“The most difficult thing is the decision to act, the rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process is its own reward.”

Amelia Earhart

I was in a guided tour trip to USA when we stayed overnight in a casino city of Laughlin (note not laughing) in the year 2000. A group of us played some Black Jack in the casino for some fun. You know there you could bet $5 for a hand then and you have free drinks. There was really a lot of fun when your “comrades” on the table shouted “Picture, picture, picture” for you when you have 11 points in your hand. One of the ladies in the group was having a streak of good luck and she had been winning quite a lot of money, may be a couple of thousand dollars. In our last bet, bigger one, she had a hand of eighteen and she asked for another card. Everyone was shouting “three, there, three” for her. And sure enough, she got it and got 21 points, or Black Jack. The house, after having to take another card, was 20. What a great hit for her and everyone, including me (before I knew or thought about probability and expected outcome in investing), congratulated her and praised her for such a great Black Jack player. In the journey back to San Francisco, she was talking non-stop about how clever that she had decided to take the extra card, and she was practically “laughing all the way to the banks”.

Luck in the stock market

“Luck is a combination of circumstances, events, etc., operating by chance to bring good or ill to a person.” Dictionary.com

In the stock market, you often hear players making millions of Ringgit, 60% in half a year, 500%, 700%, or even 1000% return from Bursa in a year; even in months punting hot stocks. They will brag about how they have made those extra-ordinary return by the use of margin financing, or other people’s money (OPM), to make the exaggerated return, and at the same time, encouraging others to do so.

“Ha ha, go and invest in your BAT and Nestle for your 10% return with the meagre saving you have. I made millions using other people’s money in such a hot stock. You take 30 years to make what I can do in a year. You are not in the same league as me.”

That was how they scorned at me. I have to console myself often that

“Even if everyone is making big money, and I don’t, it is ok”

That “hot stock” was traded at 55 sen a year ago, closed at 18.5 sen two days ago on 26^th June 2015. It had since lost more than two thirds of its value now. But seriously, many people would tell you they have made tons of money, but how many would tell otherwise and lost their underwear?

Many would tell you they speculated in KNM and made a fortune when its share price ran up from 40 cent to more than RM1.00 in a few months a year or two ago, and how many told you they have lost a bundle when its share price plunged from RM1.00 back to 40+ cent, also in a matter of a few months and now at 63 cent? And how many told you that they bought it at RM10 eight years ago and had lost more than 90% now?

Instead, they would cite those phrases below convincingly and relentlessly.

“Success is never accidental”

“You make your own luck”

“Luck is what happens when preparation meets opportunity.”

In reality, luck plays a much greater role, especially in short-term investment results than many investors may think, though skill may play a role as implied by those phrases above.

Does skill matter?

“Skill is the ability, coming from one's knowledge, practice, aptitude, etc., to do something well.” Dictionary.com

Yes, skill, or rather following a proper proven successful process in investing which is in a probabilistic field, does play a part, a major part too especially in investing in a much less efficient market as that of Bursa compared to the US markets, in my humble opinion.

One way we can judge from a process is a good one in investing is to see if it worked in the past and is it analytically sound. For this, I would like you to revisit my previous articles in i3investors:

1. Why value investing works?

http://klse.i3investor.com/blogs/kcchongnz/50988.jsp

2. Graham net net working capital value

http://klse.i3investor.com/blogs/kcchongnz/52382.jsp

3. The Magic Formula

http://klse.i3investor.com/blogs/kcchongnz/51631.jsp

Process and outcome from my portfolios

“Watching the Olympics and listening to several of the successful athletes, one of the inane questions from the interviewers often seemed to be, 'What was going through your mind before the event? Were you thinking of the gold?' The response time and again was the competitor was focused on the process, not the outcome. So it should be in investing as well. We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process we maximize our chances of good outcomes.”                                Mind Matters 1^st September 2008

In the stock market, most players are too obsessed with outcomes which no one has direct control of. However, we do and can have control over the process by which we invest, don’t we? And shouldn’t we focus on what we can control (process), rather then what we have no control (outcome) of?

I have three published portfolios in i3investors. I have discussed about the process and outcomes of the first two portfolios a number of times as they have been set up for quite a while (two to three years) and the discussion was just 10 days ago in i3investor here:

http://klse.i3investor.com/blogs/kcchongnz/78390.jsp

My third portfolios consists of a collection of 15 stocks I wrote about throughout the year 2014. It was first discussed in this thread in i3investor here:

http://klse.i3investor.com/blogs/kcchongnz/68248.jsp

This portfolio as shown in Table 1 in the appendix, is the worst performer of my three portfolios. A couple of forumers in i3investors have been mocking and reminding me about some of my failures in this portfolio, thanks for them.  We will use this to discuss the agenda of this article to reflect on my failures, after all it is more important to learn from failures than success in investing. We shouldn't only harp on our success and not a word mentioned about our failures. Agree?

The return of the portfolio

I have nothing to brag about in this portfolio except that it has done better than the broad market, a consolation. The average return of the portfolio as on 26^th June 2015 is 17% with a median of 13.3% as shown in Table 1 in the appendix. This return is still better than the broad market return of -4.3% during the same period, which means there is still a positive alpha of 17.6%, a far cry from what some people here who achieved more than 50% in just half a year. There are 9 winners and 6 losers, not too bad. The big winners are Latitude +128%, Prestariang +117%, Magni-Tech +49%, Pintaras +35%, Tasco +29%, Uchitech +24%, and Scientex +21%. These stocks were all selected based on the Magic Formula principle of Joel Greenblatt as illustrated here:

http://klse.i3investor.com/blogs/kcchongnz/51631.jsp

There are three stocks in the portfolio which were selected based on the asset based negative enterprise value and the Graham net net working capital investing strategies with the principle as explained here:

http://klse.i3investor.com/blogs/kcchongnz/45296.jsp

Those stocks are Kuchai +13%, Perak Corp -16% and Plenitude -33%. Note the big loss in Plenitude.

There was another investment strategy used in the portfolio, investing in derivatives of company warrants. The stocks involves are MRCB warrants, -46% and BIMB W, -42%. These have incurred heavy losses as at to date.

The process of stock selections in the portfolio were discussed at length in my postings in i3investors.

As the article has become quite lengthy, I will discuss in details about the process and outcome and the role of luck about this portfolio later.

For those who are interested to learn about the fundamental process in investing for a small fee, please contact me at

ckc14invest@gmail.com

The course is starting. The last train is moving.  

K C Chong (28^th June 2015)

Appendix

Table 1: