Lessons Learnt in 2014

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#1
I think it would be useful to start a thread to discuss what we have learnt during our investment journey, and also how we can sharpen our skills and analyze mistakes so that we do not repeat them.

I am confident everyone has something to share and can chip in to make this thread a useful one, for both veteran investors as well as newbies.

Let me start off by stating my own:-

1) Always keep an eye on the business - There's no such thing as a "blue chip" company doing good for years on end. The dynamics of business are such that there is always competition, costs are always going up and there's always a threat of substitute products. I've learnt that keeping an eye on the business helps me to understand when I should sell, and when I should buy.

2) Expanding my circle of competence - Although Munger says that it is important to know the limits of one's own understanding of businesses by defining their circle of competence; I'd say that never-ending learning is also important as it helps to broaden your circle of competence and gives you better insights into how businesses work. For this year, I've been reading up on various industries and companies (through initiation reports) and in the process I have enhanced my understanding of different types of businesses.

3) Understanding the role of psychology in investing - Too many focus on the mechanics of investing (i.e. the process, numbers, valuation etc) without giving much thought to the psychological aspects of investing. I spent most of the year reading up on psychology and how it can affect my investment(s). The three most common are hindsight bias, confirmation bias and loss aversion. It is important to write down your thesis and rationale for purchasing or selling an investment so that we do not suffer from hindsight bias. To combat confirmation bias, I actively seek out information which contradicts my thesis so as to gain a more holistic view of a company or investment.

4) Learning about asset allocation - Most investors don't pay much attention to asset allocation, and I have noticed this from blogs where people put up their portfolio, and also from forumers who may purchase companies in varying amounts to add to their portfolio(s). You should allocate the bulk of your funds into your highest conviction idea with the lowest risk, but it takes some time to figure out which company in the portfolio has the lowest risk. We tend to allocate capital by saying "oh I have $XXX to deploy and so I bought YYY". But the right way to look at it would be - should I sell position A to buy positions B and C as this will lower the overall risk of something going wrong with my portfolio. Noteworthy I feel, and every investor should think of this.

5) What has been priced in? - An extension of the psychology point above (3). Knowing what has been reflected in the share price is important as it reflects our knowledge of optimism, expectations and future prospects. The reason why it is tough to buy "cheap" is because high valuations have already priced in rosy prospects many years into the future. Buying a good company at expensive valuations can only result in lower overall returns and much disappointment when things do not turn out as they seem. On the flip side, if a company has priced in a no-growth scenario or expectations are poor, perhaps it may be worth considering especially if you did your analysis well and have insights into the situation.

6) To focus more on risk, rather than returns - Probably the most important lesson of all, and one which I have to constantly remind myself to do. The 5.5 year bull market has led many investors to focus only on the upside and how they can make; and therefore the downside risks have been neglected, or glossed over. We need to get back to basics on how we should mitigate risk and achieve adequate margin of safety - all this can be achieved if an appropriate level of research and groundwork is put in place before any action is taken.

So that's all for now. Hope others can chip in too and share what they have learnt on value investing.

Happy New Year!
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
Hi Musicwhiz,

Very good points you have there. Sometimes its really remembering and acting on basic things like that which can save us a lot of agony.

On point number 6, I find in addition to what you have said is to focus on "What happens if I am wrong" and if so "What is my action plan" this is to ensure we don't end up like victims of our emotions and are able to right the wrongs losing as little time as possible.

I find that there is so much on trying to turn a 7% market index return into a 10% return but somehow no one thinks of it the reverse way. "If the market loses 10% (as it often does), how can I lose 7%" which if you work it out reducing 3% on downside matters more than increasing upside by 3%.
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#3
Here is mine:

1. Know thy self. Understanding my own behaviors, how much I can risk, under what circumstances would I become overconfident, etc has been key for this year. I've seen others fall into the trap of copying blindly or becoming blindsided, I myself had also taken a bit too much risk. Fortunately my exposure has been relatively small.

2. Seek only quality companies that I believe will grow past 10 years. Tying to point 1, I find I sleep better at night knowing the investment business is relatively safer because I am risk adverse.

3. Portfolio management has been a big savior. I did not see the oil price fall coming, but as I did not understand O&M industry much, I only exposed myself to a small part. By buying into a "safer" counter, I did not make losses.

4. I am a big believer that a retail investor should strongly avoid/minimize inherently risky industries - manufacturing, construction should take a smaller portion of portfolio. This theory has served me well this year.

5. Stick to a no-sell approach. I am aware I missed out on 30+% profit opportunity and now sitting on 15% paper losses. But given my conviction on the counter, and having a diversified range of counters reassures my approach. I'm convinced things will turn around (soon).

6. Agm are almost critical for my approach. In my opinion, I have gone and left agm with greater conviction on the stock, or sold off based on what I hear. Meeting the management really says a lot more than just annual reports and personal research.

Musicwhiz: agree with most of your points, they are pretty in line with my own investing psychology. I have not done point 2 as I would like to limit to safe industries, and find myself having lesser time to research than I would like to.

Happy new year to all too. Huat ah!


Sent from my iPad using Tapatalk
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#4
I have no long story to share like mw,I can summarize my approach

1.) focus on a few stocks

2.) keep the stock pick local

3.) attend agm

4.) have patience to wait

5.) be ready to walk away if the value proposition is no longer valid

6.) work the numbers before investing

7.) hoarding cash can be a powerful strategy

8.) last but not least if don't understand, can ask the good people at value buddies...haha

*there are no such thing as a good or poor market,only good or poor market players
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#5
Walter & Edwin Schloss 'Factors to make money in the stock market':

http://www.grahamanddoddsville.net/wordp...chloss.pdf

Probably rule number 4 for me in 2014:

'Have patience. Stocks don't go up immediately'

The problem is that sometimes they do go up quite fast and and one has to convince oneself that it is just luck and not to have the same expectation for other purchases.

Which brings us to rule number 8:

'Have a philosophy of investment and try to follow it.'
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#6
Quote:The problem is that sometimes they do go up quite fast and and one has to convince oneself that it is just luck and not to have the same expectation for other purchases.

Luck does play a part in portfolio's return. But, generally, if your strategy is relatively consistent and you are consistently in luck, the right way is to consistently follow the same strategy.
Basically, it is ok to be a loner if you think you are right. If everyone is right and betting on the same investment, the return will be minuscule.
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#7
I tend not to depend on luck. With multiple stock counters which are undervalued and which has unbroken decade history dividends and which pays at different times of the year, personally i can concentrate on the reinvesting part and basically leave luck out of the equation, n sleep peacefully at night.
Perhaps, luck only plays a part when a these undervalued companies becomes fully or overvalued valued as in the case of a GO. This when it happens, its becomes like a big bonus to receiving regular salary from working.
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#8
My two cents, the day job will build up the patience in you.
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#9
Agree with MW point 3, investment goes beyond numbers. One particular lesson I have learnt is the importance of judging businesses beyond the numbers they present. As VB member, Specuvestor has pointed out, one has to analyse other layers of the business such as the structure. It is important to see how the “cash” is managed and also if the structure is benefiting the majority shareholders and prevents Minorities from getting a sizable share of the company's value.

Another lesson learnt is how our market seems to operate. From the various companies of Valuetronics & China Sshine, while these companies were indeed undervalued and talked about in VB, it was only in mid 2014 that their value proposition were realized. One of the main reasons was due to the sudden surge of analyst reports and their visit to the respective company's mgmt. These episodes serves to highlight the need to be patient with our investments too. After all, we are only small shareholders and its only when the market recognizes its value would we be rewarded. The market/company does not bother if we own a stake in an undervalued company
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#10
1) Keep the forest green, won't run out of wood to burn... Tongue
2) Don't kick yourself if you missed out on winners, there will always be others!
3) Try not to lose money and we will be fine! Big Grin

It's a business we are investing in! know it! Big Grin
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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