Saturday 31 August 2013

Value Trap and Margin of Safety

This "Margin of Safety" concept popularised by Benjamin Graham has hurt many "so called newbie value investors".

Not that the theory or concept is bad; it's great!

What could be wrong in buying something with an "intrinsic value" of $1 for 60 cents?

And If I ask where did you get that "intrinsic value"?

99% of these newbie value investors will answer:

From sell side analysts.

From financial bloggers (Don't look at me).

From investing forums.
And so on. 

Only 1% (I am making this up as to write 99.9% is a bit too strong a poke) makes their own calculations - from the raw data found in the annual reports.

I understand. Everyone busy. Everyone no time mah. So reading summaries from others is a great time saver; not to mention savings on mind power too... 

If we can, outsource! Especially when these summaries are free!

Wait a minute... Free means anyone and everyone can get a copy too!? Where's my edge then? Or am I the sheepie?

When we bought at 60 cents, let's be honest. No one buys when they think the price will keep on dropping right? 

We buy when we are afraid if we do not act now, some idiots will out-bid us and the "great value price" will run away from us; causing us to miss the boat.

Guess what? If it's great value price at 60 cents, it would be even greater value at 50 cents! Average down! I can't believe my good fortune!

And songs of rapture start breaking out as the price breaks down further to 40 cents. Average down some more! Those silly panicky sellers! I take advantage of their fear! I drink the blood they spill! Bur-ha-ha-ha!

If price drops further... 

The faithfuls will cling on the holy "intrinsic value" which they have anchored their beliefs so far. 

That is until the sell-side analysts came out with their revisions... Citing massive deterioration on the company's fundamental outlook or internals, the revised "intrinsic value" is now 40 cents. Horrors upon horrors!

Since we got these reports for free, we are at the bottom of the information food chain. The most favoured clients of these sell-side analysts are the ones selling to us @##%&*%$!@$!!

All of sudden, the "value prices" we paid don't have much Margin of Safety anymore... 

Self learning from past experience (knowing who I am)

Since I have no clue how to calculate "intrinsic value" on my own, to protect myself, I use my own definition of Margin of Safety:

It's the price I paid versus the current market price.

If I bought at 60 cents and the price rose up to 65 cents, fantastic! I now have my 5 cents Margin of Safety! (OK, you can start laughing at me now - all you true blue value investors)

If price starts to reverse, I can still get out without a loss. I hope!

It's something real; something I can see and touch. It's about here and now. No theory; no hoping. No guessing; and no forecasting.

And if I bought at 60 cents and the price drops to 55 cents, my finger would be on the sell cut-loss button. 

Sell and re-enter at a lower price if I still believe in the trade.

And if I am stopped-out on the 2nd re-entry, well, the market is trying to tell me something!

Unless of course I think I know something the market doesn't. I think not!

Sometimes it's better to just admit I am wrong (or too early) and stand on the sidelines. And wait for clarity and a better price entry point.

Take care of the downside. The upside will take care of itself.

Value Trap

What's that? Again my own non-textbook definition:

It's the mistaken belief I know more than the market about the "value" of a company's stock, the sector, the industry it operates in -  when all the information I'm basing my thesis on are written summaries from others.

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.

Monday 26 August 2013













Thursday 22 August 2013

The Black Knight Always Triumps!

Veterans of a few market cycles may recognise the Black Knight in all of us during the early days of our journey.

Hey! We may even laugh at ourselves looking back.

As for newcomers to the markets, don't worry if you have no clue what talking me.

One day, you'll remember this Black Knight video, with the accompanying epiphany (if you are lucky). 


Tuesday 20 August 2013

OK, arbritrage is almost risk free

You win coconut!

During the usual bantering and super poking of each other at the comments section of my previous post, I got sand kicked in my eyes when I used the academic definition of "arbitrage".

Well, what do you know?

Last Friday's "fat-finger trade" by a Chinese brokerage - which single-handedly helped pulled up most Asian bourses before noon - turned out to be a glitch in the proprietary High Frequency Arbitrage Trading System instead!

You can read about the story here: No rewind button on Everbright's trades in China.

To fundamental investors, the biggest fear is when the whole of their investment thesis were based on fraudulent numbers and snake-oil promises. For eg, Informatics and Accord Customer Care Solutions (ACCS). 

One of Big Daddy's funds were invested in one of the fraud case above. If pedigree offers no immunity, what more for ordinary retail investors out there?

How's that for jumping into a Value Trap? 

While others were rushing out; you keep averaging down screaming "Cheap! Cheap!" like in an IKEA sale, only to realise too late when the venus fly trap slams firmly shut.

I should be talking! For a person who trusts Price Action, the recent "unintended" trade in China may give technical traders out there a pause for concern. 

Were you faked out of a perfectly good short position last Friday? Or did you go long on a momentum or reversal play only to be stopped-out later in the afternoon? 

Everything is in the charts? Price action never lies?

What is real? What is fake?

Does it matter?

I not so sure anymore...

Which is good. Conviction is one thing; over-confident is another thing.


Sunday 18 August 2013

Dog poses as lion - you gotta be kidding me!

Dog poses as lion in China.

As you read the article above from MarketWatch, do click the link to another related article on The Telegraph about the museum in Jizhou with 40,000 fake exhibits.

You gotta be kidding me right?

During my 4 years in China, I've encountered my fair share of fake beggars, fake monks, and fake Buddhist/Taoist temples. Yes, there are "prosperity temples" too! All you need is to pay a "bribe" to the "gods" and all your fears and troubles will "magically" go away.

I am ashamed to say that during my last year in Shanghai, I would keep walking straight whenever I am approached by strangers for help. My bleeding heart has gone cold and hard. You just don't know who to trust and what to believe anymore...

No, it's not China bashing. I like China. My overall experience in China is a positive one. 

I am just writing to say we in Singapore are not as lucky as our counterparts in China.

At least these fakes in China are easier to spot once you trust your instincts: "Hey! They are not wearing any clothes!"

In Singapore, we have our share of fakes too. But they are harder to spot. 

Like Bernard Madoff's ponzi scheme, the Gold Trading scams in Singapore were only revealed once the tide goes out to sea - revealing who's naked.

If there were no sub-prime melt down, and gold continue its ascent beyond $1,900; and we are clients of these schemes, would we pay heed to the warnings from others? I think not!

How about relationships? 

What if your shepherd sensei turned out to be a paedophile? 

Your mentor's hands were caught going into the cookie jar?

A person whom you thought was your friend turns out to be only interested in monetising the relationship?

Don't be too smug or over confident.

We may have these similar experiences: 

100 people in a room; 99 says the picture is a lion. But it looks like a dog to you. What do you say?

You complain about PAP all the time at your favourite coffee shop. Loudly some more. Then one day during election campaigning, a PAP minister or MP visits the coffee shop and wants to shake your hand, what do you do? Knowing journalists and cameras are present?

Well, there and then when the tide is out we know who we are! REAL or FAKE!


Tuesday 13 August 2013

Our Real Test

Last night, I was stopped by a former Alpha Course helper in the streets.

I was surprised that this person is now praising my previous decision to end my journey after the course.

It was only a few months ago that this same person was encouraging me to further my journey with the next "advance" course.

I attended this Alpha Course at the beginning of this year to understand a little bit more about Christianity.

I have relatives that are Christians. This is my way of honouring them by seeking to understand the context and perspective of why they say or do thngs in a certain way. 

First seek to understand; then explain.

This person was not my small group leader in the Alpha Course. We weren't even close. I knew it's not a good sign when this person grabbed an acquaintance out of the street and start pouring out bile and sob stories...

This person lost the sole parent last year. Then lost a job this year. Applied to do missionary work overseas but was declined by the organisation. Recently got diagnosed with diabetes...

Needless to say, it never rains; it pours!

What was sad is that this person started to throw rocks at an institution this person is part of for 25 years... Saying there is lack of support and warmth... Turning cynical and questioning everything...

I just stood there and listened. And reached out my arm. 

No saying of empty words like "things will get better or think positive" and other crap. This person does not need advice nor is this person ready to listen. This person just wants to let off steam.

I can't help this person. First, we were just acquaintances (I don't have Big Love). Secondly, only this person can help this person (I heard somewhere God only helps those who help themselves).

We can see similar bitter people around us if we look hard enough. Take myself. I have 46 years of "membership" on this little Red Dot. 

If I become chronically ill, lost my job, business folded, or faced whatever disappointments in life, who do I blame if I don't want to take ownership and responsibility? 

Does "membership" equal immunity? 

And I should not talk too soon. I've not faced my Real Test in life yet - like many others.

This is not a post about spirituality.

It's a metaphor for why market veterans suggest we need to experience a few market cycles to really know our true selves.

And why venture capitalists and private equity investors look favourably to entrepreneurs with a few business faliures under their belt.


Wednesday 7 August 2013

One Day One Night at Shangri-La Sentosa

I spent yesterday at Sentosa relaxing at the Shangri-La hotel - courtesy of the kindness from my elder sibling.

Shangri-La Sentosa - somehow it reminded me of Santorini

Sometimes it's not what you know but who you know. Gifts from family are best!


View from the balcony of my room

A bit decadent. Worked 2 days for the first time after 19 months and immediately got a short break to "recuperate". 

Saw quite a lot of families from Hong Kong and Japan with young children playing at the pools. 

How nice! A bit of envy for the shortest flutter of the heart.

Sometimes, holidays is not about seeing lots of new places and making yourself all busy hoping from one itinerary to another.

It's about spending time together with the ones you care about. Or letting the mind be still if you are alone, like for my case.


Friday 2 August 2013

I've gone full circle after 30 years

I've just updated my blogger profile.

It now reads: currently on sabbatical from full-time work.

Tomorrow I will start a new phase after 19 months of bumming around.

I decided to go back to work during the weekends!

So it will be 2 days work; 5 days rest starting tomorrow.

Life is funny.

I started my first sales assistant job working at Metro Orchard - now it's replaced by DFS. 

For younger readers, it's the building opposite the overhead bridge at Far East Plaza. Once upon a time, that Far East Plaza area was hip.  And further down next to Metro Orchard was Tropicana - Singapore's first topless cabaret! OK, I was too young and too poor to have gone in...

I know, hard to believe. Just ask your older siblings or parents.

Guess what? After 30 years, I've gone full circle and will go back as a sales assistant on the selling floor!

I've worked almost the whole stretch of Orchard Road.

Montgomery Ward was at Palai Renaissance Building (next to the Thai embassy), Metro Orchard at Scotts Road, Robinsons at Centrepoint.

This new weekend job will be at a stretch of Orchard Road that I've not worked before. 

I am not ashamed of my new job or company. But they have a social media policy that I've signed into. So it will be radio silence on my place of work.   

If you die die must know, just email me and I will tell you. 

And one more thing. Don't ask me for discount! I can't and won't give you. LOL!

I just realised one thing. I'm no sure whether it's part of financial freedom; but I know I will not starve in Singapore. 

I have the skillsets and more importantly, the willingness to work in the service industry.

Many complain about poor service; but not many would want to work in the service industry themselves.

How's that for low competition and high demand? 

Looking forward to see how much I've developed as a person. I'll be taking directions from youngsters half my age. 

And abuses from customers looking for someone to vent their anger? 

Nah! With my sunny smile, who would want to hurt me?

"How can I help you sir?"

"My name is Jared. Feel free to look around. If you need assistance, just let me know."


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