“How’s lunch?” I asked, striking up a conversation with a fellow investor next to me. And that was how the conversation started.
It was a conversation fraught with many contradictions and woe, which I will explain why later. He was a middle-aged man. Steely-looking, with a good sitting posture and a gleam in his eyes whenever we talked about stocks. He did not want to converse when the speakers at the congress were presenting. He was that humble and respectful.
As we started talking about stocks and trying to understand each other’s investment style and philosophy, he revealed that he had been investing for 20 years. He then admitted that, sadly, he only started learning how to invest 2 years ago. With that revelation, I could only assume that he has been under performing the market or losing for 20 years.
Later on he revealed that he went bankrupt once from investing in China stocks that went belly-up during the financial crisis. His voice trembled as he recalled the 6 figure losses. I myself could feel his pain.
I asked him what caused those massive losses.
“Last time I just anyhow listened to friends and buy without researching. Now… I am trying to learn so that I can decide for myself.”
Kudos to him for making the effort. But as the day wore on I couldn’t help but notice 3 huge contradictions that seemed to be pulling him back to his old ways. I did not realise it at first but after I went home and reflected on the congress, his recurring pattern of investment failure seemed more obvious to me.
I am going to list these recurring patterns or mistakes here so that you, dear reader, can catch yourself before you find your thought processes flowing towards these 3 dangerous paths.
Overestimating your “Circle of Competence”
“I read that you must invest in your circle of competence. For example, if you work in the IT industry and you know a lot about IT companies, you should be focusing on investing in your industry,” he advised.
True that, I can’t disagree. Buffet, Lynch and countless other gurus have constantly emphasised the importance of sticking to your circle of competence. In other words, only invest in what you know.
But how much do we know? And how much do we think we know? And how much do we know what we don’t know?
Later, the man revealed some of his stock holdings. He told me he was in the marine and oil and gas industry, so he mostly invests in stocks pertaining to that industry. Great, he must be an expert insider, I thought. But he later showed me his buy price for those stocks, and the current prices they were all trading at.
My jaw dropped.
He was probably sitting on 70-90% paper losses on all those stocks!
I wanted to warn him about over-concentration of portfolio allocation in cyclical stocks but the next speaker started presenting and our conversation was cut short.
So does it mean that you have to invest in stocks only pertaining in your industry? And if you know that your industry is prone to cyclical fluctuations, shouldn’t you diversify your wealth out of it? Also, if working in an industry qualifies you to be “knowledgeable” in that industry, then why are so many companies scrambling to retrench staff and fighting for their dear lives to claw through this current oil crisis?
And as my new acquaintance has just shown, if he was knowledgeable about his industry, then why is his portfolio beaten down so damn badly now?
I think we sometimes tend to overestimate our circle of competence. And not only that, we may even be muddling in a circle of incompetence and lacking the self-awareness to realise it as such…
I feel we should all keep track of investments in our “circle of competence” and measure the actual results before we deem that we are actually COMPETENT in THAT CIRCLE.
Trying to Trade Short-Term
The next troubling thing that struck me was how this man was still trying to time his trades using patterns and charts. He talked to me something about “Teacup patterns” or “Monkey Swing from Branch-to-Branch” or some shit like that. My brain auto-filters out all content related to trading. (Thank you, brain.)
It is a well-known statistic that only 6% of traders are actually successful in making money. Well, I don’t blame you for trying to be in that high pedestal of 6% … but after 20 years of losses and still trying to trade?
It just seems like gambling addiction to me.
Worst still, I suspect that there’s some cognitive dissonance that tries to rationalise his successful trades as good decisions when it may be totally due to sheer luck.
My point is, if you are constantly losing money from short-term trades, then maybe you should consider Buy and Hold for the Long Term for a change… you know?
After all, gurus like Buffet, Graham, Lynch, Greenblatt, Howard Marks, etc, all preach a Buy-Hold for Long Term strategy. Maybe we mere mortals should follow their advice?
…And Still Listening to Friends.
Later on that day, the man pulled out his phone, showing me messages sent by his friend who is following a certain guru.
“100% profitable on all trades this year!” he claimed
Let’s rewind back. Didn’t he said that he lost 6 -figures listening to friends stock tips?
It seems to me like my acquaintance knows his mistakes, yet he is still unaware of his day-to-day decision-making. I found it rather troubling.
As I noticed he continued to sit in his upright, alert posture, studiously taking down every single word or every single quote flashed onto the screen, I could not help but feel a twinge of sympathy. Here he was, reformed and willing-to learn, but still he is still drawn back to his old ways, probably by his old friends. He is really trying hard to learn, but the problem is, I don’t think he is applying it correctly.
Perhaps the solution here is to break out from his current network of friends or even expand it.
Your net worth depends on your network.
You are the average of the 5 people you spend the most time with.
These are just some cliche quotes that I am starting to take more seriously. After all, I myself have once languished having no network of investors. I was investing alone for 4 years, not realising my own mistakes, not having anyone question my thesis. Reaching out and finding a network of investors was probably the best thing that happened on my financial journey so far.
So dear reader, I implore you to examine yourself. Other than focusing on increasing your knowledge or skill, what kind of investors are you surrounding yourself with?
Are you in the right network?
As for my acquaintance who probably hates me now for bad-mouthing him in this article, I am sorry. Trust me, I spent days mulling over whether I should write about this and have decided to write to do so in the end because I know of many other investors who are also stuck in a similar fate – old habits, old network, same old mistakes, same old losses, same old shit.
And to the other investors reading this: Are you just going to say “Oh, poor guy” and forget about this article or are you going back to re-examine your own investment process?
I urge you to do the latter.
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