Book Review: How The Wise Decide

How the Wise Decide is authored by Byrn Z and Aaron S.

It is an interesting book as it profiles the good CEOs on how decision are made. Nevertheless, the book commit a common scientific error: the lack of control group.

Interesting points:

1) Go to the source. Check with the source of the raw information before making the decision.

- Make this approach routine.

- Cultivate long-lasting contacts with the sources

- Know which source is more important, and which source is less important

2) Meet people who tend to disagree or tend to state their independent stand.

- Get all people to say their viewpoint at least once.

- People may quarrel over their viewpoints. Do not allow people to carry any bad feelings beyond the meeting.

- Seek differing opinions. Different opinions help to light up the blind spots.

- Ask for formal commitment to the decision, if you think that the person is likely to disagree with the decision silently.

3) Do not be afraid of the risk behind the decision.

- Check thoroughly what is the risk.

- Reward people who have taken the intelligent risk.

- Experiment the risky idea (i.e. setting up a small scale operation to test the idea)

- Create a risk-tolerant culture.

4) Align the decision with the vision

- Create the correct vision

5) Listen with Purpose

- Ask the correct questions

- Question the assumptions

- Listen to the people who have to carry out the decision

6) Be Transparent

- Be consistent

- Over-emphasize the important decisions, so that people will place it on higher order and implement it.

- Do postmortems on the decisions taken.

Book Review : How We Decide

How We Decide is written by Jonah Lehrer, an editor/writer.

It is a good book, especially for people who wish to learn how to make better decisions.

I will attempt to list some interesting points that I read from the book. Read the book if you wish to make better decisions.

Some interesting points:

1) We have two parallel brains: the emotional brain and the rational brain.

2) The emotional brain makes decisions very fast but its accuracy depends on experience. Situations that require fast decisions would need the emotional brain. Emotional brain is better than rational brain for repetitive situations, as emotional brain recognizes patterns faster than the rational brain.

3) The rational brain is useful in new situations or situations where time is not a factor.

4) Also, always run a rational check on emotional decisions if time permits. This will help to reduce errors.

5) To make the decisions more accurate, one has to spend time to evaluate the decisions, aka spot mistakes in previous decisions.

6) Don't forget that we have blind spots.

7) It will be good to list down the knowns and the unknowns before coming to the decision.

8) Whenever you make a decision, be aware of the type of decision you are making and the kind of thought process it requires.

Secret to Investing Success!?

It's interesting to see a thread on secrets to investing success in Next Insight. And in that thread, you'll see people advocating value investing, quoting Buffet, asking for high dividend stocks etc.

It's interesting because I disagree.

I disagree because I feel that there is no one secret to investing success.

I think that each starting investor has to find their own path, and that path will be their own secret to investment success.

First, the investor should find the suitable investment philosophy i.e. whether technical or fundamentals, short-term or long-term, diversified or concentrated etc. A suitable investment philosophy should fit his own psychological traits.

Next, the investor has to consistently refine or expand his strategy. For a value investor, it may be starting with low P/E stocks and then moving to low P/B stocks. Or starting with quantitative ratios and moving on to qualitative measures.

In between, the investor also has to learn his own psychological traits, and either change the investment methods to fit his psyche or change his psyche to fit the investment methods. Personally, I think the former is easier, since Jesse Livermore chose the latter and died a pauper.

And when does an investor know that this investing philosophy is suitable? When the investor feels that he needs not search for another philosophy.

And when does an investor know that this investing strategy is right for him? Through his experiences and investing results over a full market cycle.

And what is one essential trait that most successful investors share? Obsession. He must be, to some extent, obsessed about investing. I do not mean about being crazy about the money. I mean being crazy about the philosophy, the strategy. For example, if you read Buffett's biography, when Buffett and Gates meet each other, you will know that they will talk about what makes a successful business. They do not talk about money.

For more information on finding an investing path, you may find Mark Tier's book "The Winning Investment Habits of Warren Buffett & George Soros" extremely useful.

And what if one does not wish to pay the price to become a successful investor. There are a few alternatives here. One, buy index funds or exchange-traded fund on stock indices. Two, find a good financial advisor. Three, earn very high pay.

Ex-post answers

Here, I shall provide answers to two issues I have raised two years ago.

First, in my Dec 2007 book review, I have asked given the similarity of subprime crisis to the 1907 bank crisis, would the subprime crisis lead to liquidity crisis?

The answer, as we all know, is yes. And to add, I do not know the answer at Dec 2007, and I did not expect that the subprime crisis will lead to a global economic contraction.

I suppose that the lesson here is that one should not be fully invested if one is suspecting an incoming crisis.

Next, in my Mar 2008 post, I have mentioned about investing the first 20K of CPFOA in 3 possible stocks: Orchard Parade, Singapore Land and Hotel Grand Central

And, I have done what I have written at that time. I have bought Orchard Parade at around $1.05 using CPFOA funds. Well, if you look at the price Orchard Parade on Friday, you can derive my returns (around 13%).

This return is higher than CPFOA two years' return. However, on hindsight, I have invested at the worst possible time, such that I have to endured a capital loss of 50% during this two years. (This incident is an example of higher returns in exchange for higher risks)

Even though I have to suffer the temporary capital loss of 50%, I always felt that I will beat CPFOA returns in the long run (i.e. 5-10 years). To me, as I have bought Orchard Parade at 0.5 P/B, my margin of safety was a pretty high margin of around 50%, assuming that fair value was at 1x book.

While it may be debatable whether my investment in Orchard Parade in 2008 is correct in process, I believe that I am likely to make the same investment if the same circumstances happen in future.

This is because I do not know the future (or whether there will be a severe stock market contraction), and given the margin of safety, this investment is most likely to beat CPFOA in 5 - 10 years' time.

PS This post is written for personal preference only.

Portfolio as at end Dec 2009

This is a post on my portfolio holdings as at end Dec 2009.

My portfolio, as at end Dec 2009, contains the following stocks:

Broadway
Fabchem
Fujian Zhenyun (FZ) Plastics
Guocoleisure
Metro
Techcomp
Tuan Sing
UOA

Sold: China Eratat, Valutronics, UOA (sell a little proportion of my total holdings)

China Eratat is sold to realise the declining profit, as price is falling from a mini-peak. In addition, China Eratat is bought as a short-term play in the first place.

Valutronics and UOA are sold to raise cash so as to buy other stocks.

Bought and sold: Hongfok

Bought Hong Fok. After some evaluation, I sold Hong Fok to raise cash for other stock (i.e. Tuan Sing and Broadway)

Bought: Tuan Sing, Broadway, Guocoleisure, Techcomp, Metro

Tuan Sing is bought at a P/NTA of around 0.5, with the additional consideration that its debt will be significantly reduced after its Katong mall sale.

Broadway is bought at slightly lower price when I sold it earlier. Broadway is cheap at 4.x PER and it is in a near-oligopoly industry. There isn't many HDD makers (e.g. Seagate, Hitachi etc) left. Broadway owns Compart which is a big supplier of HDD parts. Hence, this may be a low-risk stock with some upside. The upside, however, is capped if Broadway is unable to increase earnings significantly in 2010/11.

Guocoleisure is bought at slightly lower price when I sold it earlier. I just buy back a tiny proportion of what I own earlier, so as to diversify risk. In addition, I think that Guocoleisure is another low risk stock (with low price-book ratio) that has capped upside.

Bought more of Techcomp. This purchase increase my stake in the bet that Techcomp will recover from the 2008's falling yen incident, and that 2009 2H will be much better than 2007 2H. It is a risky and potentially more rewarding idea.

Bought more of Meto. Metro is another low risk stock (with low price-book ratio) with capped upside.

Returns. Using Excel's IRR (internal rate of return), my average annual returns is 20.5% from 2005-9. The real return should be somewhat higher, as IRR assumes that I puts into the new cash in my portfolio on 1 Jan every year and this is not the case.

IRR also does not display the volatility of portfolio returns. My returns are very volatile:
2007: +46%
2008: -70%
2009: +147%

Nonetheless, my portfolio returns seems to be better than STI. This means that I should probablly continue to practice self-investing (a self-flattering statement).

My returns for 2010 is likely to be lower. And hopefully my future portfolio returns will be much less volatile.

Portfolio as at end Sept 2009

This is a post on my portfolio holdings as at end Sept 2009.From Jun - Sep 2009, there have been many changes. My portfolio, as at end Sept 2009, contains the following stocks:
China Eratat
Fabchem
Fujian Zhenyun (FZ) Plastics
Metro
Techcomp
UOA
Valutronics

Sold: Adampak, China Sunsine, China Ziano, Etika, First Reit, Guthrie, Hong Fok, Jardine Strategic and Valutronics.

Etika was sold during the early July downturn as I wish to remove this non-core position during a downturn.

China Sunsine, First Reit, Guthrie, Hongfok, Jardine Strategic and Valutronics are sold to raise cash to buy other ‘better-valued’ (IMHO at that time) stocks.

Adampak is sold to take profit and raise cash for other stocks. China Ziano is sold due to the possibility of weaker fundamentals, as its competitors have slashed prices more aggressively than previously assumed.

Bought: China Eratat, Fabchem, Metro, Techcomp and UOA.
China Eratat is bought on the basis of its very low valuation i.e. around 2 PER. However, I did not buy many lots here as I am wary of its negative cashflow then.

Fabchem is added as a proxy play for mining. Metro is added as it is trading at 0.5 P/B and as a proxy play for China properties.

Techcomp is added due to the possibility of growing sales to other countries in the long run. It is also a possible play on developing countries’ demand for better laboratory equipment due to increasing awareness of health threats from avian flu etc.

UOA is added as an ‘undervalued’ property play. However, I am not very certain presently if my original buy basis on UOA is correct.

Bought and sold: Broadway, Guocoleisure, Kingboard

Broadway is bought as a play on technology recovery. It is later sold to take profit.

I have bought Guocoleisure heavily as it is both undervalued and safe (since it is owned by the Hong Leong/Guoco group). It is later sold to take profit too.

Kingboard is a contra trade, as I feel that my initial buy basis is not sufficiently strong.

During the quarter, I am very active. My portfolio turnover may have exceeded 100%, which may be due to the market bullishness in this quarter.

Presently, the market has become less undervalued. Putting it in another way, the equity-aversion premium has more or less depleted.

Hence, I have adopted a longer horizon in my stock selection. I expect that my latest added stocks above will require longer germination time before they are able reach my target prices. And, due to the longer germination time, I guess that my portfolio turnover rate will decline as portfolio holding period increases.

As for my portfolio returns, it has safely out-distanced the STI returns this year due to the good returns on both the First Reit position and Guocoleisure position.

Belated Portfolio Update

This will be a post on my portfolio holdings as at 30 Jun 2009.

From Mar - Jun 2009, there have been quite a number of changes. My portfolio, as at 30 Jun 2009, contains the following stocks:
Adampak
China Sunsine
China Ziano
Etika (small stake)
First Reit
Fujian Zhenyun (FZ)
Guthrie
Hong Fok
Jardine Strategic (JSH)
Valutronics

Sold: Sihuan, Pfood and Man Wah.

Sihuan and Man were sold because I found better opportunities. Pfood was sold as their Q1 results were abysmal.

Added: Adampak, China Sunsine, Etika, Hong Fok, JSH and Valutronics

Added Adampak and Valutronics as plays on technology recovery. Added China Sunsine as plays on automotive recovery. Insiders' purchase also play a factor in my buy decision here. Etika is a trading buy and it was disposed soon in the Jul downturn. Hong Fok and Guthrie are bought as property plays due to their low P/B value. JSH is bought as a sort of placeholder (temporary place for excess cash) and also due to its low P/NAV.

Trade: First Ship (FSL)
Bought and sold First Ship. This is just a trading purchase (based on technicals).

During the quarter, I have been experimenting with some TA. However, I am apparently a poor TA practicioner. Hence, I guess I will only use TA as a tool to sell my short-term plays.

Readers should not follow my buys here, as my turnover rate is very high during the last 2 quarters. My high turnover rate may be partly due to my internal philosophy of always trying to search and buy more under-valued stocks; and partly due to my guess that there may be a recovery in technology stocks. This guess occurs in end-June, as a result of some reading from newspapers, websites and analysts' reports.