Friday, 13 November 2015

6 personal quirks I have as an investor

Everyone has their own style when it comes to investing, but beyond that there are some personal rules/beliefs/behaviors/quirks that people do that is vastly different from others. Here are some of mine, which follows mostly follows the theme of 'try not to screw yourself up'

1. I don't make big macro or market predictions.

Although its fun to-do as it requires little hard work like digging up an analyzing data. All you need is to paint a picture, throw in some buzz words you read in some article and captivate an audience. For example:

'The recent US rally is not going to last, with P/E multiples still expensive, interest rates hike coming in, china gdp slowdown and the stronger dollar hurting profits. Blah blah support level 17k, up on weak volume, blah blah blah'

The problem is that this would cause biasness to creep into my strategy when i don't buy a stock even though it hit my target price, because I read news about 'market slowdown, next recession' and get scared into not buying.

2. I don't purposely do asset allocation.

Many people like to state the fact that asset allocation makes up 90% of all investment gains (even though this is found to be not true). Its reasonable when you are planning for your retirement or have goals such as receiving a steady stream of income, but don't do it to sound cool and go all 'financial savvy' like 'I see a great rotation in the bond market and shifted a % of my portfolio away from equities to tide out the recent volatility' Like shut up, especially if you manage like 20k, how much can you actually allocate lol.

My main beef is that asset allocation requires you to have a macro view, like where interest rates/gold/market sentiment are going, which in my honest opinion, everyone gets it wrong.  (see point 1)

Even if you somehow have an uncanny habit of 'sensing where the trends are going' wasting so much time on predicting big trends and limiting your investments in a certain asset class just because of the line 'market sentiment is looking weak doesn't appeal to me'

My asset allocation method is quite simple and automatic, if i find stocks that provide me with a fair amount of return, I buy. If I don't I don't buy. So far this worked out pretty well as in a downturn (think STI at 2.8k) i can find plenty of stocks, and in a expensive market (STI 3.3k) i have 50% cash because i cant find anything cheap enough to buy. Same applies for bonds.

3. Once I buy a stock I delete it from my watchlist

I think i repeated it loads of times, that before buying a stock I always have a target selling price. Once I buy the stock i delete it off my watchlist and add a stock alert when it hits my target price. This is so I don't get tempted to sell and cash in quick gainz, or panic and sell at a loss. (I'm weak that way). If you ask me hows my stock doing now, my answer should be 'I don't know'

4. I don't buy bank/property stocks

I really really really don't know how to value them, maybe one day I'll know, but till then I'll stick to easy to understand stocks like SGX or raffles med.

5.  I try to update my portfolio performance irregularly 

I still haven't mastered my emotions while investing, which is why I try NOT to look at my performance. I tend to be more risk adverse when I'm making money (Eh take the money and run lah) and be more risk adverse when I'm losing money (Eh shit, losing money liao). I think I'm still up 13.5%. Shit I'm still weak. Kudos to those that can update monthly and still keep their emotions in check.

6.  Never liked share re-investment schemes

All of these letters go directly into the thrash. Never liked odd lots

Anyone else with other personal quirks to share?

Thursday, 12 November 2015

Don't get information overload - keep it simple stupid

If I have to pick one-line that summarizes my investment style its
'I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over'

This quote totally relates to my style of being both lazy + simple. Too often we have been spammed with information about investing such as

'should you care about the death cross?' - No what the hell is that
'Is China going into a recession?' - I don't know, ask Xi
'Should I allocate more to bonds?' - How about you allocate more time to getting a life?

which overwhelms both new and old investors as they struggle to understand everything about the market.
Back then, I used to be like that, digesting all the information that people throw at me and then try to make sense of it. Luckily, laziness soon took over and I developed a method to help me focus my time on the things that matter in investing.

Too long didn't read version (also how i invest)

1) Find stocks with predictable earnings
2) predict the earnings
3) Value the stock using your predicted earnings
4) wait for stock market to do something stupid which allows you to buy stock at cheap prices
5) wait somemore - 80% of success in investing is sitting around and doing nothing
6) buy the stock
7) ta-daa

1. You have limited time but unlimited resources
Sounds obvious, but step 1 is realizing that 'I can't/shouldn't be keeping up with every damn thing, I have facebook to scroll a life to lead. Learn to sift out whats important, which brings us to point number 2

2. Earnings drive stock prices.
Full Interest rates, market outlook doesn't directly stock prices, they potentially change future outlook/or peoples perspective of future earnings which then drive stock prices. When people ask you 'whats your take on interest rates/market outlook?' They are thinking in a wrong way as below

Interest rate movement -> stock price
market outlook -> stock price

When in fact it should be

Global outlook -> interest rate movement -> country specific outlook -> industry outlook -> stock earnings -> stock price

Once you get into your head that earnings drive stock prices, this bring us nicely to point number 3

3. Focus on earnings
Sounds obvious,but people like to predict the first link of what affects stock price such as 'interest rate movement' or read articles about 'outlook'. Firstly not are you wasting your limited time on indirect effects on stock price (remember interest rate movements is like 3 links away from stock prices) but you are most likely to predict it wrongly.

Rule of thumb: The larger the picture you are looking at, the higher chance you are going to get it wrong. If most people are struggling with 1 LINK stock earnings -> stock price, what makes you think you can handle 3 or 4?

Might as well scroll thru facebook, making no decisions is better than wasting time to make wrong decisions.

4. Find stocks with predictable earnings.
Ok so at this point you would have realized that
a) you have limited time
b) you should spend that limited time reading about stock specific news that can help to predict earnings.

The easiest way to make the link stock earnings -> stock price easier is to find stocks that have predictable earnings. As in everyone sort of knows shengsiong is going to grow single-digitsish going forward, but who the hell knows what keppel corp is going to do? If you focus on shengsiong and not keppel, you would find making the link infinitely easier.

5.Zoom in to the top few points you think its important for a company

Ok so now our position is
a) you have limited time
b) care about stock specific news
c) find stocks with predictable earnings

a) and b) is to stop you from wasting time reading not-so productive articles. c) is to narrow down your investment universe to the few stocks that you think have predictable earnings

This step is to ensure once again, you don't waste your effort looking at so many variables. In life, we learned how to prioritize and care about a few factors.

In an experiment, its usually a couple of variables that have the biggest impact on the result
You prioritize your time, allocating more to priorities you care about
You look at ~5 key traits in your girl/boyfriend not 200

Same thing for investments, focus on a few key points that may affect a stock earnings.

6.Find your target price

Easiest step ever, once you have a company with predictable earnings, and you know the key factors that may affect it, go ahead and chuck multiples (historical, industry, whatever number you like) at it to get the stock price

7. Wait

Stock markets aren't idiots (most of the time). If you find a company with easy to predict earnings, with easy to understand factors, chances are its usually fully priced most of the time. But markets like doing stupid things frequently (look at the 'meltdown' in august, the hk rally in april, the 'meltdown' last october) which allows you to pick up these company's at attractive prices.

Tuesday, 10 November 2015

My investing strategy - go in between

I'll admit, I'm a lazy investor as can be seen by my lack of posts. The same thing can be said for my stock selection.

Some people can do deep analysis about which company is going to benefit the most from big global trends such as healthcare and e-commerce or the supposed recovery in the housing market, but I'll be honest in saying that I have no idea.

E-commerce trend
Is Alibaba going to take over amazon? - No clue

Which biotech company is going to come up with the next cancer healing drug? - Dunno, I got B for biology

Property rebound
Do you know which property company is going to benefit from a housing recover? - I honestly haven't the foggiest idea of where Capitaland invest in. All I know is China and Singapore.

Oil prices
Which airlines are going to benefit most from low oil prices? - All I know is that I'm still pissed that flight costs are about the same as before the crash.

Good news is that there is a better way to play the trend, it involves buying what I call the 'in-between companies', or companies that are involved in the supply chains of the trends. Here's a few examples

Chinese market 
Does anyone, anyone know where China is going????

E-commerce trend
Do i know which company is going to survive the bloodbath is e-commerce, no idea. But I do know that there are MAINLY 2 ways to pay. Visa or mastercard (ok there's paypal, but i have no idea whether they will survive that)

I also know there's MAINLY two ways to get the package to your doorstep. Fedex or UPS.

We all can quote the 'ageing population trend blah blah buy healthcare blah blah' But do you know which hospital is better than the other? Which drug company is going to come out with the next blockbuster drug? I don't, and I really don't want to find out. But you can buy PBM (pharmacy benefit managers) that act as the middle-man between drug makers and pharmacies. CVS and Walgreen Boots dominate the market in this sector

Property rebound
I guess you know where this is going. Buy Sherwin Williams instead, it is one of the largest companies (Ok mostly focused in USA) that sells paints and coatings for houses.

Oil prices
Buy Airports of Thailand instead, or Boeing/Airbus, they dominate their markets instead of having to compare which airline is better. Or you can go one step deeper and buy aircraft engine manufactures such as Rolls Royce or PCP (Warren Buffet just bought out PCP)

Chinese market
Insurance companies such as AIA, invest their premiums into (hopefully) high grade Chinese bonds and equities, which is a safer way then chucking it to some S-chips of small tech company in Shenzhen. Another plus side is that it has a stronghold in the Chinese and ASEAN insurance market, where the population is severely under-insured

Another plus point is that you can wave off insurance agents by saving ' I own stock in your company' but that's not nice.

Here's a summary of the advantages of going in between

Its much less work
I don't really need to care which e-commerce firm is going to survive the bloodbath, nor read about the latest drugs. I just need to know that the trend is still there.

These in-between companies operate in a monopolistic environment. Its going to take a long time to challenge Visa or Mastercard, or Boeing. In contrast, Alibaba/Sia can plummet 5 years from now and you wouldn't even know what hit you.

Stable earnings
As with their monopolistic nature, these companies will give you sleep easy mid-teens, high single digit growth as long as the overall trend still holds. But for Alibaba? Earnings can swing from 20-40% and no one has any clue, SIA/capitaland can swing from profits to loss within a year. I'm not smart enough to value a firm like that, nor be able to capture the next wave.

Of course if you want outsized gains, doing your homework and identifying the winner in these markets would be the best. But if you are
1) lazy
2) lazy and not smart enough to analyze companies like me
3) want companies with 'sleep easy' steady profits 
then its better to go in between.

Disclaimer: (I used/still own stocks in Fedex, UPS, Sherwin Williams, Visa, AIA, PCP) and you pull back the earnings/share chart of these companies you would understand why I love these companies.

Disclaimer 2: I still haven't used the 'I own stock in your company so don't bug me' line to insurance agents yet.