Author:
kcchongnz | Publish date: Mon, 28 Nov 2016, 05:01 PM
It is saddening to read and hear about people who treat the stock market as a “game” give in to unbearable stress and commit suicide due to heavy losses “playing” in the stock market.
How did they get themselves into such situation?
One probable way I can think of is they get greedy by using margin finance in the hope of getting exaggerating return by using other people’s money. But when the market or their stocks tanked, which they often do, they faced, instead of exaggerated gain, amplified losses which wipe out all their capitals, plus still owing the banks, or Ah Long huge sum of money.
Many of those who lost huge amount of money speculate on rumours, hot tips, hypes and fads. The share prices of these stocks move up and down hugely every day, often manipulated by big boys, insiders and syndicates. Speculators of these stocks must “monitor” their stock prices every day, every hour, and every minute, whether to cut loss or average down, while they are working during a normal day. The outcome is quite certain as shown in this link below, all of them eventually lost huge amount of money. How not to be stressful speculating like that?
http://klse.i3investor.com/blogs/kcchongnz/104168.jsp
Even investing in a seemingly reasonably good company can be very stressful as you could lose a lot of money chasing it when it is already jacked up sky high, and you have no idea how to assess it but merely following hot tips from hot hands. If you have bought Focus Lumber at its height at RM3.09 on 12th January 2016, you would have lost more than 50% in just 8 months later, wiping out all your capital if you are with a margin of 50%.
http://klse.i3investor.com/blogs/kcchongnz/102572.jsp
Even investing in Gadang, which so many investors and investment bankers are super bullish of, with the push by the company with all those freebies at its height of RM3.30 can cause you plenty of stress if you are on heavy margin finance, and sailang all your money in it when it was heavily touted as a sure win bet.
What if you speculate in Genetic following the “golden rule” speculating on its just one quarter good results without understand the details and use that to extrapolate future performance, or XingQuan with highly suspicious accounting practice, and some other hot tips? I have no eye see. One could lose 60%, or 70% within just a few months.
Why should one want to get himself into such a stressful situation in investing? Doesn’t he have a better choice of investing in a stress-free manner as that of Walter Schloss, Warren Buffett, or Joel Greenblatt?
Walter Schloss
Schloss was a high school graduate and had worked under Benjamin Graham. If I were to use golf to describe Schloss, he would be the “nearest to pin” in Graham’s investing philosophy
We can sum up Schloss investment philosophy in one sentence: “He buys cheap stocks”. That was precisely the cigar butt investment approach of his mentor, Benjamin Graham. He liked to look at the balance sheet more than income statement because,
“I try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper. … Price is the most important factor to use in relation to value…. I believe stocks should be evaluated based on intrinsic worth, NOT on whether they are under or over priced in relationship with each other…. The key to the purchase of an undervalued stock is its price compared to its intrinsic worth.”
Schloss practised adequate diversification. He repeatedly said “I don’t like losing money”. So, he needed to take a diversified approach so he could “sleep well”. He often owned 60 stocks or more at a time, sometimes as many as 100.
“I like the idea of owning a number of stocks. Warren Buffet is happy owning a few stocks, and he is right if he is Warren….”
Schloss invest with a long-term view. He did not expect his investment strategy yielding results in a short time. He often owned his stocks for an average of 4 years. Obviously, he doesn’t look at stock price movement every day, every hour, and every minute, and thus get stressful.
“Don’t buy on tips or for a quick move.”
Schloss rarely talked to management, choosing to invest only on the numbers. He spent very little time on thinking about the economy, or the quarterly performance of a company, unlike the analysts nowadays, and their followers, chasing every quarterly result and make moves all the time, and hence get very stressful. He simply felt that if he could get a good price backed by as much quality tangible assets as possible, the upside can take care of itself.
“I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors!”
Many here may say his way of investing is no use using historical records, that he must know the management, read and must be well versed in industrial and economic news and get the up-to-date information of whatever the companies he invested in etc. But he didn’t because he just wanted to invest in a stress-free manner.
But do you know how well he had done for himself and his investors in that stress-free manner?
He is one of the most influential investors based on his 5 decades long performance from 1955, returning 20% per year, almost three times the 7% return of the S&P during the same period. If you placed $1000 investment with Scholss in 1955 for 50 years, your $1000 turned into $9.1m, 300 times more than the just $30000 from the return of the broad market!
There has been hardly anyone who can break his long-term track record.
Schloss is also a very happy man too, because for him, wealth with no health, no true friendship, no family love, no principles, means nothing to Walter Schloss.
Warren Buffett
Warren Buffett requires little introduction. He is the most successful investor in the world. Buffett is the chairman,
CEOand largest
shareholder of
Berkshire Hathaway, and is consistently ranked among the
world's wealthiest people with a net worth of USD62 billion.
Buffett is noted for his adherence to
value investing, and a notable philanthropist.
That $1,000 invested in 1964, when Buffett took over the company and
shares cost just $19, would be worth about $11.5 million dollars today. This is equivalent to a compounded annual growth rate (CAGR) of about 20% for a long period of 51 years.
Buffett loves investing. He used to say he taps dancing to work every day. What stress? He doesn’t look at stock prices every day like most of us do because his investing horizon is long-term. This is the implication in this paraphrase of his famous quote:
“No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.”
Buffett, unlike Schloss who just buy cheap stocks, takes value investing to another level. He likes to pay a little bit more for a great business producing great earnings potential, and more focus on his investment, rather than too broad a diversification.
This is a good advice from Warren Buffett for investors regarding the greed in the stock market:
“I've seen more people fail because of liquor and leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing.”
Hence if you follow Buffett’s way of investing, investing in good companies for long-term, rather than chasing each quarterly result, you are likely to produce good outcome in the future, and without any stress.
Joel Greenblatt
Joel’s investing principle amalgamates both the philosophies of Buffett and Schloss. He invests in good companies at cheap prices.
I have mentioned about Joel Greenblatt in my investment articles in i3investor a lot because my investing principle is mainly based on his Magic Formula Investing. Here is one of the articles.
http://klse.i3investor.com/blogs/kcchongnz/51631.jspJoel Greenblatt is an American academic, hedge fund manager, investor, and writer. He is a
value investor, and
adjunct professor at the
Columbia University Graduate School of Business.
In 1985, Greenblatt started a hedge fund,
Gotham Capital, with $7 million. Through his firm Gotham Capital, Greenblatt presided over an impressive CAGR of 30% from 1985 to 2006. The $7 million capital turned into $1.7 billion 21 years later.
Joel focus on buying good companies at cheap price. Good companies again mean companies with high return on invested capital, ROIC and not earnings growth, and cheapness measured by earnings yields, and not the simplistic PE ratio.
This is Joel’s thoughts about stock price and value:
“I just want to take advantage of prices away from value. If you do good valuation work and you are right, Mr. Market will pay you back. In the short term, one to two years, the market is inefficient. But in the long-term, the market has to get it right—it will pay you back in two to three years. Keep that in mind when you do your analysis. You don’t have to look at the next quarter, the next six months, if you do good valuation work—Mr. Market will pay you.”
“Buying good businesses at bargain prices is the secret to making lots of money.”
I particle like what Joel says here:
“Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”
On leverage in investing, Joel said:
“If you are going to be a very concentrated investor, you should not use leverage. You can’t leverage because you need to live through the downturns and that is incredibly important.”
Joel also warned investors about stock tips and advice from people purportedly want to make you rich.
“The odds of anyone calling you on the phone with good investment advice are about the same as winning the Lotto without buying a ticket.”
So, how can investing be stressful if we follow Joel’s way of investing judiciously?
Conclusions
Investing should be treated as an enjoyment, and at the same time build up long-term wealth. The way to do investing in a stress-free manner is to follow some of these real super investors:
- Buy companies at very cheap price like Schloss did
- Buy great companies at reasonable price like Buffett does
- Buy good companies at cheap price like Greenblatt does
- Carry out assessment of the value of the company you invest in
- Diversify
- Invest for long term, not focussing too much on the next quarter or the next six months
- Don’t follow rumours, hot tips, hypes and fads
- Don’t use money you can’t afford to lose, especially margin financing
- Take care of the downside, and let the upside takes care of itself
- Don’t bother to look at your computer screen all the time
Happy investing
K C Chong
