It is human nature to be optimistic. It is human nature to hope. Hope is a component of a healthy state of mind. In our life, we must have hope to combat negativity which is not good.

Hope for riches from the stock market is always animating us.

Unfortunately, hope is a big money-loser in the stock market. It is hope that keeps us from selling our losing stocks. It is hope that stops us from cutting our losses in a bad business we invest in before they get bigger. It is hope that leads us into mania and buy stocks from rumours, hypes and fads and good businesses at super-expensive prices, following the greater fool’s theory.

But hope, begging, blind faith, wishful thinking etc., whatever you want to call it, deserves no place in our portfolio. It is a dangerous pitfall one should avoid.

Hope doesn’t work in the stock market. It is a hindrance instead.

I have written the pitfall of this “hope” investing strategy on one of the stocks, KNM, in my “Model Portfolio” one and a half year ago in the link below:

http://klse.i3investor.com/blogs/kcchongnz/51962.jsp

Six years ago investors of KNM were all with a soul full of hope as explained in the link above. They bought KNM at RM3.50 with the hope that its share price would rise up to its previous adjusted peak price of more than RM9.00 apiece. However, the soul full of hope turned into a hole full of soap.

KNM closed at 51 sen today. The loss is a whopping 85% since six years ago while the broad index has risen by 53% during the same period.

Today, KNM remains a hot stock, with all the headline news; of its securing of big oil and gas jobs (again), and all the hope about its recovery. Investment banks and analysts again are writing about KNM with bullish reports. Read these reports from investment banks. They are all “buy” calls, just like when it was 7 years ago when KNM was trading at more than RM9.00.

http://klse.i3investor.com/ptservlet.jsp?sa=pts&q=knm

Let us look at another hopeful stock in the “Model Portfolio”, Hibiscus Petroleum Berhad.

Hibiscus Petroleum Berhad

I cannot figure out how an investment process can be based on hope; hope of the opportunity to strike oil big all over the world while competing with so many other much bigger and more established international companies.

In fact, many investors (speculators) were so bullish on Hibiscus after it had made a qualifying acquisition (QA) of 35 per cent stake in Lime Petroleum for US$55 million that they thought their hope of becoming very rich would soon be materialized.

How not to be rich? The author in the article below mentioned that Hibiscus share price should be “a lot higher than RM2.00”. Just read the report and you will know how one wouldn’t get rich investing in Hibiscus at about RM1.50 then here:

http://klse.i3investor.com/blogs/kianweiaritcles/37280.jsp

With that QA, Hibiscus now has the world’s cutting-edge oil exploration technology, and they have countless licenses, memorandums of understanding, joint ventures etc. to explore oil in many countries all around the world, presumably they are more deserving than many other international oil exploration companies, because the company is led by a very successful and capable oilman, Dr Kennet something.

I personally am very sceptical about SPACs. I have read something about SPAC that almost all Special Purpose Acquisition Company (SPAC) went bust after QA from the experience from US which have these SPAC experience much earlier than us for many plausible reasons.

http://wealthmanagement.com/investment/staying-out-murder-holes

But for Hibiscus, soon after the QA and the numerous licenses it obtained, its share price was chased up by 80% from RM1.50 to RM2.70 in just four months from August to December 2013.

Hibiscus’s share price would just jumped because of rumours on when the drilling machine would reach the destination, and when it would start drilling, as if oil would definitely ooze out as soon as the drill rig is lowered.

Hope, plenty of hopes were in the air.

However, till to date, we are still hoping to strike the first oil, but already many retail punters were spilling blood everywhere multiple times as its share price has dropped by 32% from RM2.70 to RM1.84 in just three days just before the Christmas of 2013.  It then followed a constant decline as shown in Figure 1 below.

Last week, Hibiscus’s share price plunged by 48.5% from 51.5 sen to a close of 26.5 sen today on 16^th November 2015. The share price of a stock which has dropped by so much from RM2.70 to 51.5 sen, and yet would dropped by another 48.5%, in just a week. Those who have bought it at the peak of RM2.70 would have lost a fortune, 90% in less than two years. Not a single drop of oil has been extracted yet.

Figure 1 below shows the share price performance of Hibiscus. You could see how its share price rose abruptly from RM1.50 to RM2.70, and the continued to drop, and finally a sudden plunge last week.

The reason given for the steep drop last week was coincidently, margin call on some of its major shareholders, something I have been talking against in my many postings in i3investor all this while. Yet there are still people propagating the use of margin finance in public forums where few people could handle it.

Have speculators and punters lost hope in Hibiscus? I don’t think so.

If you look at those investment forums talking about Hibiscus, the hope to make big money in this stock has not yet diminished.

Yeah, these are all the hopes. Lottery-like stocks like KNM, Hibiscus, like lottery tickets, offer hope of winning big. Most individual investors are attracted to lottery-like stocks, owning on average 90% of them.

But think and analyze, what is the probability of any of these hopes to be realized, and that the shareholders will enjoy reasonable return from their investments in lottery-like stocks such as Hibiscus and KNM?

Fat hope I think.

One should heed a prime rule of investing:

 “Hope” is not a good strategy in investing.

Avoid hope in investing and follow a well thought through process of investing in good companies when they are selling cheap. And then embrace patience and reality…however painful it may be.

 I hope you understand and know what I mean and what to do. You still have hope if you don’t, by contacting me for learning to follow a proper process when investing in the stock market to build long-term wealth at

ckc14training2@gmail.com

I hope you would join me.

I hope this is not a fat hope.

K C Chong (16^th November 2015)