“Hello Mr KC Chong,

I have just started to follow your blog on i3investor and find your approach to analysing companies very structured and logical. 

I am very new in stock investing; just started last October. In fact, I only got into it after my father followed someone’s method. I also blindly followed; for a while my portfolio return was commendable but whatever gains have been wiped out due to heavy pressure on export-related stocks.

I therefore think there should be a better way.

Could you teach me how to analyse stocks like you do?

I am very willing to learn, I have started reading investment books by the gurus - just finished One Up on Wall Street by Peter Lynch, currently reading The Intelligent Investor by Benjamin Graham.

Sir, I would be very honoured if you would be my mentor.

Thank you in advance and have a prosperous Chinese new year.

Commentator”

Dear Commentator. A happy new year to you too. I am glad you like my approach in investing. This is not the only “right” approach though as you should be aware that many others have been successful using different approaches in investing.

The success in stock investing depends to a large extent on a successful logical, plausible and dependable strategy. There are also some behaviours to be avoided in order to have a better outcome in investing. Here I will suggest to you ten key “Don’ts” behaviours which are harmful to your investment returns you should be aware and steer clear of.

1.    Don’t use OPM

This is my “Golden Rule” and “First Commandment” in investing, especially for a young person and new investor in the stock market like you; never use Other People’s Money hopping to make exaggerated return from investing in the stock market.

I have written about this numerous times in the link below.

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

http://klse.i3investor.com/blogs/kcchongnz/79429.jsp

http://klse.i3investor.com/blogs/kcchongnz/82699.jsp

If you have bought those export themed stocks a month or two ago closed to their peak, which has lost an average of 20.8% in such a short time, and if you have borrowed 50% to invest, you would have lost about 42%, excluding the set-up fee and interest expense on your margin finance.

How much your portfolio will have to gain in order to break even? The answer is a whopping 70%. How many years do you think you can recoup that kind of losses? 5 years? 10 years? As a hint, the long-term return on the stock market in the matured economies, including that of Malaysia is about 8% to 10% a year. And hope that the value of your portfolio does not continue to drop resulting in force selling and total loss, or may be still owing more money to the bank.

In your case, it is lucky that you did not also follow to use of margin financing too as propagated. Most brokers and remisiers will encourage you to invest with margins. They will tell you that you stand the chance to make big money that way, but not telling you what if the market goes the other way. You see, they are doing something befitting the golden rule in investing;

“Heads I win huge; tails I win too.”

The only thing is this “win” only applies to them, and not the investors in you.

Few, very few, none of that I truly known of has made a fortune using OPM. Instead, using OPM in investing has ruined millionaires and billionaires alike, including the most famous Jesse Livermore. 

In the most recent case of the Shanghai market just 8 months ago, the SSX Index has dropped by 45% in just 8 months.

http://klse.i3investor.com/blogs/kcchongnz/79429.jsp

How many speculators and punters in China have lost their fortune, and their life? Don’t let OPM ruin you.

Investing in the stock market itself is already risky, and using OPM to invest only amplify your risks and so it shouldn’t be done with borrowed money. Avoid it like a plague!

2.  Don’t have an investment plan

Venturing into investing without having a plan is like starting a voyage without a compass. You will end up in the wilderness and likely a loser. Before you start investing, you must have a personal investment plan or policy that include your goals and objectives, the risks that are relevant to your chosen investment style, the benchmarks for measuring your success (No, it should not be 100% return a year), and your plans to diversify your investment. Don’t make the mistake of climbing the ladder to investment success only to discover it is leaning against the wrong wall.

Just because a “guru” made his millions doing the “blah, blah, blah” strategy doesn’t mean it’s the right strategy for you as one size does not fit all.

I had a friend who has consulted me about his investment portfolio. Before I gave him my opinion, I have asked him a few questions to gauge his investment objectives and personal risk profile and was told that he just wanted to have a higher return than other alternative investments in the long run. However, looking at his portfolio, he was heavily leveraged with concentrated portfolio and with two thirds of the money belonging to the banks giving him the margin financing. His investment strategy was way off from his investing objective and personal risk profile.

http://klse.i3investor.com/blogs/kcchongnz/61822.jsp

I gave him my opinion that may be it would be best if he could sell down his shares and reduce the margin finance. He got angry with me and even talked bad about me in public, what the @#$%&*? I didn’t know if he could sleep soundly after the market dropped by another 10% from then on before recovering.

Having a plan will keep you focused and disciplined, and will help you adhere to a healthy long-term policy even when market conditions are unfavorable.

3.    Don’t invest in stock market in the short term

You are young and I believe you are investing to pay for some event down the road, like to build up wealth for your retirement, or setting up an education fund for your children which are decades away.

You plan for your retirement in the long run in 40 years, and hence do not react when the market has a bad month, like what you are feeling now.

But it's dangerous. While long-term financial plans benefit from compound growth, short-term reactions are cursed by emotions and randomness. Very few decisions made based on reactions to short-term market moves will help you achieve your long-term goals. The investor who ignores the noise and becomes blissfully unaware of what the market did yesterday may have a big advantage over those retail investors and the professional alike who watch every tick whole day on the computer.

“Compounding interest is the eighth wonder of the world” Albert Einstein

4.    Don’t yearn for quick gains

This don’t is somewhat similar to the above. Most new investors enter into the market because they expect to start raking huge profits within a few days, weeks or months. This desperation leads them to take unnecessary risks and as a result, making many mistakes, which eventually lead them to huge losses.

You see, in investing, there are no quick gains, as profits accumulate over a long time. This could be more than 10, 20 years, or even longer.

“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

“You Can’t Make A Baby In A Month By Getting 9 Women Pregnant”        Warren Buffett

“Focus on the Downside, and Let the Upside Take Care of Itself.”  Mark Sellers

However, many investors, I consider them as traders, consider a 3 year investing horizon as a very long one.  So, if you are finding a means to get rich overnight, don’t consider investing.

5.    Don’t buy on tips, or placing excessive trust on “experts”

There are some people out there who are well intentioned, honest and sharing their limited knowledge with you and hoping that you will be successful in your investing experience, but take it that they are rare. In the real world, almost everyone has a conflict of interest with your wealth. The bottom line is your investment advice is coming from sources whose objectives are focused on their own wealth … not yours.

Don’t make the mistake of trusting and following tips from the experts who seem to carry some weights. You should always operate from the assumption that the investment advice you receive is tainted.

Buying shares on the strength of tips, or following the “experts” like what you and your father doing can be and often a recipe for disaster. You should have a better understanding of his method of investing if it is plausible, logical and sustainable under all circumstances before placing your hard-earned money in it.

Your tipster may be just a follower of another tipster and have no idea about the company he tips you on.

I believe those export stocks you have are not bad or even good stocks. But you have to do your own home work if they are selling at the right prices, something like what I have done here:

http://klse.i3investor.com/blogs/kcchongnz/90970.jsp

I have written here regarding speculating on hot stocks based on tips in the link below:

http://klse.i3investor.com/blogs/kcchongnz/59866.jsp

Always remember this axiom, “There ain’t no tooth fairy in the stock market”. The only person you can depend on in the success of your investing outcome is none other than you, only you.

6.   Don’t follow the crowd

If you do what everyone else does, you’ll get what everyone else gets, i.e. an average result. I have the haunch that the results are actually way below the average.

In fact, if you are looking for a proven formula for losing your money quickly, try following the crowd, like following the greater fool theory by chasing hot stocks, hypes and fads, higher and higher without understanding their fundamentals.

Herein lies one of the advantages of you being an individual investor. You don’t have to follow the crowd; learn some proven techniques and strategies in investing, and develop your own investing strategies.  This is far more likely to lead to success in investing in the future.

7.    Don’t neglect to do your homework 

This rule follows the previous rule to be wary of being blinded by “tips”.  Remember that it is the success of the business itself that is going to drive the share price in the long run.  Be sure to study and fully understand the underlying businesses of any share that you are considering buying, analyse if the business is a good business, and also if the price is reasonable, and better still, cheap. 

In this ln below, it is shown that doing your homework pays in investing in the stock market.

http://klse.i3investor.com/blogs/kcchongnz/89516.jsp

It is good to read the investing philosophies and methodologies of the true super investors in the world besides the Peter Lynch book on “One up Wall Street”, and the “Intelligent Investors” by Ben Graham that you have done. You are actually far ahead of many market players in Bursa. Here are some guides on who else and their writings and books you can follow:

http://klse.i3investor.com/blogs/kcchongnz/88007.jsp

It is great that you realize the importance of acquiring some proven philosophies and methodologies in investing, and wish to learn the nitty gritty of them. I believe, you have come to the right place, seriously.

If you have read “What has worked in investing”, a vigorous research on what methods have worked in investing over decades, you will understand what I am trying to convey to you. These philosophies and methodologies have worked for the long-term, all the time. I am actually surprised that they also worked well for me in the short-term as shown in the evidence in the link below:

http://klse.i3investor.com/blogs/kcchongnz/89516.jsp

Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest”           - Benjamin Franklin

Yes, I sincerely believe this is a better way of investing for the long-term, in a less stressful way. Your “willing to learn” attitude, and knowing to learn the right stuff, will provide you with a much higher probability to be successful in investing in the future.

With this knowledge, I believe you would be able to sift myths from facts and not get carried away by other people’s opinions.

Yes, I am happy to teach you my philosophies and methodologies in investing which I have learned from the super investors above too. Teaching on how to fish in the jungle of investing, and not just throwing fish to you has become my passion now. Thanks for your decision of choosing me as your mentor.

8.   Don’t put all your eggs in one basket

"Diversification is protection against ignorance. It makes little sense if you know what you are doing." Warren Buffett.

But a lot of investors not named Warren Buffett don't know what they're doing, and Buffett's own Berkshire Hathaway controls 55 subsidiaries in industries ranging from underpants to private jets, newspapers to industrial chemicals.

 “Warren Buffet is happy owning a few stocks, and he is right if he is Warren.”      Walter Schloss
 

See what have the strengthening of Ringgit has done to the portfolio of all export-oriented stocks you have, and what it will do if the Ringgit continue to strengthen?

No, I am not saying Ringgit will continue to strengthen. I have no ability to predict that. I believe others can’t predict it with any level of confidence too. Often, recommendations to overweight certain market sectors based on macro-economic factor, like the strength of foreign exchange rate, are just guesses which are also likely to increase your risk in investing.

There are thousands of economists in this world, some of them are renounced economists but their opinions on macro-economic issues always split into half. So forget about any “expert” says about what the direction of the Ringgit will be. Otherwise if you put too much emphasis on the hope of the continuous strengthening of Ringgit, and hopefully the continuous rise of your export stocks; and if they don’t, your investment outcome will not be pretty.

I am not just plucking figures from the sky. All academic research has shown that there is no statistical significance that this macro-economic thingy can be correctly predicted, even by the renounced economists in the world.

So, diversify, some export stocks, some local consumption stocks of different industries, but do not over-diversify. A portfolio of five to ten shares is probably your best bet. 

I have written an article here deliberating that diversification is the only free lunch in investing in here:

http://klse.i3investor.com/blogs/kcchongnz/48946.jsp

“Diversification "means that you're willing to exchange the opportunity of making a killing for the assurance of never getting killed."

9. Don’t “average down” when the price is falling, unless you are cock sure of what you are doing

“Averaging down” means adding to the holdings of a share that you already own, but at a reduced price.  On the face of it, this makes sense.  If you liked the share in the first place, then why not buy more when the price falls? The problem is that a falling share price could very well be the result some bigger events which we do not know about as a retail investor.  True, the market often over-reacts to bad news, but there is also the possibility that the market has got it right and we are wrong.

I personally have experienced this when I wrote about a stock pick on Coastal Contracts in the link below here when its share price was at RM3.27.

 http://klse.i3investor.com/blogs/kcchongnz/70035.jsp

It was the alert of a course participant which prevented me from average down when the share price continued to drop, and instead I cut loss at an early stage, though I still own a little now.

Don't forget that we can often be wrong in our analysis. When someone who had all the insider information about Xingquan, visited all its factories a few years ago, has a close relative audited its accounts, and yet completely wrong in his assessment about the companies; or someone who could just pick up the phone and talked to the very top management in Mudajaya, or JayaTiasa and yet made huge losses in investing in them, where do we as small retail investors, the Kuching kurat stand in this game in the jungle out there? Can’t we be wrong too?

But don’t worry too much. As long as we are prudent in our investment, do all the necessary risk management such as diversification, doing our homework, invest in good companies at cheap price, for the long-term, and avoid margin, our overall investing outcome should be okay. It has proven that.

The fundamental principle still applies; it is the future prospects of the company that will determine the share price in the long run.  Only if you are certain that the fundamentals are still intact should you average down. But if in doubt, avoid averaging down. Bad news could often be worse than the market anticipates.

10. Don’t Stick with clear losers

Many investors hang on to shares of which the companies’ businesses have not shown any proven record of success, or have been deteriorating unabated, stuck with the same poor and management of questionable integrity. In valuing these shares, I often find that they don’t even worth a sen, and clearly there is no chance of a turnover.

In this link below, I have deliberated what I mean above:

http://klse.i3investor.com/blogs/kcchongnz/89007.jsp

Investors of these stocks still hope that the shares would pick up again sometimes in the future. This is a very practical way to see your money melt down like a burning candle. Once fundamental analysis shows the company has no future, quickly jump off the leaky boat, rather than follow it down a bottomless pit.

Conclusions

By avoiding these don’ts and common mistakes in investing, you will have a high probability of meeting your investment goals and save yourself from lot of regrets in the future. Even though some of the tips given above may not make you an investment expert or providing you with outsized return in the short-term, they will keep your feet firm on the path to success in the world of investing in the long term.

That is exactly what investing should be, in my personal opinion.

A Happy Lunar New Year and a Happy Beggining to everybody.

KC