In my last article on “Should you avoid the stock market?” in the link below,

http://klse.i3investor.com/blogs/kcchongnz/93614.jsp

I have deliberated that the stock market is an excellent place to build long-term wealth. It was shown that for a 141-year period from 1871-2012 in the USA, stocks’ compounded annual return (CAR) is 8.6%, way outperformed the 4.7% for bonds and 2.7% for gold.

Back in Malaysia, the KLCI has a CAR of 9% for the last 10 years covering a complete economic cycle from year 2006 to 2016, compared to the average bank deposit rate of about 3% during the same period. That is also a huge difference in return compounded over a ten years’ period.

The article also discussed the back testing a portfolio of 19 Bursa stocks of mine as published in i3investor, which shows that the portfolio has yielded a CAR of 24.4% for the last 10 years, outperformed the 9% of the broad market during the same period by a wide margin.  

Hence it would seem a pity if individuals shun investing in the stock market and lose the golden opportunity to build long-term wealth.

However, life is not always as rosy as it seems to be.

The poor performance of individual investors

In the same article, I have shown that an average investor has been underperforming by a wide margin when compared with the return of the broad market due to various factors which are not favourable to the retail investors.  This is true not only in the US, it is also true all over the world, including that in Bursa.

Here is a typical portfolio belonging to an average investor which actually went into huge losses of 43% while the broad market has gone up by 10.8% during the same period.

http://klse.i3investor.com/blogs/kcchongnz/67199.jsp

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 as it is dominated by fund managers, syndicate players, insiders etc. 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.

 It is really a jungle out there for retail investors. It is a loser’s game for retail investors. They as a whole have little chance, unless he is the 5%-10% above-average investors who have skewed the average results.

Knowledge (Plus Experience) is power

 I have also deliberated that to be an above-average investor, one has to know the language of the business, i.e. some simple accounting, as investing in a stock is akin to investing in part of a business, and he must know how to value a business. The other important thing you have to know is the psychology of investing, having a proper mind set when investing, and some useful philosophies and methodologies of investing. There are plenty of resources out there for you to learn about these skills, including some online courses which one can learn during his own free time.

However, there are some problems too as shown in the comments in my previous thread.

[Posted by limko1 > Mar 25, 2016 10:50 AM | Report Abuse

Most people won't bother to invest in equipping themselves with the right attitude and knowledge on Investing. They just want the easy way by listening to tips and rumours. They just want to gamble.]

This is a real problem, people just want to take the easy way out hoping to make money from tips and rumours. They think there are tooth fairies in the stock market who want to help them to make money in the stock market by giving them tips for free.

By the way, of late there are many tips given in the public forums, but how many of you have made money in the last few months following these tips? Why are there people out there so “kind” in helping you to make money from the stock market? Why are you the chosen ones?

I do share my knowledge and views in public forums with pleasure, but frankly I find no value created for the society as whole by helping strangers to make money from the stock market. I have a lot of better and more noble things to do to the society, such as educating the public how to manage their personal finance etc.

Gambling? What is the odds against you when you are gambling with the institutional investors, the fund managers, the insiders, the syndicates, or even the ones who give you the tips, knowing very well that gambling in the stock market is a zero sum game?

Here is another good comment in the thread.

[Posted by 3iii > Mar 24, 2016 08:11 AM | Report Abuse

KC, On this topic of yours, perhaps I may add. It is great to know you are conducting courses to educate and equip those interested in fundamental investing. This is commendable. The truth and this is also borne out from my observations and interactions, only a minority will be in the position to benefit totally from everything you share. The biggest enemy to investing is still the person starring back at you in the mirror - yourself. A good education to develop a sound investing philosophy is certainly a sine qua non to profit from the stock market. The biggest enemy of your cash is inflation. The best friend of your cash is compounding. The stock market is a safe place to compound your wealth for those who know how to. It is simple but not easy.]

Besides sharing and teaching the fundamental of investing, I also dwell with the behavioural finance in my online course. Yes, it is not easy. Few are really committed to this what I consider a very important aspect of their personal finance, to learn to build long-term wealth slowly but surely.

Fundamental value investing is about finding good companies and only invest in them when they are selling at reasonable or better still, cheap prices. Often, when you find one and invest in it, it normally takes some time, 3 years, 5 years for others to discover it too when they show their results in the long run for the price to go up to their intrinsic values. Very few investors have that patience. They keep on singing the song “Three years”, 3年, left three years and right three years, expressing how frustrated it is to wait for three years to see their love ones again, or for the investments to bear fruits.

“An entrepreneur needs 3 years to see the fruits of his success of his venture, a house requires three years to build. Why can’t we investors wait for three years to see the good results of their investments?”

Cold Eye.

Yes, it is very true of this statement by the commentator below,

“The biggest enemy to investing is still the person starring back at you in the mirror - yourself.”

Most people have their career and family as their priorities, which should be, but they should have better time management to at least spare some time for this important aspect of their personal finance. Some are not willing to spend eight months to go thoroughly through a fundamental investing course. It is too time consuming and they prefer to do the other easy way out. They opine the fundamental analysis is just theory. I try to make fundamental value investing as simple as possible, but I also agree in what Albert Einstein said, “Everything should be made as simple as possible, but not simpler.”

There are also many who do not think FA works, or can work alone, despite of the volumes of evidences showing otherwise as shown in these links below.

http://klse.i3investor.com/blogs/kcchongnz/92580.jsp

http://klse.i3investor.com/blogs/kcchongnz/92871.jsp

Seth Klarmen also said it right to the point that for fundamental value investing, it is either you get it or not. However, most people don’t get it, and hence won’t bother about it.

Yes, investing is not easy, and anyone who thinks it is easy is stupid, said Charles Munger. Those who do not know how to read financial statements and understand the business they invest in, and those who have no time to learn about it will be even more difficult.

However, they may have an alternative if they still wish to build long-term wealth from investing in the stock market, i.e. to engage a knowledgeable and proven successful person to manage the investment for them. But make sure they don’t burn a big hole in your pocket, and more important, there is a proper alignment of both your interest and his interest.

However, there are still other valid concerns such as these below.

Some myths of investing

Hi KC,

I have 3 concerns and they are:

(a)   The market seems to be going on the downtrend in the near future and if so, whether it is the “right” time to invest as even very fundamental stocks will also follow if that happens. I understand that some will say that timing is not critical for fundamental investing but isn’t a lower entry price preferable?

(b)  I would like to learn how to invest first rather than be dependent on stock pick service only in the long run.

(c) On the first issue, is there a method to mitigate such a scenario like buying in stages instead of in one go?

Thank you.

Blanked

Regarding (a) above, the right timing is surely critical, buying a stock at a lower price later is definitely “preferable”, but my question is how are you so sure that you can buy at the right timing and get a lower price later, and not that the price will shoot up high before you can wait for that opportunity? How are you so sure that this “downtrend” will not suddenly reverses itself?

I have read many academic research showing that nobody would be able to predict the trend of the market correctly and consistently. You know with the power of computer now, it can easily simulate any trend one wishes and back test it. However, there is no statistical evidence that one can predict the trend of the market in the future based on the past.

Rather, the pertinent question should be whether you find any good buys now? If so, is the overall market that overvalued historically?

Regarding point (c) above, sure, buying stock in stages does seem to reduce risk and make you feel happier when the stock price drops after you have bought it as you can now buy it at lower price, and hence lowering your average cost. That is what is called Dollar Cost averaging (DCA). That is what the unit trust agents who sell you the unit trusts to you by asking you to sign a form and then periodically withdrawing your EPF money tell you to do so. That is how they get the most commission from your investment, to withdraw your EPF money for investment to the limit, and then again when your EPF money has built up again later. Think about how can you make money when upfront, 6% is taken off from your money before investing the rest of it in the unit trust, and continue to charge you 2%-3% annually from your fund?

The stock market has been growing at a CAR of about 10% long-term in most developed and developing countries, including that of Malaysia. How can one get a better return by investing his money in equal amounts over time using DCA when the probable direction of the market is up? You may be brain washed that it is a less risky, or lower volatility way of investing, but that is for the birds. The benefits of DCA has long been debunked.

Point (b) above, “I would like to learn how to invest first rather than be dependent on stock pick service only in the long run” is an excellent comment which I think most aspiring investor should adopt.

So contact me at the email below for an online investment course for a small fee.

ckc14training2@gmal.com

For those who are busy in your career and have limited time but still wish to invest in the stock market to build long-term wealth by someone reliable to manage your investment can also contact me for a fee.

For those who are interested in the performance of my previous picks and portfolios, they have been established in i3investor since more than three years ago and you can judge my yourself their performance as shown in the links below:

http://klse.i3investor.com/blogs/kcchongnz/88504.jsp

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

http://klse.i3investor.com/blogs/kcchongnz/92412.jsp

http://klse.i3investor.com/blogs/kcchongnz/92727.jsp

http://klse.i3investor.com/blogs/kcchongnz/92871.jsp

You can see the consistency in extra-ordinary returns from all the portfolios above with little risk.

K C Chong