Wednesday, December 1, 2021

Overcoming challenges in investing

 It is said adversity breeds tenacity. Well, only if the adversity does not wipe you out.

I do think there is some truth to that statement, especially when you encounter a stumbling block or fall to one of life's many and varied challenges.

The fact that you're reading this on this blog means this particular phrase will deal with things mostly in the investing world. And yes, adversity does breed tenacity if you do not get wiped out in the stock market (reminder: never be 100% fully invested if you can help it or if there are not good deals i.e. market crashes or severe corrections).

So how do you make mistakes in investing? I can tell you that mistakes are commonly attributed to being too emotionally driven that one misses the facts for the potential which a company may/may not have and certainly may/may not be able to live up to (Luckin Coffee in NYSE (or is it just OTCMKT now?) for one, DWAC in NYSE for another), followed what others told you (for me, it was KAB in KLSE) and did not verify for yourself (for me again, this was GCB in KLSE), off about valuation (for me, too optimistic about HARTA in KLSE in 2021! my goodness), FOMO (for me, it was CRSP in NYSE after watching that netflix documentary - I thought this was a technology which will fly off the shelves), no conviction (also CRSP coz I only watched the documentary but did not have knowledge about that industry and certainly did not understand the factors that will affect the performance of this company). There are many drivers but the key thing is if you done your due diligence by researching and understanding the business of the company, ascertaining if external events relating to the company are favorable or not, and are satisfied that the management knows what they are doing, a lot of the mistakes I mentioned above can be avoided. The stock market is not a crystal ball or some blackbox you put money in and expect riches to come out. It is a participation in the growth of a company, and in effect, to participate in a nation's economy as well. The better the company does, the better that its workers and customers become!

Ok so maybe how do you make mistakes is not the question- rather, how do you define a mistake in investing? Certainly, it is not by whether a share price is up or down the day after you bought a share. Rather, it is more about the business and whether or not it has lived up to the investment statement you have crafted, is the management able to manifest what they've said they wanted to do a few quarters ago? If the management is/was able to do what they said they would/are going to do, the results of that will be reflected in the quarterlies or annual reports. If not, you'd see the signs: gross profit margins beginning to decrease, return on equity starting to shrink, net profit margins thinning out faster than your uncle's hairline (I don't know how I came up with that), current and cash ratio dipping below 1, debt increasing (maybe the company ain't doing too well and needed a cash injection to keep things running while they figure out how to survive); the chairman statement starts to fill with many jargons, filler words to convey a sense that everything is under control, like a fire blanket providing protection against a flame albeit for some moments..ok so I think you get it, there are a number of red flags to spot when a company is beginning to go hero to zero. Even then, it bears remembering that it is NOT YOU who made the mistake, it is the company that couldn't live up to its promise and potential. Don't beat yourself up when you see your share going tits up (or down? I can never understand that phrase). Investing is a cycle, sometimes you are up, sometimes you are down, sometimes you make the wrong choice, sometimes you make the right choice - you don't need to be right on all bets or at all times either.

By failing or making mistakes, it is the best feedback you can receive because you now know there is something you can improve upon! And you don't fail when you make mistakes - you fail when you give up and walk away, because your chance at reflecting on what went wrong and how to ensure that wrong does not happen again, is gone. In effect and in some metaphysical way, walking away from a setback is really just you just setting yourself up to fall again in the future when you meet the same challenge but manifested in a different setting/person/task/activity. So, I think, it is best to fix something when presented with an opportunity to do so lest you keep encountering it in greater intensity later on in life.

So, the big question how do you overcome challenges in investing? Like my analogy between fishing and investing, what do you do with the fish that got away? You have to let it go, but also understand was there anything you could have done in the moment to catch/reel it in, and what could you have done before hand to maximise the chances of capture?

In investing terms, that means:

1. You really gotta let it go - something bad happened but you didn't die, you survived to invest another day. Be wiser and be better the next time round.

2. During the moments/periods when you first noticed things were not as usual with the company, what was your initial reaction - was it to ignore, or to hope for the best, or find out what's going on, or right away: sell/hold/add? Each reaction will likely tell you how much conviction you had in the company in the first place

To ignore and to hope for the best is at best, a lazy man's strategy and at worst, a speculator doing unspectacularly (see what I did there). There's this thing I used to do and I am sure you do it too: the share has tumbled from $10.00 to $5.85 - its fundamentals are really not fun anymore and I know I should sell away but I won't, at least not until it goes back up to $10.00 coz that's when I can recover my capital. Well sir, I can tell you from my experience and others who have shared with me, as soon as that thought enters your head, the share magically does not move at all! In fact, it will continue to further tumble as if following some twisted law of attraction in the markets. Or, it will rise but only up by a small margin every now and then as if giving you a sliver of hope that the share market listens to you. Such is the law of no-one-owes-you-anything in the share market. The stock doesn't know you own it (Peter Lynch) and is not obligated to return to whatever levels you bought it for. 

Going to find out what's going on - if any recent developments had a direct impact on the company's fundamentals - is the de factor thing to do (at least it is for me..well it is NOW haha) and should inform you of the next steps, namely buy,sell,hold. If you are really on top of things (I'm not really on top, and on time most times - for stocks I mean), you'd already know which of the three to do, buy on the dip to average down, hold because the stock hasn't reached the margin you want, or sell quick to rotate into something more promising or hold cash if there's nothing good.

3. After you got over your mistakes, reflecting on what went wrong and what can you do right the next time is really one of the hallmarks of being a human, in that we are ever moving forward. When you fall, you just gotta get up and move forward. In investing, if you want to improve, it can be as simple as setting aside 15 minutes a day to check on any news or developments in the companies you invested in - if there are a lot of time, well good! You've got more materials to go over during the weekend. It can also be as complicated as having a checklist of sorts when looking at the financial section of the annual report; it is long and hard to swallow in one go (that's probably the title of someone's sex tape) and having a checklist to only look at certain figures and ratios (the really important ones - i mean you don't need to know the petty cash amount changes y/y right?) will help you to focus on what's important, financially for the company and leave you more time to analyse stuff like the MD&A - management discussion and analysis - and risks portion of the annual report. It is usually the subjective things that play a bigger role in providing clarity about how a company is doing and how well its past plans are manifesting. In short, find out what was lacking in your initial approach - was it not enough time or understanding in analysing the finances, did not go through the quarterly earnings calls/transcripts, missed out on other developments not covered by the quarterlies or by the company's IR, did it take too much time or energy to research about a particular part about the company, or was it difficult to always keep updated with company news? 

Sometimes, well for me, it is most times, it is the emotional side of things that have made me do some real wtf moves. Like, seeing my portfolio turn red - every single stock with drops in the double digit %, not knowing why and worst of all, not knowing how to react - it is as Peter Lynch puts it, "In the stock market, the most important organ is the stomach. It's not the brain". In the face of adversity, you gotta calm yourself down and not act out of instinct but out of logic. Easier said than done but that's something everyone who would like to put investor in their instagram needs to be able to do (yes, I put "investor" in my instagram..ok maybe it's "investing" but same same no difference). The most important thing (and takeaway if you didn't read any of the above) here is to not let your emotions dictate your actions but to let it flow first, and then use logic to go through what has happened, find more information to substantiate what has happened and then decide logically. After that, sleep on it and if you still feel like doing what it is you decided, go ahead. Really, the solution is just sleep on it

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