular stock instead of selling his other holdings that he bought at higher prices? He said that he did not want to recognize the losses but preferred to lock in the profit. This is the most common mistake committed by investors because they do not want to admit their mistake of picking the wrong stock. Moreover, the profit from the sale could easily cover the losses.


Studies have shown that on average, it is easier for well-managed companies to continue their good performance than for bad companies to improve their poor position. That is why we should not sell good shares too early and retain the bad shares.

TEH : Fully agreed.

Why invest in public listed shares? Statistics show that our Malaysian Stock Index has an average annual growth rate of more than 10% which is more than most other forms of investment. One can still buy the winning horse after the race in the stock market'. It means that you can still buy shares of really good companies after they have announced their good results.

TEH : Yes, I will want to write in greater details WHY I have chosen stock-markets instead of putting my money in FD(haha ...), UT or even property. All I need to learn is to manage the risk ... and let the profit runs. Yes, 10-20% is not really impossible. I will teach my tratles NOT TO LOSE money ... and will slowly challenging themselves to profit 10% or more per year.

When to sell? After having said all that about selling too early due to the loss aversion phenomenon, we must not forget that no share can keep climbing up and up indefinitely for whatever reasons. In other words, we must not be too greedy and wait for the bubble to burst. Hence the time to sell is when the reasons you bought the share' growth and profit' are no longer there or valid.

TEH : Yes, we need to plan to SELL ... when our reasons of buying is NOT valid. It could be fundamental or technical point of views. Profits are profits ... manage your losses.
 The above are some very good notes shared by Mr Khoo, the well-known Malaysian investor. Copy his way of investing ... do that.

DO NOT listen to those in forums or blogs. Do your own homework.

THINK.

TEH