Posts Tagged ‘mistakes’

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Throwing Out The Hammer

July 19th, 2008 by Jae Jun

This article originally appeared on The DIV-Net July 12, 2008.

In my recommended reading post on Old School Value, I recommended people to read Ronald R Redfield’s notes on Seth Klarman’s book Margin of Safety – Risk Averse Value Investing Strategies for the Thoughtful Investor.

As I was going through it, it reminded me of many investing basics as well as investment principles and philosophies and I came to realize a couple of critical issues about my investing habits which I felt I had to evaluate.

  1. The man with a hammer mentality.
  2. Consider risks before gains.

Now I enjoy going to the gym and power lifting, but without reviewing my form, technique and fixing those little bugs, a short term gain is always there but over the long term, I’ll probably have a jagged spine or crooked knee. You get the idea.

The Man With A Hammer

“To a man with a hammer, everything looks like a nail.” – Mark Twain

I believe this quote to have been brought forth into the investing world most prominently by Charlie Munger and it seems like I have fallen into the same habit. I’m a big fan of spreadsheets and tools that help people become efficient in their activities, whether it be investing or in general. Many people that have downloaded my spreadsheets understand this, but it has come to a point where I find myself trying to apply the spreadsheet to every company.

The spreadsheet is my hammer, and every company is beginning to look like a nail.

A skilled and experienced tradesman knows which tools to use for a particular job. Investors should also be equipped with different tools to apply to different companies. This means looking beyond simply applying a growth rate to the Discount Cash Flow model.

Other aspects must be valued, financial statements must be torn through, not just looked through. Finding what the market is missing is also integral to the whole process and it has become something that I am spending less time on.

“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.” – Warren Buffett

Targeting Risk

As a hot blooded male, psychologically, my mind weighs gains and risks quite differently. Until now, I was targeting a return and was confident that it would play out as long as I kept buying with a large margin of safety. Now, a better idea has come along and for me, it’s out with the old, in with the new.

Target risk BEFORE calculating investment returns, where risk is defined as “both the probability and the potential of loss”. Risk is not defined as volatility, trends or analyst downgrades in this case.

“Investors must be prepared for any eventuality.” – Seth Klarman

Another point is that an investor targeting specific returns over time, will make it difficult to achieve the goal as he/she feels the need to take additional risk or speculation in order to meet their “target return”.

“Targeting investment returns leads investors to focus on potential upside rather on downside risk… Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk.” – Seth Klarman

Putting It All Together

Given such economic downtimes which equates to times of opportunity, now is the perfect time to put it all together and see whether it holds.

“A market downturn is the true test of an investment philosophy.” – Seth Klarman

Tags: habits, mistakes, munger, thinking mode
Posted in Investing Perspective | 1 Comment »

A Nice Magic Trick: Mutual Funds

June 14th, 2008 by Jae Jun

I don’t like mutual funds. Not because of the excessive fees and not because 95% (or more) underperform the market. I don’t like or invest in mutual funds mainly because I don’t have the temperament for them and I can’t stand their sleight of hand.

No Patience

First some background. My current investment assets are ALL tied up in my 401k account and since I can’t take that money out till I’m 60, it forces me to think for the long term. I also only invest in individual stocks on my 401k plan (If you have this option on your plan, you should really take advantage of it). No mutual funds for me. I have no patience for them.

It may seem contradictory that a supposedly value based investor has no patience, but I find my patience levels for stocks and mutual funds are on completely different scales. When I invest in individual companies I begin to understand the company as a business partner. When I invest in mutual funds, I see only YTD returns and charts.

Common Mistakes

Before I started to learn about investing, I did invest in mutual funds. I figured that a “guaranteed” 10% return would be great. Along with that naivety, I found myself following some common traits.

  1. I looked at the percentage gains and chose funds based on the previous years returns.
  2. I chased after rising funds.
  3. I somehow always seemed to look at “growth” funds.
  4. I switched between funds like a race driver switching lanes.
  5. I figured a 2% expense ratio didn’t affect my investment returns.
  6. I had no idea what I or what the mutual funds were doing and I didn’t do anything about it.

Now 1-5 are all common silly mistakes but the real problem was no. 6. I didn’t know what was going on. Since I didn’t know what I was doing, I was making the first 5 mistakes.
So why wasn’t I doing anything about it? If you read my about me page you would know that I believed I was incapable of investing on my own. But here I am doing it old school style.

Fast Forward with Clarity

I began to notice a trend whenever I went out to a restaurant or even a health supplement shop and asked for a recommendation. Guess where the salesperson always led me? Straight to the highest margin product. Sure they would mention something about another product, but the conversation would quickly focus again on the high margin product.

Witnessing this time after time, a question finally popped into my head. Are brokerage firms or financial advisers trying to sell me something based on margins or commissions without much regard for my financial future? For the majority, the answer is YES. They are all businesses and like all businesses, they need to sell something, sometimes anything, in order to make a buck. This means mutual fund companies have to sell the good the mediocre and even the bad funds. They will pass it all off as good funds of course.

Mutual funds also spend truckloads of cash in advertising and marketing to seduce the first time investors by claiming “performance figures” and diversification, but with so many companies in a mutual fund, there are sure to be bad companies in the mix. The truth is that mutual funds are a product of the financial markets so that companies can make money. Not to make you money.

I’ll end this with a Munger quote.

When you mix raisins and turds, you still have turds – Charlie Munger

Advice of the Day

Throw your rubbish in the bin. If it’s too far, throw it from where you are.

Tags: mistakes, mutual funds, wall street
Posted in Investing Perspective | 4 Comments »

Beware The Bad Habit of the Spreadsheet

March 27th, 2008 by Jae Jun

As the title suggests, beware of how you use the spreadsheets. Like a pen, a finance spreadsheet can be used to create wonderful ideas and opportunities or it could just as easily ruin you and leave your mouth gaping open with a crap taste in your mouth. I’ve noticed a lot of people downloading the files and although I have a disclaimer tab in there, I would like to expand on some things.

Learn From Experience

When I first downloaded the FWallStreet spreadsheet, I thought it was the coolest thing. I read the post on JNJ on FWallStreet and I thought to myself

I’ve got it made. Just find companies with a nice linear FCF history which are cheap according to this spreadsheet and I will make money – Jae Jun

(p.s. please don’t quote me =P )

So I kept searching for companies that I knew and their competitors, companies that hit 52 week lows, companies that were recommended, abused, and the works. Each day, I would go through so many companies just to find something that showed “YES” on the spreadsheet.

Note that I did not mention researching any of those companies. Of those screens, the ones that the spreadsheet claimed to have a large margin of safety, I admit that I did “invest” my money.

The result, the price went up for a few weeks but slowly started to lose 20-30% of its value. I felt uneasy, unconfident, worried and found myself questioning myself. All signs that I didn’t know a thing about the company, except that I thought it was cheap.

Luckily I knew I had made a mistake and only realised a 10% loss. At least I learnt my lesson and I remember what I learnt, unlike the sentiment I have for Wall Street.

Wall Street people learn nothing and forget everything – Benjamin Graham

It is Just the Beginning

The spreadsheets are just the beginning. If your research starts and ends with the price, then I must say that the spreadsheets will probably cause you more harm then good.

Combine the spreadsheet information with a little deeper research and not only will your circle of competence increase, your judgement and analysis skills will surely improve as well.

Just because a stock is considered extremely underpriced, without doing any research we cannot tell the difference between market panic freefall and company fundamental breakdown.

Detachment with Investments

Ever that get feeling in your stomach when you have a “tip” or a “hunch” that a stock is the next Microsoft or Google?
That, my friend, is just a signal for you to find a toilet to sit on.

Along with that gut feeling, another dangerous investor pitfall is not selling when you should. One of the causes is due to an investors attachment to a particular investment. When the price starts to climb, we start to believe the company is invincible and limitless. Exactly what happened with Google and AAPL. When reality and common sense stating that a billion dollar giant can’t maintain its scary 30%+ growth, the price of both companies plunged. Ultimately, we miss the opportunity to sell when the price goes beyond its intrinsic value because of our greed.

Be fearful when others are greedy, and greedy when others are fearful. – Warren Buffett

Preparation Will Always Yield Fruition

What goes up must come down – Isaac Newton

There is no way around common sense. No company can produce consistent growth year after year forever. That is just impossible. Management gets shuffled around, founders pass away, the world changes and companies can not always adapt and capitalism creates ever increasing opportunities and competition. With so many variables to consider, a company, no matter how good it is, can not be constantly perfect.

By being patient, and preparing and researching companies, time spent trying to understand the company may cause you to miss an opportunity. But a time WILL come when the company you were researching will hit your radar again. This time, you already know most of the things you need to know. Now you can act quickly on the knowledge you’ve gained over that time.

I say this because this is something I (still consider myself a beginner investor) learnt the hard way like most people. I still find it hard. There is just a psychological tendency for us to act hastily when it comes to making a decision on an opportunity. Ever been in a situation where you saw something on sale for “a limited time” or “today only” and ended up buying it without going through your options? Yup, thats the issue I’m talking about.

Price is Just an Number

Price is just a number. It is important to uncover what the price is relative to. Read that sentence slowly again. It is important to uncover what the price is relative to. The spreadsheet can only do so much as to point you in a certain direction.
Don’t fall victim to the laziness a spreadsheet can bring.

Tags: habit, mistakes, spreadsheet
Posted in Investing Strategy | 1 Comment »

Five Don’ts & Five More Don’ts

February 21st, 2008 by Jae Jun

As I continue reading one of the greatest investing books, Philip Fisher’s Common Stocks and Uncommon Profits, I thought I’d share some “Dont’s” in the book before I do a book review later on.

Who Is Philip Fisher?

For those that are unfamiliar with the name, Buffett tells us that

I’m 15 percent Fisher, and 85 percent Graham

but obviously, this ratio has been changed dramatically now.

During Fisher’s 70+ years of money management, he achieved an excellent record by investing in excellent, high quality growth companies. From reading his words and the words of his son, Kenneth Fisher, Philip Fisher wouldn’t have survived on Wall Street. Not just because of his unsocial, worrying, walkaholic, laid back, nature loving nature but also because his methods would have been deemed “Old School” compared to the excitement Wall Street tries to offer. He states that brokers

know the price of everything, but the value of nothing.

This is a book that should definitely be read more than once.Common Stocks and Uncommon Profits is a must read for any serious or keen investor.

Five Don’ts

1. Don’t buy into promotional companies.
Basically, don’t buy IPO’s or startups without at least two or three years of commercial operation and one year of operating profit.
IPO’s are sometimes referred to as “Illustrative Purposes Only”

2. Don’t ignore a good stock just because it is traded “over the counter”.
Not all OTC stocks are risky penny stocks. OTC stocks do go public and if you are able to find a gem, go for it.

3. Don’t buy a stock just because you like the “tone” of its annual report.
Self explanatory.

4. Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price
To put it simply, a great company will probably sell for a higher PE ratio later on. The current PE may seem too high and the future growth may seem to be factored in, but great companies will continue to grow and the price could increase just as quickly.

5. Don’t quibble over eighths and quarters
How many of us have put in a order for $0.10 or $0.05 below the current market price? Sometimes, it may never drop that extra 5c and we would pass. We would be missing out on huge potential gains just because we didnt get $50 off the initial price. Why miss out on $5000 or more just for $50? He tells us to just buy at market prices if the price is attractive.

Five More Don’ts For Investors

1. Don’t overstress diversification
Discussion is very similar to my previous diversifaction post. Wall Street tells you not to “put all your eggs in one basket.” However, Fisher states that, once you start putting your eggs in a multitude of baskets, not all of them end up in attractive places, and it becomes difficult to keep track of all your eggs.

2. Don’t be afraid of buying on a war scare
I consider this much like the recession scare we are experiencing now. Historically, after every recession, the market has been a raging bull, climbing to new heights each time. Why not buy when the market is having a fire sale and willing to give you $1 for $0.5? If the country never recovers from a recession, your money is “worth less” anyways.

3. Don’t forget your Gilbert and Sullivan
This Don’t should be titled, Don’t be influenced by what doesn’t matter. Fisher provides an example where most investors always look at the 52 week high and low price and then rate the current price as either under or overpriced compared to its 52 week high and low. This does not tell you anything about the value of the company or potential.

4. Don’t fail to consider time as well as price in buying a true growth stock
Fisher says quality growth companies are often overpriced due to its attractiveness and potential. So rather than buying and knowing the price is overvalued before the real growth occurs, buy the stock just before the growth occurs. This is a Don’t which requires a longer explanation so I encourage you to read it for yourself (book pg153-155).

5. Don’t follow the crowd
Don’t be a lemming. Don’t follow fads and styles of the stock market.

As a group, lemmings have a rotten image, but no individual lemming has ever received bad press. – Warren Buffett

Tags: checklist, mistakes, phil fisher
Posted in Investing Strategy | 1 Comment »