One of the most common comments I get is that if I were more adventurous, I would make more money in the stock market. And often, I will be getting these from people who I consider to be worth listening to.
Whenever I get a criticism here, whether I consider it valid or not at first glance, I will take some time to consider it seriously, and this was one comment, because of how often it pops up, I’ve spent quite some time considering it.
Samples of these comments are as follows.
Icon8888 This portfolio too politically correct
With your skills , brain and experience, should be more adventurous
Posted by CharlesT > Aug 31, 2018 07:05 AM | Report Abuse
How old are u? If u r really 20+ years old i think u could be the smartest young chap i hv ever seen….
If u could be a little bit more adventerous u can do very well in stock mkt i believe
Posted by value88 > Aug 31, 2018 10:10 AM | Report Abuse
CharlesT said it well. If Jon can be more adventurous and not that conservative and rigid in stock investment, he would do very well with his knowledge. I can also benefit by following his picks.
But with what he is now, I would not be interested in his picks.
Posted by VenFx > Aug 31, 2018 10:26 AM | Report Abuse
Haha jon the adventurous legend.
Walk the path
Baru cross check with theory
Better if u can earn your own formula
Anyway like to your story juga.
Why I find it hard to digest.
The problem with that statement is, it came from people worth listening to, so I have to assume they know what they’re talking about, and is not just drunk on animal spirits, or have had previous successes doing stupid things gone to their heads.
For me, risk means the permanent loss of capital due to miscalculated risk and reward ratios.
The expected value of high risk, high reward investments and low risk, low reward investments is exactly the same.
- 10 high risk, high reward investment of RM1,000 each, for a total of RM10,000.
- 10 low risk, low reward investment of RM1,000 each, for a total of RM10,000.
For the person making the high risk high reward investment, 5 of his investment go to zero, while the other 5 makes 240%. He ends up with RM12,000, and a return of 20%.
For the person making the low risk low reward investment, none of his investment died, and all returned 20%. He ends up with RM12,000, and a return of 20%.
I personally have no problem making high risk, high reward investments or bets, if the odds are right. I personally bet a few thousand (small amounts for some of you) on the election results, for PH winning. And as it paid 3:1, I made five figures.
Why? Well, I figured the odds of PH winning was more like 50%. And people seem to think that they only have 20-30% max odds of winning. As there was a mispricing, and despite all of the few thousand being l
I figured the people above understood the following concepts before making those comments, and thus I studied further.
I tried to understand further by first identifying the differentiating factors between being “intelligent” and “adventurous”
What is the difference between investing or speculating intelligently, versus investing or speculating adventurously?
What is investing intelligently or speculating intelligently?
An intelligent investment, is where you try to buy something that is worth RM1 for much less than that. And the way we determine how something can be different, and so we can have many different values. But the concept is the same, to pay significantly less than what you think its worth.
An intelligent speculation, is where you make an educated guess as to where the price of something will be in the future, given the information you have at hand. For example, many people a few years ago predicted the strong demand for lithium and cobalt, both of which are key ingredients for batteries, to exceed current supply, and thus started buying up contracts on them, or even opening warehouses to store them. And thus when prices are now sky high, they make a handsome profit.
In I3, the intelligent speculator, may notice certain information which he thinks will result in a strong quarter for a company, higher steel prices, thick crack spread and thus buy the shares beforehand. For the less ethical, or/and impatient or unsure ones. They will then write an article, and use the uniquely centralized Malaysian equities community, to push the price up and lock up their profit.
Do I speculate intelligently, or as intelligently as I can?
I do. I buy some warrants, which is speculative in nature as you are betting on prices being at a certain place and a certain point in time. Which is different from an investment, where the time does not really matter.
And I do speculate on quarter results to an extent, for example, I bought Hengyuan at RM7-ish before the run up, sold at RM17, before rebuying a smaller amount at RM14.3, LOL! Still a net gain I guess.
I also bought Parkson 2 quarters ago at RM0.4, expecting a profit for the quarter (due to the HK listed division posting a profit a week or two before), and figured, if it didn’t happen, I wouldn’t mind holding it as a net asset investment. When the profitable quarter appeared, and the stock shot up 50%. I sold at RM0.61. Interestingly, I thought this quarter would be positive as well, but I thought a little too many people seem to feel this way, and at RM0.6, they are better Net asset plays, and so didn’t buy, despite the Hong Kong listed division posting a profit again. As it turned out, they posted a loss due to SEA division being really weak. Just goes to shows how unpredictable predictions can be. Hahaha
What is investing or speculating adventurously
Now, I am not an expert in investing or speculating adventurously, but from what I observe, people seem to mean it this way.
An adventurous investment, is where you are not sure of the value of what you’re buying, and thus do not know whether the price you paid is worth the money or not. However, you have a good feeling about the long term prospects of the company. And at that point in time, you might feel good enough about it to buy a certain amount of it.
Personally, the most recent of my adventurous investment is Layhong. And in 2017, it was VS Warrants, VIS and Elsoft. All of them were small positions. In terms of companies I am thinking about investing adventurously today but have not bought, is SKP Resources, Takaful, Maybank, Allianz, BIMB and a few more.
The difference between an adventurous and intelligent investment, is how much you know about the investment and how sure are you. And because of that, it automatically fails one very crucial stress test.
The key to being a successful investor, according to Howard Marks, is
- The ability to estimate the intrinsic value of an investment;
- The ability to hold or buy more as prices fall;
- And most importantly, to be right.
You fail the first instantly. And if you are not sure of something, how to you hold or buy more as prices fall?
And if you can’t determine the intrinsic value with a high level of confidence to begin with, doesn’t this make the probability of you being right significantly lower?
With this in mind, I usually only put very small amounts in my adventurous picks. Usually not more than 3% of portfolio each. Most are 2% or less.
Having said that, there is a way to turn adventurous investments into intelligent ones. That is to study more and improve your circle of competence.
However, if you were to invest adventurously and plan to turn it into an intelligent one by studying it further, you would have already made the error of trying to understand what you invest in, instead of investing in what you know. Which automatically reduces the probability of that being a successful investment.
What is an adventurous speculation? Well, just look at 90% of the people in i3, and there you go. Most if not all lose money. It’s essentially speculation based on zero facts or understanding, beyond the expectation that the price will be up or down in the near future.
My takeaways from this exercise.
What are the only investment edges one can ever get in the market with a very high certainty, especially as a retailer? In my opinion they are,
- Strong knowledge of your limits and circle of competence.
The biggest investment edge one can ever have is to have a long time horizon. The longer your time horizon, the higher the edge.
Just a quick example, late 2016 and early 2017, everyone was so worried about the effects of MFRS 9 on the quarterly profit figures of financial institutions, despite it being only an accounting principle that has zero bearing on the fundamental economic reality of these companies. At one point, Maybank hit a six year low. Look where they are today.
If these banks were your family business, you would not give a fiddler’s fart as to these accounting adjustments. Everyone knew it, even the fund managers. However, as the price have shown, they have clearly sold some.
Why? Because fund managers have to price stocks for the next year. They cannot benefit from these mispricing’s even if they know it exist. Underperform for a year and you lose your bonus. Underperform for two, and you lose clients. Underperform for five, and you were fired a year ago. Seth Klarman, one of the best investors period, had an initial underperformance to the index of almost six years, before going on to produce one of the best long term returns in the market.
The irony of this situation is that from an investment standpoint, the long term is almost the only thing that matters, whereas from a career standpoint, you can only focus on the next year or two.
And a lack of understanding or confidence in your investment due to it being adventurous, will make it very difficult to have a long time horizon for it.
Now some people will say, “Well, those people have so much money, of course they can hold for so long.”
Here is where I think people misunderstand. The holding power and time horizon of your capital has zero correlation with the amount of money.
The point is to put the amount of capital that will enable you to have very strong holding power and a forever time horizon. Reduce the amount until you reach that figure.
Having said that, many of the investors here in I3, even those speculating intelligently, will say that they are speculating, or have short time horizons because they want more money faster.
I asked my 500% trader friend. When your capital grew from less than RM100,000 to RM750,000, did your quality of living increase seven times? How much did you take out over the fund’s lifetime?
The answer, No and RM3,000. He still eats the same food and drive the same car.
What was the main difference between less than RM100,000 and RM750,000 then? He said, well, with this amount, I can choose not to work unless I want to, and do whatever I want.
Well, in that case, why take the kind of risk you are taking now at all? And risk what you need for what you merely want.
I think for many of you reading my articles, your money is a lot more long term than you think, and you are more likely than not, risking what you really need for what you merely want.
Strong understanding of your limits and circle of competence.
One of the funniest story I remember about Warren Buffet and Charlie Munger, was one about a comment made by an interviewer.
He said, “Having interviewed both of you for the past hour, I can’t help but think that you guys are not smart enough to be as rich as you are today.”
Well, the thing about investment, is not about how smart you are, but knowing precisely how dumb you are, and the things you don’t know.
Berkshire, could make the mistake of not buying any pharmaceutical stocks in 1970’s, not buying Amazon, Google and Microsoft post 2000. Buying Apple only from 2016. All of which would have been adventurous investments (as WB and CM did not understand them that well then) and still turn USD 17 per share to currently more than USD300,000 per share.
There is no shortage of people overestimating their abilities in this world. There was a poll asking people if they thought they were above average drivers, and over 80% said yes.
Imagine the lowest quartile investor ever. He does not read at all, he does not even know how to read accounts. In fact, he does not even have or want access to these information. In almost every scenario, he should be making much less money than everyone else, or losing money.
And yet, just buy acknowledging he knows nothing, and thus buys the S&P500 index or the MISC World Index, he will go from last place to top 50%.
Imagine if you as an investor is much smarter than him, how much higher can you go?
People fail in investing, not because they are not smart enough, but because they think they’re smarter than they really are.
A sure recipe for failure, as seen in Wall Street where the most brilliant congregate, is to be the man with an IQ of 140, but thinks he has an IQ of 190.
I think being adventurous in your investing or trading, is almost a sure sign of over estimating one self.
In addition, each investment style will have certain trade-offs. It’s just that statistically, value investing gives the best one, over a long period of time and a large sample size.
Value investors under-perform bull markets, and over-perform bear markets.
In bull markets, it is the most inexperience and foolish who make the most money, as they are the ones willing to make the biggest bet, where mature investors, scarred by experience, hesitate and consider. While in bear markets, the inexperience bull dies, while the matured value investor makes his biggest purchase.
There are old investors, and there are adventurous investors, but there are no old adventurous investors.
I would much rather be in the middle of the pack during the good years, and near the top in the bad years.
You have to decide what suits you.
As some of you may be aware, I manage a fund for a number of investors. And this includes a portion of my parent’s retirement fund, the savings of friends who like me have only started working a few years and some outside parties who decided to take a bet on me.
As a fund manager, I think there is a certain sacred duty. A person’s savings, is probably the 3rd most important thing in their life, behind their family& friends and their life.
A person’s savings takes years of blood, sweat and tears to accumulate. It is all the things they chose not to enjoy over the years. That Empurau fish they did not eat, that holiday they did not go, that toy they did not buy for their children.
The number one goal for the fund is to therefore not lose money, and the number two goal is to not forget number one. If anything, I should be reducing my adventurous investments or trades, even though they have been profitable thus far.
The one thing I’ve learnt this year, is to be contented making money the way that makes perfect sense to me. I prefer making money the moment I buy something and count the profits later. I know the profit is captured the moment I buy the bargain.
And there is nothing bad about making a perfectly satisfactory amount of money while everyone is making more. They are far more, far worse things in investing.
As I always tell my clients, I would rather lose you as a client, than to lose your money.
If you want a trader, get a trader to manage your money. If you want someone who will invest based on a gut feeling, or adventurously, find that person or do it yourself.
They are more than enough risk and dangers in the market as it is. There is no need to choose to be adventurous. And they are more than enough things to buy without being adventurous. Need me to adventurous? I’ll go sky diving and ride a superbike in Sepang.
And at the rate we are going, we know we will be quite rich by the time we get to the age of the forumers here (most are retirees i think), why risk that?