Volume 3 Issue 30: Intelligent Investing

Pity the Policymakers

I just really like the analogy given by El-Erian here when describing the situation in the Eurozone:

I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do. I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals.

So it is unsettling that policymakers in many Western economies today resemble the second group of pilots. This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations.

Looks like tough times ahead. But remember this:

Be fearful when others are greedy, and be greedy when others are fearful. 

Volume 3 Issue 24: Two-Cent Economics

The Downside of Being a High Achiever

This is one of the best articles that I have read recently. It is a very long article, so be forewarned. It is definitely worth the time.

Here is one of my favorite parts:

Focus on the Long Term

Major goals can withstand interim setbacks. When you are looking at the big picture, you often give yourself more latitude to make a few missteps.

One lawyer with a passion for civil liberties, Steven, told us of an experience writing a brief that was in an area of law that lay outside his experience. He was paralyzed by the prospect of looking incompetent to the members of the legal community he admired most. That the subject matter was only slightly out of his area of expertise made it all the more daunting—he felt he should know instinctively how to respond.

Steven realized that he had to grant himself the permission to be mediocre—an appalling prospect for achievers.

He weighed the possible consequences of a subpar brief against the broader benefits of expanding his expertise and making an influential contribution to the case. As it turned out, his work on the brief garnered him additional respect from his colleagues. It was a solid effort that demonstrated his ability to stretch beyond his comfort zone.

Long-term success requires some willingness to commit to necessary short-term risks. High achievers often let their fear of failure stop them from taking those chances.

That was the case with Rick, a respected professor but a dismal team player. His students loved him, but his peers were increasingly vocal about his refusal to contribute at an organizational level. He couldn’t be counted on to complete any work other than what was on his own to-do list. Rick consciously ignored his colleagues’ feedback, in part because he knew he was less talented at organizational tasks.

Mostly, though, he was just too self-absorbed to pay attention to anything other than his own teaching, research, and publishing agenda. Unfortunately, Rick’s inability to see the big picture was his undoing, and his contract was not renewed.

In his next position, Rick resolved to do things differently. He invested time and effort in shoring up his organizational abilities. Though he worried initially about not focusing his all energies on teaching, his farsightedness paid off: He’s now one of the most highly regarded professors in his department—on all counts. He still feels anxiety about his weaknesses—that’s who he is—and in a way it’s what makes him great. He’s never satisfied.

Doing the right thing poorly is painful for high achievers. It’s much more satisfying to do something well, even if it’s not the best use of your time.

Moving your A game to a new level or in a new direction takes humility, it takes practice, and it takes patience (not necessarily your strong suit). But it’s a necessary step on the road to doing the right thing well.

I have been preaching about long term thinking for a while now. This article just puts it aptly, among other amazing things.

Volume 3 Issue 8: Intelligent Investing

The Power of Diversification?

Very often, we hear so-called financial planners tell us to diversify our assets to minimize risks. Today, we shall examine a few simple cases to put this adage to the test. Let's just assume that Mr UTA (Unit Trust Agent) is a relatively educated investor and has decided to listen to his "financial planner" to diversify his assets when investing in the KLCI. So, what better way than to diversify it according to the KL Composite Index itself.

For your information the KLCI comprises 30 of the largest stocks by market capitalization listed in Bursa Malaysia. By that virtue, how badly can Mr UTA do?

Now let us take a look at the KLCI since January 2003.

If Mr UTA were to buy and hold all the stocks according to the KLCI since January 2003, he would have earned a handsome return of 124.0% in total or about 10.4% per annum. That is not too bad by any standards. But in actual fact, Jan 2003 is at one of the low points of the KLCI. We will come back to this later.

Now let us take a look at the performance of DiGi.com Bhd (DIGI) in the same time period. 

The returns for DIGI, excluding dividends paid, is 1,029.5%, or a whopping 35.0% per annum. Now, this is one case where one particular stock has outperformed the KLCI. The reason I picked DIGI was because it is a household name that many of us can relate to. Most people would have known or heard about what DIGI was about. It is not some obscure stock that is into some sketchy business. The key was in finding out the fact DIGI was a good investment all the way back in 2003.

Let us look at another household name, Parkson Holdings Bhd (PARKSON).

OK, so PARKSON is not DIGI. DIGI may have been an exceptional case. The cumulative returns for PARKSON over the same time period was about 347.0% or an annual compounded rate of return of 20.4%. Both of these stocks clearly outperformed the super diversified KLCI by a huge margin.

Perhaps you may think that stock picking is luck. What we hope to do here at the Main Streeter is to identify stocks like DIGI or PARKSON way in advance and buy them at times such as in 2003 when they were severely undervalued. While there is some element of probability in this, but it is most definitely not luck.

Finally, let us look at the KLCI again. But this time, assume that Mr UTA had bought into the KLCI since January 1994.

After approximately 17 years and 2 months, the overall return for Mr UTA would have been ONLY 16.8%, which translates to about 0.91% compounded per annum. Yes, it is less than 1% per year. Mr UTA would have been so much better off if he had just did nothing but put his money into fixed deposit.

As you can see, it is not always good to diversify your investments. In fact, it could even backfire. Simply following the "market" or the KLCI is not the intelligent way to invest. What the above examples also show is that, timing the market will most likely lose out to stock-picking through genuine, thorough research. If one could have identified companies such as DIGI or PARKSON in 2003, one's returns would have been extraordinary.

Of course it is very easy to say all this with hindsight. Perhaps, in the future issues, we could examine deeper into some of the indicators that could have led us to purchase these shares in January 2003.

Disclaimer: All company analyses, including the paper portfolio that appear in this newsletter are derived from facts gathered from various sources and the contributors' personal opinions and for education purposes. It is NOT an invitation to deal in securities, and especially not a recommendation for buying or selling any stock. The contributor(s) do not guarantee the accuracy of the facts being presented. The accuracy of such facts are only as reliable as the sources that they are obtained from. Please consult your investment advisers before acting on any information provided by the analyses here.

Economics @ Home © Volume 2 Issue 24

Be Long Term Greedy

Many value investors or people who are interested in value investing would have heard of this term many times. What does it mean? In simple terms, it would mean to focus on getting what you want in the long term. To address this issue, there are two questions that you should be asking.

Why should we be greedy? Is greed good? Morally speaking, and conventionally speaking, it is difficult to view greed as a good thing. How can greed be a good thing? To know that, we must first understand what greed is. It is simply always wanting more than what we have. To never be content. More is simply better. Well, it is indeed greatly unfortunate that human nature drives us to want what we can't have. For those who are able to practice self-restraint, then the act speaks for itself. Self-restraint, which is to deny oneself of one's true nature.

That settled, it is safe to generalize that most of us are greedy. We have a tendency to always want more than what we can chew. Now, there is no way of twisting this to make it sound like a good thing. However, the discussion today is not just about being greedy, but about being long term greedy.

This brings us to the second question. What does the phrase long term add to the issue? For those of you well-read economists, you might quote the great Keynes, who said "In the long run, we are all dead". However, my boss would be very quick to add, "We would rather be dead in the long run, than dead in the short run". Now, back to the question, what does long term greedy really mean?

The quick definition was given to you at the start of this issue. It simply means to focus on obtaining what you want in the long term. Well, the point I am trying to bring up is that, since we are going to be greedy any way, it is better to be greedy in the long term than be greedy in the short term. But why is this better?

As we have all experienced, in our daily lives, new events, new inventions, new fashion and what not keeps cropping up and we always want the next newest thing. Seeing the new arrivals, we tend to set a goal towards obtaining those new goodies and soon before we are able to achieve our goals, new and better goodies are going to pop right out and now, you will have to change your goal to achieve that instead.

If you were to set a long term goal, something which is to be achieved in 20-30 years time, and work towards that, you will be less likely to be distracted from the short-run fluctuations. Set the goal way high up, be very greedy about it. Work towards the long-term goal. That way, we always have our eye on the ball. We would not be distracted by the short run hiccups on and off the road.

As always, these kind of things are easier said than done. It is very difficult to work on, and you will only truly realize the benefits once you have tried it. That is why it is so difficult to grasp the concept. But listen to those who have succeeded. Read about the success stories of those who chose to delay their gratification. Make the short term sacrifices. Focus on your long term wants. It is OK to be greedy. But be long term greedy. Achieving long-term goals is not a sprint event. It is a marathon.