Friday, July 8, 2011

Investment advice as a newbie

Many years ago, I started a thread entitled "Investment lessons learnt this year and advice for newbies" on a now-defunct investment forum called WallStraits. I thought it was lost but I retrieved some of the posts which I wrote 6 years ago on another blog (

It is quite embarrassing to talk about my own performance in my first year as a retail investor. The year was 2004 and I suffered stomach-rending losses in a year when the Straits Times Index rose 17%. To lose money was bad enough. To lose money when everyone else seems to be making it made it far worse. To top it off, the losses came in a year of extreme hard work with great passion. I had to really question myself ... am I stupid?

Below were my thoughts written 6 years ago to fellow newbies as I pondered over my failure in my first year of investing as a newbie. The losses were caused by a large, concentrated position due to repeated averaging-down in a China S-chip stock.

Investment lessons learnt this year and advice for newbies
When I just started investing late last year, this was the first investment website I stumbed upon. I was greatly influenced by its FA bent and the eloquent arguments from fellow forummers.
I have some advice for newbies from personal experiences as a newbie.
There are certain practices advocated by FA(fundamental analysis) proponents that newbies need to be careful of. (If you are a grandmaster like d.o.g or Sage, you can ignore the warnings below. I need your advice more than you need mine. This post is more for the benefit of newbies)
The first one is with regards to averaging down. FA proponents like to say when the share price of one of your holdings goes down, you should buy more because it has become cheaper. So, when prices are depressed, you should be happier because you can buy more of the same good thing more cheaply.
You could try that if you have sufficient grounds to be so confident of your investment. But if you are just starting out as a newbie like me, please cut your losses and don't compound your mistake. You make a purchase, the share price goes down -> probably you made a mistake. Who are you, little junior, to argue against the market? If you are a newbie, assume you are an idiot waiting to pay school fees and don't average down. Cut your losses!!

Perhaps the most valuable advice that I have received from FA proponents is to know your investments very well and avoid those which you only vaguely understand. If you know your investments with the depth that Warren Buffett has with his, then you can average down with less worry.

One of my mistakes was to make investments based on superficial understanding. True, I read prospectus, annual reports and even taught myself accounting so that I could understand financial reports better. Most of my investments were made based on favorable financial ratios without a deep understanding of the business nature. I did not try out the company's goods and services. I don't know if the company's customers, employees, suppliers are satisfied with it.
My main fault as a newbie was to be over-confident. I thought after reading and learning so much, I was ready. I thought I could be as good as the masters and followed one of their strategy -- concentrate your eggs in one basket and watch that basket carefully. Once again, I reiterate that such a strategy is meant for the masters. If you are an amateur, it is safer to assume that you are an idiot and to protect yourself from stupidity, please diversify. By putting all your eggs in one basket, you may have fatally injured yourself by catching all the falling knives with one hand.
Some FA practitioners do not have a stop-loss policy. They use a similar argument - if a good thing becomes cheaper, I should buy more instead of selling it away.

The TA(technical analysis) approach "Cut your losses and let your profits run" is worth considering. It is a safe way to protect your capital. Sell after your losses reach 10% of the intial capital outlay no matter what. After all, he who fights and runs away may live to fight another day. In fact, by adopting such an approach, you could protect yourself against CAO (China Aviation Oil), Informatics and Auston.
Unfortunately, I did not follow the advice above. I waited until fundamentals have clearly decayed before thinking of selling. In the meantime, I continued to average down as the price slided down. When the financial report was out, fundamentals did look bad but ALAS!!, it is too painful to sell now.
This is one of the problems with FA. You can only make decisions an a quarterly or half-yearly basis which by then, the price may have slid to a psychological unacceptable level to sell.
FA proponents like to say making decisions based on price movement is nonsense. Say, the management has been trying to hide important fundamental data from the financial reports for as long as they can. The silent accomplices - auditors and independent directors - who are on their payroll prefer to close one eye or both eyes as long as they have ready excuses to plead ignorance and other disclaimers when the situation implodes.

The poor FA practioner will continue to average down, thinking that he is profiting at the expense of the foolish irrational market. Meanwhile, the insiders are selling the stock down to the sucker - that foolish guy averaging down.

In such a situation, the TA practioners will be safe. Having observed that the price has been in a downtrend caused by insiders selling down, they would have already sold out before the bombshell explodes. In the cases of CAO, Informatics and Auston, the price chart has shown an obvious downtrend before the explosive truth was out.
Are there any other advice and warnings fellow forummers can share with future newbies?
PS: I do not want to get into a TA vs FA debate. If any FA proponent thinks I am wrong, please point it out objectively without making personal remarks. I am still learning and am considering using a mixture of both FA and TA at the moment.