Lessons learned from the market

  • Business
  • Saturday, 04 Jan 2003


I HAVE made and lost money every which way in the stock market”, a friend intimated to me not too long ago. I thought the same comment could have come from many local investors, because of their cavalier “anything that makes money goes” approach, instead of the consistent investment style approach common in the more developed markets.  

The interesting part of this message, however, is not that one can make or lose money in a multitude of ways in the stock market, but rather that first hand experience is probably the greatest educator in investing. It is unfortunate, however, that while the lessons imparted by the market are many, the number of investors enlightened by such are few.  

In my view, the stock market is in a way, the epitome of the school of hard knocks. You could have learned invaluable lessons on “How to be street-smart”, or complete aspects of the “Education that university failed to teach you” if you could just take the effort to sit down and reflect over the experiences derived in the process.  

This being the start of the New Year and all, I thought it would be a fitting tribute if we could resolve to learn from our mistakes past, in order not to repeat them in the long investment years ahead of most of us. 

Like the friend of mine, in my 15 years of investing in the stock market, I can probably lay claim to having tried and tested every formula for losing money you can think of.  

No different from most other retailers, I had also committed the cardinal sin of investing – buying stocks simply because they were “about to go up”. And if you were to ask me then why they were “about to go up”, I would be hard pressed for an answer as usually no reasons were provided along with such tips, other than perhaps because somebody – you were never told who – was about to push them up.  

Economic theory dictates that like any other goods, stock prices must appreciate when demand is more than supply. Demand can exceed supply because of fundamental reasons, in which case the share price appreciation is likely to be sustained as long as favourable fundamentals are in place.  

Alternatively, demand can also exceed supply because of artificial or transient reasons, arising from herd mentality, or share manipulation. It seems the latter has evolved from conventional share ramping into a choreographed art, involving timely market trades, the application of market psychology, and well-placed rumours whispered strategically to kick-start and to provide the momentum to sustain a price movement for a while.  

Very few retail investors who trade on this “about to go up” approach will come out profitably from such investments in the long run. The “Greater Fool Theory”, i.e. investing on the belief that there exists somewhere a bigger sucker who will take you out at a higher price, sounds fine on paper, but seldom works in reality, in my experience. 

I have also been gullible enough to be taken for a ride on those “too good to be true, but is nevertheless true” deals: Acquisitions of great assets at bargain price, discoveries of crude oil in plantation land, inventions of new technology that had a global market.  

In hindsight, how I wished I had believed more in the market’s efficiency, had a better grip of reality and most of all, looked at gift horses in the mouth back then. 

In further pursuit of this guilt trip, I can also count a couple of occasions when like other avid readers of publications glorifying the achievements of prominent businessmen, I was duped into investing in companies run by these personalities with the so-called “golden touch”.  

Unfortunately more often than not, it was a case of all glitter no substance, as many of them were more adapt at spinning great stories than at running real businesses. 

I have also lost money before investing on the belief that corporate paper shuffling e.g. bonus issues, share splits and reverse splits are always good for share prices. In effect, the funds ended up being tied down for an extended period, being exposed to market vagaries but with no compensating economic justification for earning a decent return. 

Elsewhere, my portfolio returns have also suffered from a lack of discipline on my part in not cutting losses when the change in circumstances for the worse had become quite apparent, and in hanging on to warrants for too long in the hope for that one last rally to exit, even as the maturity date draws nearer by the day. 

Obviously I have also made good money in the market, particularly when I adopted a contrarian approach, investing in cyclical stocks at their lows or investing in bear markets. The use of warrants has also been very rewarding; helping augment my stock returns several fold in many cases. 

But in investing, it is not only the successful trades that one should aspire to learn from. Over the last decade, the investor who had the knack for avoiding the duds but was only able to pick moderate performers should have far outperformed those who excel at picking winners but cannot avoid pitfalls. Hence heeding the lessons from failures may be just as important, if not more. 

In summary, among the most common mistakes to avoid would be first; never invest just because you are told a stock’s price is about to go up. Doing that would be no different from placing a bet on the roulette table. Will the price go up or will it go down? It is all luck, you have no control over the outcome, and you haven’t even attempted to improve your odds one bit. 

In stock investing, there is always an underlying business behind the piece of paper you intend to purchase. Do some research, understand the business, the financials, the management, and then invest if the stock is still as attractive as you thought it was. 

Second, never invest with a complete disregard for the state of the economy. The best stock in the market will lose you money if you invest at the wrong end of the cycle. Just as death and taxes are certainties in life, so are bull and bear markets in investing.  

No one possesses the perfect foresight to invest right at the bottom or sell right at the peak, but having some awareness of economic and business cycles, and the discipline and the conviction to act regardless of the noise will pay dividends in the long term, I believe. 

Third, do not ignore the price you are paying for your stock, because there is a price tag beyond which you should not pay for even the best stock in the world.  

The return you earn from your investment is obviously a function of the business returns of the stock, as well as the price you pay for it. The higher the price you pay, the lower the return. 

In bull markets, picking winners do not require much skills. The challenge in investing is really more in sustaining your returns and minimising your losses under normal to adverse market conditions. 

  • Yeoh Keat Seng, keatseng@commercetrust.com.my is the CEO of Commerce Trust

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