Chapter 8: Invest, Invest, Invest

8.1 Why Speculation Leads to More Loss Than Profit

8.1.1 The Reasons for Difficulty in Gaining Profit Through Speculation

  1. The profit margin is limited
    • Most speculations originated from rumours and feelings that are disconnected from the fundamentals.
    • Their confidence is based on rumours and information, posing huge risk.
    • Causing speculators to sell of after little increase in share price, then repeating the cycle.
    • Any slight mistakes might cost more than what had been earn through previous efforts.
  2. Loss through commision fees
    • Each transaction requires commision fees, repeated transactions will accumulate to huge cost, greatly reducing profit.
  3. Inefficient Usage of Capital
    • The retrun from long term proper investment is way greater and with high confidence.
  4. Buying More Than Capable Have High Risk
    • Buying RM 10 mil stocks with available RM 1 mil cash is risky, you either gain more or lose all.
  5. Investors That Neglect the Fundamentals are at Huge Risk of Buying Rubbish Stock
    • Shareholders of suspended or capital reduced companies are mostly speculators.
  6. Speculation == Gambling
    • It had been long known that gambling will result in losses in most cases.
  7. The Rise of Stock Price is Usually Ladder Shaped
    • After each stage of price increase, there will usually be slight drop for adjustment.
    • Speculators make use of this phenomena to engage in short term investment.
    • Resulting is less profit compared to long term investment.
  8. Business Competition is Challenging, Hard to Gain Profit
    • Most corporations requires long term operation to hopefully gain profit.
    • Burst of profit in short period is extremely rare.
    • Since stock price is proportional to (profit months to years), its natural that long term investors will gain the most.
  9. All Speculators Wish to Earn More in Short Time
    • They believed that by accumulating small profit from short term price difference, they could end up earning a lot.
    • However, human are prone to make mistkaes, causing potentially more loss than earnings.
  10. Gambling Den’s Favourite Customers are First Time Winners
    • Such customers are usually more willing to continue gambling.
    • Such situation applies to stock market as well.
    • Being blinded by initial profit, they are prone to making mistakes along the way, losing more than expected.
  11. Stock Market Alternates Between Bull and Bear, Bull == Ladder Climbing; Bear == Elevator
    • Bear market usually comes unannounced.
    • The stock market is analogous to hydroelectric dam.
    • Reservoir collects water drop by drop, but once it collapsed, all the collected reserves were gone immediately.
    • Therefore, most specualtors could not sell off in time to cut loss.
  12. Speculating is Addictive
    • Addicted speculators will feel uncomfortable is they are not investing.
    • Blinded by addiction, they are prone to be repeated mistakes.
  13. Investing Risk is Inversely Proportional to Investment Period
    • According to “The Millionaire Next Door”, in 100 million American famalies, 3.5% (3.5 million) of them are millionaires.
    • None of them are speculators.
    • From this, it is clear that speculating is not the way towards wealth.

8.2 Common Mistakes of Commoners

  1. Follow Suit
    • The reason for commoners to keep repeating the mistake of following the crowd while knowing the consequences is most stock rises when stock market improves.
    • Commoners could not stand the temptations and succumb towards speculation.
  2. Listening to Rumours
    • Most commoners invest without any knowledge or study in fundamentals.
    • Decisions were made purely based on rumours, naturally causing them to lose more.
    • Author advises such investors to try popular stocks that have good qualities, its safer.
  3. Playing Contra (对敲)
    • Contra is the act of purchasing stock and selling it before payment date (3 days usually) and profitting from the price difference.
    • Contra is purely speculating, highly risk, low profit.
  4. Release Good Stock Keep Bad Stock
    • During slight improvement of the stock market, good quality stocks will usually rise first, thus people sold it off sooner.
    • Keeping mostly bad stocks waiting for opportunity to recover capital.
    • During bearish market, good stock drop less than bad stock, to cut loss, people sold of good stock sooner too.
    • In the end, investors achieved nothing.
    • The correct way is to keep no stocks during bear market.
    • If insist in keeping, keep only good stocks, sell all the bad stocks.
    • When the good stock price drop, buy more to average down the invested price per share and wait for improvement.
  5. Easily Influenced
    • After conducting sufficient study, buying in target stock, hoping for the best.
    • Most of the cases, the neglected stocks started rising while the target stock remained stagnant.
    • Driven by impulse, they sold off all the good stocks, converting them to popular stocks.
    • Unexpectedly, the sold stock rises, while the popular stock remained.
    • Achieved nothing in the end.
    • Author advised to be patient, as long as the stock is performing well in fundamentals, they will eventually bring more profit in the end.
  6. No Self-Control
    • Most investors failed due to their impatience, succumbing to temptations, resulting in huge losses.
  7. Speculating
    • Commoners should give up of the idea of shortcut towards wealth.
    • Never speculate.
  8. Impatient
    • Some commoners give up after slight mistakes or failure.
    • Such traits do not belong to successful people.
    • People will be patient in doing work, paying loan installment, buy why no be patient with the investment?
  9. No Opinion
    • Investors that are always asking for decision, never consider decision on their own are prone towards failure.
  10. Never Know When to Stop
    • Resting is an important element in investment.
    • Never keep yourself constantly in the stock market.
    • After earning profit from good investment, have some rest, study for the next opportunity.
    • Its almost impossible to seek for selling and buying point at the same time.
  11. Never Know to Stop Loss
    • During bearish market, some investors including professionals are still holding the bad stocks instead of cutting losses.

  12. Frequency Stock Change and Selling

  13. Disorientation
    • Some investors placed too much attention on stock market that causes them to making improper decision.
  14. Cooked Frog
    • Commoners are like frog, being placed on a pan that is gradually heated.
    • The gradual increase in heat did not caught the attention of the frogs, causing them to die from heat.
    • The increase in stock price is gradual as well, it is easy to neglect the trend and suffer losses.
    • Experienced investors will always sold all their stocks when the stock is highly overvalued.

8.3 Study First Before Investing

  1. What business is the company doing?
    • Understanding on company business and industry is crucial in ensuring that the company have growth.
  2. Do the business have future growth?
    • Inviting friends for business venture only works if you could persuade the friend that it will make profit.
    • You should do the same thing of convincing yourself the worth of investing on this stock.
    • This could be achieved through carious studies on the company.
    • E.g.: The past performance of the company, product market, product quality, product competitiveness, industry condition.
  3. Is the management reliable?
    • As minor shareholders, we do not have rights in intervening the company management besides during general meeting of shareholders.
    • Thus, ensuring that the management is reliable is crucial.
    • Talent is an important key to company success, if the management is incompetent, the company is unable to solve problems, expand business, efficiently use the invested capital, unprofessional, and lack of enterpreneurship.
    • If in doubt in the management, do not involve in the stock.
  4. Is the financial situation of the company stable?
    • Is the liability too high?
    • Is the company capable of paying for it?
    • Is there any cash flow problem?
    • The above questions could be answer from the financial reports.
    • The financial reports could be obtained from Bursa Malaysia

8.4： Learning from Yan Yuan Zhang (严元章)

  1. He posessed the correct mindset in stock investment.
    • He emphasizes in “investing” instead of “playing” stocks.
    • He adopt a serious attitude towards stock investment, diligently studying factors that affect the success of stocks, investment risk, minimizing risk and improving chance.
  2. He adopted contratian methods.
    • In 1970s~ when property price crashed, Prof. Yan adopted contrarian way and invested in property unit that is undervalued, resulting in 10 times profit.
    • The same situation goes to his HSBC stocks, that yield 50 times of the invested capital, excluding dividend.
  3. Only buy blue chip among blue chip
    • He studies every company and shortlisted a list of blue chip company.
    • THen among the list he shortlisted again the blue chip among blue chip –> HSBC.
    • It is impressive that he had the guts to invest most of his wealth in one stock, indicating his confidence in his selection.
  4. He engaged in long term investment
    • Even after his demise, he did not sell his HSBC stocks, while commoners worry about selling the stocks after 1 month of purchasing.
    • His confidence and patience is his key towards wealth.
  5. Time Makes Heroes
    • The accumulated wealth of Prof. Yan is related to Hong Kong’s environment.
    • Hong Kong was booming in development leading to more demand than supply of property.
    • He sieze this opportunity to earn more with little capital.
    • In 1970s~, Hong Kong became one of the world’s center of economy, while HSBC is leading in this trend.
    • His investment in this leading company would naturally lead to investment success.
    • Thus when buying stocks, we must be clear of the direction of future development to increase the chance of successs.

8.4.1 Self Reflection

8.5 Wise Words from John Templeton in Investment

8.5.1 22 Wise Words From Templeton

  1. The sole objectives of long term investors: Fight for the highest real rate of return after tax.
  2. To achieve excellent result, huge research is required, not an easy task.
  3. Unless your action is special, otherwise you wont be successful.
  4. The best buying point is when the crowd is pessimistic, the best selling point is when the crowd is optimistic.
  5. When majority is selling their stocks, its the best time to buy in cheap stocks. (Another way of putting 4.)
  6. When people are selling in grief, you collect their stocks. When people are buying in greed, you sell your stock. Hard do execute, but very rewarding.
  7. Bearish market is usually temporary, will usually rebound between 1 to 12 months before achieving the lowest point.
  8. When certian industry or stock had been popularly traded, the trend will not last long, hard to rebound after plummeting.
  9. Speaking in terms of long term, stock price will fluctuate between the long term increase in NTA.
  10. In countries that enjoys free enterprise, the profit of stock market index fluctuates according to index stocks replacement value (指数股账面替换价值).
  11. If you buy according to others, the most you get is the same as others.
  12. When short term shareholders sold all their stocks, is the best entering point; when the short term shareholders buy all the stocks, is the the exiting point.
  13. The stock price fluctuates more than the stock value, making it hard for index funds to perform well.
  14. Too many investors focusing on “prospects” and “trends”, causing those that focused on “value” to benefit.
  15. If you seek worldwide, you will find more variety of stocks that are safer comparing to focusing on one country’s stock amrket.
  16. #f03c15 The fluctuation of stock price is approximately directly proportional to the square root of share price.
  17. You sold of all you holding assets only when you have better replacement.
  18. When one investment strategy is adopted widely, we should change to those that are unpopular. (refer 3.)
  19. Be flexible and open minded in making decisions, always question back on the decision, throw away popular stocks and method and adopt the unpopulars one to succeed.
  20. Investing in normal stocks requires the highest skill in making choices.
  21. The best performance is attributed by one person, not an organization.
  22. Start by making prayers, this will make your mind clearer, making less mistakes.

8.6 Be Realistic in Investing

8.6.1 Learn from Pasr Aunty

8.7 How to Make 1 Mil From 10k

Stocks Years Starting Investment (RM) Current Value (RM) Appreciation (times)
MAYBANK 40 10,000 14,812,875 1481
PBB 26 5,000 1,200,000 240
HONG LEONG BANK 33 12,000 1,474,200 122
ORIENTAL 29 10，000 905,760 91

8.7.1 The Power of Compound Interest

Table Demonstrating Power of Compunding Interest at 12% Interest Rate

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Reference

[1] 冷眼, 30年股票投资心得. 马来西亚: 辉煌世纪, 2018.