This post is a review on 'Don't Believe Everything You Think: The Six Mistakes We Made in Thinking' by Thomas Kida. It can be borrowed from NLB (at 153.42 KID).
As explained in the title, the book highlights six thinking mistakes:
1) We prefer statistics to story.
2) We seek to confirm
3) We rarely appreciate the role of change and coincidence in life
4) We can misperceive our world
5) We oversimplify
6) We have faulty memories
Overall the book is quite interesting. It touches on the above six points and also other aspects such as the use of science (eg hypothesis testing in statistics) to overcome our thinking mistakes. It is rather readable to me and I do detect certain overlapping materials with Taleb's "Fooled by Randomness" and "The Black Swan". This is not surprising given that Taleb draws a lot of materials from psychologists.
Before I end this post, maybe I can briefly share how these points can be relevant to investing. Pt 1) explains why listed companies nowadays announce their results with a press release. The press release is to satisfy our desire for stories. For pt 2), it is commonly known that Soros seek to avoid this bias by searching for disconfirming evidence. Pt 3) is linked to my older post on rear-view or restropective thinking.
Pt 5) is interesting as we may oversimplify in our investment hypothesis. It leads me to question whether if Monish Pabrai's view is correct. Pabrai's view is that in looking at stocks, only a few variables are important. I am not sure if he has fallen to oversimplification but then again, his hedge fund performance is supporting Pabrai's view.
Well, pt 6) is one of the reasons that I started a blog. The blog will hopefully prevent me from having faulty memories.
Monday, July 30, 2007
Sunday, July 29, 2007
Been Raising Cash
Last week, I have quite a number of trades. Besides buying Hongwei and one other stock before the selldown, I have also disposed two other positions on Friday so as to raise cash.
I have sold my positions in China Precision, C&G Industrial and SP Chemical. Even though China Precision and C&G Industrial are considered to be still undervalued by me, the degree of undervaluation is lower compared to my other positions, in my opinion. Also, I sell them to raise cash, which I have started to do since the last Mar selldown.
The act to raise cash serves a psychological purpose, which is to show that I have taken action to reduce losses in case the market corrects further. In other words, the act to raise cash is to reduce regret aversion. Or in chess terms, you can call it a prophylactic move to avert regret.
The act to raise cash may also help if the market corrects more. I will have the cash to purchase more undervalued stocks. Nonetheless, this may backfire at times if the market recovers, while I am not fully in stocks. In other words, there is a trade-off.
SP Chemical was a sale because of its 3Q 2007 profit warning. As I am not familar with how China's export rebates work for its chemicals, and with the market correction, it becomes one of the really candidate for sale.
Interestingly, I can observe retrospective thinking (or rear-view reasoning) in these market correction. A lot of pundits have been attributing the correction due to US subprimes, market aversion to risks and even yen-carry trade. While I do not know whether these reasons are correct or sufficient to explain the market selldown, I know that the reports often will state these reasons without much support or proof.
As for me, I will try not to theorize so much regarding the causes of market selldown this time. Rather, I will concentrate on buying cheap stocks if market selldown continues. Or maybe even sell a bit more. Let's see how the marlet develops.
I have sold my positions in China Precision, C&G Industrial and SP Chemical. Even though China Precision and C&G Industrial are considered to be still undervalued by me, the degree of undervaluation is lower compared to my other positions, in my opinion. Also, I sell them to raise cash, which I have started to do since the last Mar selldown.
The act to raise cash serves a psychological purpose, which is to show that I have taken action to reduce losses in case the market corrects further. In other words, the act to raise cash is to reduce regret aversion. Or in chess terms, you can call it a prophylactic move to avert regret.
The act to raise cash may also help if the market corrects more. I will have the cash to purchase more undervalued stocks. Nonetheless, this may backfire at times if the market recovers, while I am not fully in stocks. In other words, there is a trade-off.
SP Chemical was a sale because of its 3Q 2007 profit warning. As I am not familar with how China's export rebates work for its chemicals, and with the market correction, it becomes one of the really candidate for sale.
Interestingly, I can observe retrospective thinking (or rear-view reasoning) in these market correction. A lot of pundits have been attributing the correction due to US subprimes, market aversion to risks and even yen-carry trade. While I do not know whether these reasons are correct or sufficient to explain the market selldown, I know that the reports often will state these reasons without much support or proof.
As for me, I will try not to theorize so much regarding the causes of market selldown this time. Rather, I will concentrate on buying cheap stocks if market selldown continues. Or maybe even sell a bit more. Let's see how the marlet develops.
Monday, July 23, 2007
What is your motive for investing / trading?
Buffett has mentioned that an investor should be animated by greed but not be controlled by it. Van Tharp, in Schwager's Market Wizards, said that movitation in making money is not an important trait in expert traders. Martin Pring, in Investment Psychology Explained, noted that great investors and traders invests/trade because they love the investing/trading, and not because of the money.
What is your motive for investing / trading? Is it because of the money or is it because you love investing? If you have not examined your motives thoroughly, you may wish to examine it again.
Personally, I started to invest due to the motivation to make more money. However, slowly and slowly, I realise that investing allows me to profit from ideas. I can expose myself to (new) ideas, synthesize or combine a few ideas, test them through the markets and in the process, gain feedback from the maket. This process of coming up with new ideas, testing the new ideas by staking one's money on it and getting feedback from the market is very interesting to me.
So much so that money, while important, may not be the sole motivator for my investing. If one day, assuming that I am lucky not to have money worries anymore, I expect myself to continue to search for new ideas and stake my money on these ideas. How fun the process can be.
What is your motive for investing / trading? Is it because of the money or is it because you love investing? If you have not examined your motives thoroughly, you may wish to examine it again.
Personally, I started to invest due to the motivation to make more money. However, slowly and slowly, I realise that investing allows me to profit from ideas. I can expose myself to (new) ideas, synthesize or combine a few ideas, test them through the markets and in the process, gain feedback from the maket. This process of coming up with new ideas, testing the new ideas by staking one's money on it and getting feedback from the market is very interesting to me.
So much so that money, while important, may not be the sole motivator for my investing. If one day, assuming that I am lucky not to have money worries anymore, I expect myself to continue to search for new ideas and stake my money on these ideas. How fun the process can be.
Sunday, July 22, 2007
Insights from The Black Swan: Pt1
At present, I am re-reading some chapters of The Black Swan (TBS) by Nassim Taleb. In my first reading of TBS, I find it more philosophical than Taleb's last book 'Fooled by Randomness'. Which is why I did not dare to give a review. I do not want to review something I do not fathom.
I find TBS more provocative than other books. TBS may, at some point, trigger some thoughts of mine which will link TBS concepts to my real life investing.
In a previous post, I mentioned that TBS highlights the rear-view mirror or restrospective problem. That is, humans tend to theorize the past based on ex-post results. For example, historians may use the actual occurance of World War I (WWI) to highlight that the events before WWI can be used to predict WWI. This is a form of rear-view mirror theorizing as one looks for possible explanations for something that have happened, and one likely would dismiss randomness as one of its causes. (Research using bond prices indicates that the market did not expect WWI to happen.)
How does rear-view mirror theorizing relate to investing?
Upon stumbling on the idea of rear-view mirror (retrospective) theorizing, I find that I also fall into the rear-view mirror theorizing at times. For example, when Shanghai Asia run up to 27c -30c recently, I lamented that I should have seen the rise of Shanghai Asia occuring sooner or later. I should not have sold Shanghai Asia at 21.5c. But I later realize that at the time of sale, I would not have possible known that Shanghai Asia would run up 30-40% a month later.
Knowing the problem of rear-view mirror theorizing may help me to avoid blaming myself too hard in future when results show unexpected losses or omissions.
Rear-view mirror (retrospective) theorizing may also highlight the problem of linear thinking. That is, we may extrapolate past trends into the future and underestimating the uncertainty of the future. My example and past observations would tell me that due to the strong run-up in Sesdaq recently, people are getting very interested in penny stocks and expects more gains from penny stocks. I am thinking that these people may have fallen for the rear-view mirror (retrospective) theorizing trap. However, I also understand that the uncertainty of the future may prove me wrong and these people right if Sesdaq keeps on increasing.
In this case, awareness of rear-view mirror (retrospective) theorizing may only help one to be less confident in one's prediciton of the future and allow more margin of error. Hopefully, the additional margin of error may bring better results in the long run. However, it is difficult in practice that one will turn the awareness into some checking tool due to a few reasons. Possible reasons are recency bias, the herding tendency and the overconfidence tendency.
I would not be surprised if I fail to turn this awareness into a checking tool and remain as a over-confident investor (or more harshly, fool).
I find TBS more provocative than other books. TBS may, at some point, trigger some thoughts of mine which will link TBS concepts to my real life investing.
In a previous post, I mentioned that TBS highlights the rear-view mirror or restrospective problem. That is, humans tend to theorize the past based on ex-post results. For example, historians may use the actual occurance of World War I (WWI) to highlight that the events before WWI can be used to predict WWI. This is a form of rear-view mirror theorizing as one looks for possible explanations for something that have happened, and one likely would dismiss randomness as one of its causes. (Research using bond prices indicates that the market did not expect WWI to happen.)
How does rear-view mirror theorizing relate to investing?
Upon stumbling on the idea of rear-view mirror (retrospective) theorizing, I find that I also fall into the rear-view mirror theorizing at times. For example, when Shanghai Asia run up to 27c -30c recently, I lamented that I should have seen the rise of Shanghai Asia occuring sooner or later. I should not have sold Shanghai Asia at 21.5c. But I later realize that at the time of sale, I would not have possible known that Shanghai Asia would run up 30-40% a month later.
Knowing the problem of rear-view mirror theorizing may help me to avoid blaming myself too hard in future when results show unexpected losses or omissions.
Rear-view mirror (retrospective) theorizing may also highlight the problem of linear thinking. That is, we may extrapolate past trends into the future and underestimating the uncertainty of the future. My example and past observations would tell me that due to the strong run-up in Sesdaq recently, people are getting very interested in penny stocks and expects more gains from penny stocks. I am thinking that these people may have fallen for the rear-view mirror (retrospective) theorizing trap. However, I also understand that the uncertainty of the future may prove me wrong and these people right if Sesdaq keeps on increasing.
In this case, awareness of rear-view mirror (retrospective) theorizing may only help one to be less confident in one's prediciton of the future and allow more margin of error. Hopefully, the additional margin of error may bring better results in the long run. However, it is difficult in practice that one will turn the awareness into some checking tool due to a few reasons. Possible reasons are recency bias, the herding tendency and the overconfidence tendency.
I would not be surprised if I fail to turn this awareness into a checking tool and remain as a over-confident investor (or more harshly, fool).
Thursday, July 19, 2007
Acheiving Competency in Investing (and maybe, trading)
How can one acheive competency in investing?
1) Read
2) Think
3) Practice
4) Repeat 1), 2) and 3) every week, every month, every quarter and every year
The above four steps, in my personal view, are the basic steps to acheive competence. This is also what I have been doing for the past few years to improve my investing skills.
While it is amazing how much I can learn by doing the four steps, I am amazed by the commitment one needs to do the four steps. You can always try out these steps and see if I am lying on the commitment required.
To get you started in step 1), I shall list down a few books that are important, regardless of whether one is an investor or a trader. Just ignore the titles and read them.
1) The Winning Investment Habits of Warren Buffett & George Soros by Mark Tier
http://marktier.com/Main/index.php
2) Trade Your Way To Financial Freedom by Van K. Tharp
3) Way of the Turtle by Chris Faith
http://www.wayoftheturtle.com/2007/03/22/the-four-maxims-of-trading/
4) Enhancing Trader Performance by Brett Steenbarger
http://www.brettsteenbarger.com/
Read the above books for the psychology of being a trader or investor. From my personal experience, the psychology is always the hardest part in investing. Unless you are lucky to have a brain suitable for investing, you will find that the other aspects of investing are not as important as the psychology.
1) Read
2) Think
3) Practice
4) Repeat 1), 2) and 3) every week, every month, every quarter and every year
The above four steps, in my personal view, are the basic steps to acheive competence. This is also what I have been doing for the past few years to improve my investing skills.
While it is amazing how much I can learn by doing the four steps, I am amazed by the commitment one needs to do the four steps. You can always try out these steps and see if I am lying on the commitment required.
To get you started in step 1), I shall list down a few books that are important, regardless of whether one is an investor or a trader. Just ignore the titles and read them.
1) The Winning Investment Habits of Warren Buffett & George Soros by Mark Tier
http://marktier.com/Main/index.php
2) Trade Your Way To Financial Freedom by Van K. Tharp
3) Way of the Turtle by Chris Faith
http://www.wayoftheturtle.com/2007/03/22/the-four-maxims-of-trading/
4) Enhancing Trader Performance by Brett Steenbarger
http://www.brettsteenbarger.com/
Read the above books for the psychology of being a trader or investor. From my personal experience, the psychology is always the hardest part in investing. Unless you are lucky to have a brain suitable for investing, you will find that the other aspects of investing are not as important as the psychology.
Wednesday, July 18, 2007
The Government giving a Black Swan?
The government has given us a black swan today. The markets falls cascadingly when the development charges increase from 50% to 70%. And the most badly hit was the Sesdaq.
It's a pity that there is no put warrants on Sesdaq, else I may have bought some yesterday. I was looking at STI warrants yesterday, but I did not buy.
Euphoria turns to pessimism. Contel drop back to my purchase price. I do hope it drop further, so I can bear to buy more. I also hope some of my targeted stocks drop, so I can also buy more.
While I am fully vested in the market now, I do have spare funds and borrowed funds left unused. I do use a little leverage which is less 15% of my funds. This leverage has been lying in the bank some months back as I cannot find many bargains since the last Feb/Mar drop. Probably the leverage can be put to use soon. Maybe I should see if I can get more leverage. I don't know.
In the more deeper June correction last year, I manage to find better bargains such as CG Tech at 26c or China Sky at 80c. Not sure if I can find better bargains this time. But bargains come at a cost. My portfolio declines my 25% during the last June correction. I did feel quite upset during last June drop.
I am re-reading The Black Swan this morning, hoping to instill a bit more pessimism in my market outlook. Surprisingly, the market or the government decides to join in to give me more pessimism too.
The Black Swan mentioned that we always don't learn that we do not learn. Probably that's quite correct given my euphoria and the market yesterday. The book also mentioned on human's fondness for retrospective thoughts, or looking at the rear-view mirror. Which is also interesting, as the rise in Sesdaq may be due to retrospective thoughts. And lastly, I read that we are poor predictors of the future.
Given this knowledge, I can only know that I dare not predict where the market may go next. But I being human, I can't help but predict that the market may go down some more.
Yet, I am feeling more happy than unhappiness now. Probably that's due to I not holding any Sesdaq stock or not holding any property stocks. A more certain reason may be that the market and my declining portfolio may not be most important. Another matters more to me.
It's a pity that there is no put warrants on Sesdaq, else I may have bought some yesterday. I was looking at STI warrants yesterday, but I did not buy.
Euphoria turns to pessimism. Contel drop back to my purchase price. I do hope it drop further, so I can bear to buy more. I also hope some of my targeted stocks drop, so I can also buy more.
While I am fully vested in the market now, I do have spare funds and borrowed funds left unused. I do use a little leverage which is less 15% of my funds. This leverage has been lying in the bank some months back as I cannot find many bargains since the last Feb/Mar drop. Probably the leverage can be put to use soon. Maybe I should see if I can get more leverage. I don't know.
In the more deeper June correction last year, I manage to find better bargains such as CG Tech at 26c or China Sky at 80c. Not sure if I can find better bargains this time. But bargains come at a cost. My portfolio declines my 25% during the last June correction. I did feel quite upset during last June drop.
I am re-reading The Black Swan this morning, hoping to instill a bit more pessimism in my market outlook. Surprisingly, the market or the government decides to join in to give me more pessimism too.
The Black Swan mentioned that we always don't learn that we do not learn. Probably that's quite correct given my euphoria and the market yesterday. The book also mentioned on human's fondness for retrospective thoughts, or looking at the rear-view mirror. Which is also interesting, as the rise in Sesdaq may be due to retrospective thoughts. And lastly, I read that we are poor predictors of the future.
Given this knowledge, I can only know that I dare not predict where the market may go next. But I being human, I can't help but predict that the market may go down some more.
Yet, I am feeling more happy than unhappiness now. Probably that's due to I not holding any Sesdaq stock or not holding any property stocks. A more certain reason may be that the market and my declining portfolio may not be most important. Another matters more to me.
Tuesday, July 17, 2007
Deja Vu Again
Today os a day where most stocks went up a lot. Today is the day where Sesdaq hits 300, giving a year-to-date return of 111.5%!
Today is perhaps a lucky day for me too where I just bought Contel at an average 0.242 and it has hit 0.275 in two days. My last purchase was at 0.285 today. Contel is a stock that I have missed out. I should have bought it earlier. It was an ommission mistake
Interestingly, I have also corrected a mistake by doing a one-day contra or selling what I had mistakenly bought yesterday. The mistake is due to faulty analysis.
But I think tomorrow or the morrows after that may be worse. The optimism is a bit too high, too high for my comfort. However, I suffer from over-confidence. I do not really want to sell, as the stocks I am holding are not near my valuation yet.
I do not know whether this is a bad move in not selling. However, I know that I am 100% in the stock market now. I am also underperforming Sesdaq by around 25%. Probably my returns will be better if I have invested in property or construction stocks. But I didn't except for the brief holding period in Orchard Parade. I do not really understand or value property plays.
I am probably a bit too conservative in trying not to buy what I cannot value. Not sure if I can change. So far, I have listed 3 mistakes and it seems that the bullish market is able to tolerate my mistakes.
Nonetheless, I am in a cognitive dissonance now. I am persimmistic about the market but I am optimistic about the stocks I am holding. I am not surprised at my over-confidence. Perhaps I should not be surprised at my failure to held back my over-confidence too. However, stocks and stock market are not the most important to me.
Another is more important but similar to the market, it is out of my hands.
Today is perhaps a lucky day for me too where I just bought Contel at an average 0.242 and it has hit 0.275 in two days. My last purchase was at 0.285 today. Contel is a stock that I have missed out. I should have bought it earlier. It was an ommission mistake
Interestingly, I have also corrected a mistake by doing a one-day contra or selling what I had mistakenly bought yesterday. The mistake is due to faulty analysis.
But I think tomorrow or the morrows after that may be worse. The optimism is a bit too high, too high for my comfort. However, I suffer from over-confidence. I do not really want to sell, as the stocks I am holding are not near my valuation yet.
I do not know whether this is a bad move in not selling. However, I know that I am 100% in the stock market now. I am also underperforming Sesdaq by around 25%. Probably my returns will be better if I have invested in property or construction stocks. But I didn't except for the brief holding period in Orchard Parade. I do not really understand or value property plays.
I am probably a bit too conservative in trying not to buy what I cannot value. Not sure if I can change. So far, I have listed 3 mistakes and it seems that the bullish market is able to tolerate my mistakes.
Nonetheless, I am in a cognitive dissonance now. I am persimmistic about the market but I am optimistic about the stocks I am holding. I am not surprised at my over-confidence. Perhaps I should not be surprised at my failure to held back my over-confidence too. However, stocks and stock market are not the most important to me.
Another is more important but similar to the market, it is out of my hands.
Sunday, July 8, 2007
A Regret and some trades
I shall post some of my recent trades here. However, first I will state a regret or maybe an error of mine.
Recently Shanghai Asia has rose to near $0.30. As I have posted sometime ago that I have sold Shanghai Asia and thus I have missed the run from low $0.2x to near $0.30. This is my error in not being able to be more patient.
My impatience or psychological weakness may have shone again as I sold Jardine Strategic when the STI drops around 50+ on a certain day. On the other hand, the sale was made as my strategy is to raise cash when market starts to fall. The cash raised will be handy to pick up bargains if market fall becomes a market correction. So far, Jardine Strategic has risen above my selling price. I am not certain whether I am willing to buy it back at the current price given my caution for high margin of safety. I would prefer to buy when it's at below $13.
Besides selling Jardine Strategic, I have also sold part of my Global Testing position. The sale of Global Testing position may be another potential mistake as semicon recovery may be in place now. Nonetheless, as I have retained part of my Global Testing position, I will continue to gain if Global Testing rise in future.
I have meanwhile used the receipts from the sale and some cash to buy China Lifestyle, C&G Industrial and SP Chem as the market recover slightly from the bearines (or STI 50+ drop).
However, I have kept some cash in reserve. While my portfolio is still underperforming Sesdaq (Sesdaq YTD is over 90%!), I am glad that one of my holdings, Techcomp, has risen to $0.65. My cost price for Techcomp is slightly less than $0.30. Despite the small sale by Techcomp director, I am still quite optimistic of Techcomp given its positioning in the scientific instrument industry.
Firstly, scientific instrument industry is less affected to recession. Secondly, Techcomp is introducing new products (new distribution contracts), having new capacity and developing new line of products (consumables). Thirdly, if Westcomb recent report of Techcomp's competitors is true, then Techcomp is in a sort of sweet spot as it may not face fierce local competition as it is in the mid-market segment and most local competitors are in low-range segment. Finally, my own valuation of Techcomp, based on Westcomb and Kim Eng's estimated earnings growth rates, would be just slightly lower than Westcomb TP of $0.97. Which means that Westcomb TP of $0.97 is still reasonable given its estimated earnings growth rates.
Recently Shanghai Asia has rose to near $0.30. As I have posted sometime ago that I have sold Shanghai Asia and thus I have missed the run from low $0.2x to near $0.30. This is my error in not being able to be more patient.
My impatience or psychological weakness may have shone again as I sold Jardine Strategic when the STI drops around 50+ on a certain day. On the other hand, the sale was made as my strategy is to raise cash when market starts to fall. The cash raised will be handy to pick up bargains if market fall becomes a market correction. So far, Jardine Strategic has risen above my selling price. I am not certain whether I am willing to buy it back at the current price given my caution for high margin of safety. I would prefer to buy when it's at below $13.
Besides selling Jardine Strategic, I have also sold part of my Global Testing position. The sale of Global Testing position may be another potential mistake as semicon recovery may be in place now. Nonetheless, as I have retained part of my Global Testing position, I will continue to gain if Global Testing rise in future.
I have meanwhile used the receipts from the sale and some cash to buy China Lifestyle, C&G Industrial and SP Chem as the market recover slightly from the bearines (or STI 50+ drop).
However, I have kept some cash in reserve. While my portfolio is still underperforming Sesdaq (Sesdaq YTD is over 90%!), I am glad that one of my holdings, Techcomp, has risen to $0.65. My cost price for Techcomp is slightly less than $0.30. Despite the small sale by Techcomp director, I am still quite optimistic of Techcomp given its positioning in the scientific instrument industry.
Firstly, scientific instrument industry is less affected to recession. Secondly, Techcomp is introducing new products (new distribution contracts), having new capacity and developing new line of products (consumables). Thirdly, if Westcomb recent report of Techcomp's competitors is true, then Techcomp is in a sort of sweet spot as it may not face fierce local competition as it is in the mid-market segment and most local competitors are in low-range segment. Finally, my own valuation of Techcomp, based on Westcomb and Kim Eng's estimated earnings growth rates, would be just slightly lower than Westcomb TP of $0.97. Which means that Westcomb TP of $0.97 is still reasonable given its estimated earnings growth rates.
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