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Wednesday, 28 August 2013

Context and Perspective

Views and opinions are a dime a dozen these days.

Especially when markets are euphoric or downright gloomy...

Listening to the advice of others can be misleading and confusing if we don't know the context and perspective of the speaker.


Buy and hold; don't sell at the high and buy back at lower prices.

Makes sense if you have bought at near 52 weeks (even better at 104 or 208 weeks!) low prices. Why bother with the noise of a 10 to 20% correction when you are up 200 to 300% with a wide margin of safety? Stay the course!

Sounds logical right? 

But if you have bought near 52 (and 208) weeks high during May 13...


I don't use stop-loss

If this investor has a max 5% allocation to a single stock in his portfolio, a 50% loss on a stock is "only" a 2.5% scratch in his total portfolio. 

And in the worst case scenario where a stock goes to zero, his max loss is "only" a 5% irritation at best in totality. More a case of losing bragging rights than anything else.

If you owned the same stock as this investor and you have invested 100% into this one stock, would it be wise to follow what this investor does?

The investor already had his risk management in place when he entered into the stock. What risk management steps have you taken to prevent a 50% loss? 

A scratch to that investor is hara-kiri to you!


If it's value at $2, it's even more value at $1.50!  (Value trap)

This investor have a uncanny ability to do bottom-up stock picking. Averaging down when his value picks get even more attractive as he takes advantage of the emotional fear of the market.

Inspired, you try it on the stocks you owned.

Unfortunately, the results are different...

Mark Twain once said:


It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

Then you realise cheap can indeed become cheaper.

Maybe you have got the "value" wrong at the first price entry

Others may be averaging down into more value; you are merely throwing good money after bad...

    
It's all you

I can go on but you get the picture. 

Other people are merely sharing their opinions based on their personal experiences. They are not trying to mislead or confuse you. 

But they are not you.

And you not them.

It's not just context and perspective of others. You have to know your own abilities.

If only the road to riches is as simple as copy-cat what others are doing blindly.




6 comments:

  1. Small monkeys cannot anyhow copy-cat Big Gorillas.

    ReplyDelete
    Replies
    1. CW,

      Everyone wants to start riding the big Harley first. Vroom, vroom, vroom!

      Spend more time shopping for bandanas, leather jackets, boots, shades, etc; than improving riding skills.

      Only after accident then realise a Honda cub can be more suitable...

      Delete
  2. Hi SMOL,

    Copying is also a skill. Look at how far our country has come. The key is to know what you are copying and adapt it to your situation.

    I still remember in secondary school, I had this math teacher. If you were found out copying (the guai student had copied a wrong question or made a careless addition mistake), he would make sure you copy another 20 times.

    After a while, we learnt to value add and copy more responsibly. Sometimes, we can even point out the mistakes of the person we are copying from! Guess financial bloggers who share their investments would appreciate such gestures too.

    ReplyDelete
    Replies
    1. Stoical Keynes,

      Wow! Let me first compliment you on your power and unusuall nick!

      I am a person who is never shy to steal or borrow with pride.

      The word I meant to emphasise in my last sentence is "blindly".

      We are in harmony - " copying and adapt it to your situation" is not doing it blindly :)

      Yes sir. I do "poking" and let others poke me back. It's my way to honour those financial bloggers I like and respect. It's also shows we are over the polite polite phase ;)

      LOL!

      Delete
  3. Good day SMOL,
    I feel like you're speaking directly to me on this one... unfortunately I'm between the 5% and 100% investor situation. I am still learning not to fall into the value trap (again!). Thanks for sharing your thoughts in these uncertain times.

    ReplyDelete
    Replies
    1. ckw-I99,

      I am glad you are not going to let a loss go to waste without profiting from the lesson.

      I am neither brilliant nor smart (only a pretty face); I've merely shared from my past experiences.

      There was a time I thought I was so clever. I researched most of the Singapore focused mutual funds and tried to "copy" their top 10 holdings. Then 2000 came and I went down the cliff like lemmings do...

      Copying the "essence" of others and no brainer copy-paste are same same but different!

      Ouch!

      Never outsource independent thinking ;)

      Delete

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