Sunday, July 26, 2015

The Temptation To Invest Without Research‏ing

A few months ago, I divested my position in one of the counters I used to be vested in - Sembcorp Industries (Link Here). Back then, I remember receiving a few criticism coming in from a few readers. 

One of the criticism which I remember vividly was from a reader that commented I was doing plenty of research, analysis and valuation runs on the company, but only to end up in a loss upon the divestment at the end of the day. On the other hand, the reader commented that he did not have to do much research on the company but yet was making a profit. He questioned the need to undergo such a detailed process when investing doesn't seem difficult to him.

I digested his words and compiled a few learning points from the incident. 

The thing about doing homework on companies before you invest is this. I do not mind doing a lot of homework and analysis on companies and still made a loss at the end of the day. From my view, I will know that I have learnt something from my mistakes and probably there are many more instances like this in my investing journey. After all, we are all vulnerable to making mistakes in our lives.

I replied to the reader that I am happy because he has made a profit but I am more worried for him because he has not done his homework but yet made a profit out of it. I hope he understands what I was trying to say.




Temptation To Invest Without Research

Investing is a tricky and risky thing to begin with. 

You would not necessarily ended up going into profits immediately, even if you are already putting so much effort in researching the companies. There are the other market forces you have to contend with, for instance recession cycle – things like this that are out of our control. 

On the opposite end, you can make profits just by randomly picking the stocks that you think would outperform, but you will never know if it is attributable to luck or skills at the end of the day. The question to ask is if you are making sustainable profit calls in the long run. If the answer is a resounding yes, then by all means go ahead with your strategy.

Since it appears that the outcome comes across as multi-dimension matrix, many investors chose the easy way and go for the short cut by investing without preparing sufficiently in trying to understand the company better. There are also other investors who have “done” their homework by reading multiple brokerage analyst’ reports and/or blogger’s opinions. No strategy is wrong of course, until hindsight proves otherwise. 

Temptation To Invest Before Research

This is a trickier one to be honest. 

Some investors tried to invest before researching sufficiently on the companies. The key word to look out here is before. By the time they are vested, they would then spent their time looking for positive news surrounding the companies that made them believe they have made the right decision. This is called confirmation bias. Confirmation bias is harmful because your brain is wired only to take in positive information, and filter out everything that might come across as negative.

It’s actually pretty difficult to set this straight in our brains because I remember making the same fallacy of errors when I started my investing many years ago. I think this is a pretty common fallacy committed by many investors because as human beings, it is only natural that we see what we wanted to see and it is made even harder through the widespread coverage of the media which is deemed as noise and are often no much use to any investing decision made.


Final Thoughts

Investing is easy but successful investing takes a lot more effort than that.

Often, it requires many than simply the first level of screening, and even more so, it requires a lot of disciplinary strategies such as proper asset allocation and emotional investing. For many, it can take a heavy toll on the health and family relationship when things doesn't work out properly.

For investors who are not prepared to do spend too much time monitoring the market or picking individual stocks, but would like to participate, they can do so by investing in an ETF index fund which has proven to be much simpler and outperforming many other average investors. At the end of the day, what are we looking for when we are investing? What are our objective of investing? Isn't not losing money our main objective or are we looking for more beyond that?

What are your thoughts on this? Let me know.



25 comments:

  1. Hi B

    This could be one of your top post i have read. It is thought provoking. It is always good to know what we are investing. We spent our precious hours accumulating cash is not to be gambled. I know some enjoy gambling.

    My thoughts have always been that stock investment is only 1 method to build wealth, out of a few. It is a great tool but it is not the only.

    However, you have done well and stay focus with your direction. You will continue to do well.

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    1. Hi Frugal Daddy

      Many thanks for your kind words.

      You are right. Stock investment is merely a tool to make money work harder. There are other ways that are feasible and some people have the competitive advantage to use them to their advantage. In that case, the stock market will not be the only holy grail for them.

      Let's keep interacting in our personal chat group and hope we'll come out better than yesterday for all of us :)

      Delete
  2. Hi B,

    Knowing the company before investing is critical.

    Knowing the business and industry and who are the people leading the business is even more critical.

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    1. Hi Rolf

      I've always wanted to learn from you more about the o&g industry. I think there's no one in the local blogosphere who are more familiar with the industry than yourself so that would be an extremely important asset for you :)

      Delete
  3. Hi B,

    First of all, apologies for not commenting as often as I should. Have this bad habit of only commenting when I am using the laptop although alot of reading is done on the phone.

    I have to agree with Frugal Daddy that this has to be one of your best posts ever. Investing without doing any homework is tempting. Even for me.

    Especially with regards to following financial bloggers like Kyith, AK and you. Although I do think that it does take some intelligence and wisdom to decide "who and what" to follow, not doing any due diligence is "very dangerous".

    I will not be surprised to know that there are some people out there who just follows bloggers' picks. Imagine what would happen when these bloggers disappear (not saying they will). If they know close to nothing about the company, would they proceed to sell all their stocks the next day?

    Isn't that a scary position to be in?

    ReplyDelete
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    1. Hi 15hww

      Glad to have you here :) No worries about the commenting as I know we've been interacting much in our personal chatgroup.

      The tempting is very much true and realistic and it goes beyond just analyzing stock investment. For example, I have leeched on much information regarding the ocbc 360 from your blog and the related bonds queries from LP. Since these information is available publicly, we still need to make the intelligent choice whether to action them or not at the end of the day. Like you said, copying blindly will be fatal when things go sour and the investor does not know when to get out.

      I have also previously discussed this issue witg musicwhiz which I thought was interesting to share. Assuming a beginner investor comes into the scene, not knowing much about the ratio or the numbers, wouldn't it be more sensible to "follow" bloggers like musicwhiz or kyith who have done their homework and made sensible buy calls on the stock. If he were to make his own analysis, it probably wont be as precise anyway.

      It's a two way really and both have its pros and cons.

      Delete
  4. Hi B,

    Actually there are many times where I disagree on certain stock picks that bloggers /& analysts like but to me i read for information and I keep my opinions to myself. It is indeed tempting to follow somebody's pick but so far I've not gone down that slippery slope and no intentions in the future to do so.

    ReplyDelete
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    1. Hi Joyce

      That's a great attitude that many investors should learn from you. Indeed, they are at times tempting to follow because of the herding mentality but sometimes it takes a brave soul to burst through the fire alone.

      Delete
  5. We know who are long ONLY and successful investment bloggers; keep a large war chest and leverage on them. We just need to have more patience and discipline to buy a few cents lower than them. Over long run; we are likely to be on par or better. LOL!

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    1. Hi Uncle CW

      Haha that can be done if one keeps a disciplined attitude to follow the bloggers call every time. But what if the bloggers sell and he didnt blog about it? :)

      Delete
  6. Hi B,

    My thoughts on this matter is:

    1) if someone did no homework but has a reliable and capable "manager" that he trusted, that works. Key word is "trust" and "capable"

    2) if he do no research and rely only in his ritual ways, in the longer run, there is bound to be more pain than gain.

    3) while it is true that no research and no "mountain" means no chance for long term gains, research might not lead to gain at all.

    All bloggers have some "research skills", but we will not whether we do well a not except when it does fulfilled our goals. Luck play an important part and research hones the Mind. The actual buying and selling in the thick of action toughen the heart. Then we have the lifestyle that allows to have the necessary "M" for money.

    In my opinon, u just need 2 of the three to do very well.

    if u have 3 out of 3 well...

    ReplyDelete
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    1. Hi SI

      Thanks for your views.

      No. 1 looks to me like employing a fund manager to handle unit trusts :D In fact, I think that's what they are doing. Relying on bloggers can't be a long term solution because bloggers don't update their buy/sell on a live basis. So I think one can follow blogger's pick but still ended up going under than the bloggers himself.

      I'd fully agree with no. 2 and 3. I just think that the ubiquity of the media and market these days tempt investors to quickly invest before thinking. The latter can be fatal.

      Delete
  7. Think most do some research e.g. research on others' research. :-)

    ReplyDelete
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    1. Research on other's research. Good idea!!! New innovative

      Delete
  8. Hi B,

    I think researching before investing in a good practise. However, it does not guarantee making a profit, as many of us have realised. Hence, the viewpoint that he managed to make a profit without doing research goes against the good practise. Nevertheless, researching is good as we should do as much as we can to balance the odds in our favour before investing.

    In the end, the stock market is a weighing machine (and that should be kept in mind)

    ReplyDelete
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    1. Hi Kenneth

      Indeed, researching before investing is a good practice. Investing before researching is a bad habit. At the end of the day, investors can get all the luck they have, but the long run is a weighing machine and that will come back to haunt the investor.

      Delete
  9. Hi B,

    While we still may lose money even if we did extensive research on the company I think that it's the process that counts, we just have to slowly refine this process so that we'll be able to improve our judgement in the future. Usually companies that have been able to withstand our research would be good value, just need to wait for the market to appraise it as such, as Kenneth mentioned "the stock market is a weighing machine".

    From,
    Just Some Thoughts

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    1. Hi Just Some Thoughts

      You are right. The habit and attitude counts for a lot there. Over time, investors are able to refine their researching philosophy and methodology and improves over time. For people who are just punting, they probably will repeat the mistakes over and over again after some time.

      Delete
  10. Hi B, nice blog, It seemed you were talking about me as your friend who has more profit without doing any research.

    I am new into investing & have bought a few stocks on gut feel. i did not do much research about them but i just did a superficial search about the financials of the company , liked the service & way they treated there customers & made decision based on that. Most of those decisions turned out well.
    now I have started to do a bit of research but I find that makes me a bit apprehensive about the decisions I want to take & stocks I want to buy.

    I still get a gut feel about a stock but my mind cannot take a decision.

    Over time I hope to fine tune my compass to direct me to the proper direction.

    ReplyDelete
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    1. Hi GP Blogger

      Since you are new to investing, you'll get better at them as long as the right attitude towards long term investing is there. There's a tons to learn even from my side so it's never going to finish.

      Delete
  11. Hi B,

    It's definitely a big temptation to invest without doing the research up-front, especially if you get excited by a potential new stock investment. Then you're in real trouble after that because that confirmation bias is so powerful, you're unlikely to ever admit you made a mistake!

    If you don't want to do the research, then an ETF or index fund is the best way to go for sure. The other big objective for me is 'sleeping well' at night and removing as much stress as possible, which you can do with a simple plan to invest in index funds, or with a rock-solid investment plan and discipline.

    Cheers,

    Jason

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    1. Hi Jason

      Yea, in a bull market, everyone gets away without doing proper researching and they get complacent when rough patch comes. The key is in the entry price and ensuring the business model is sound. But going into the 6th year bull run, we see less investors doing more of that these days.

      Delete
  12. You mentioned u have done research on SCI before investing but I don't understand since u had done your homework on SCI,why do you divest SCI so hastily ?unless your objective is to make a quick profits out of SCI .The blogger who mentioned to u is most likely a trader .

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    1. Hi Dividend Town

      You don't understand it's probably because you did not read my write up on SCI. I'd suggest you read up on them first before commenting on it. Business and industry fundamentals change and they are something which not even the management is able to predict about it. When these factors have changed, the thesis for investing will also change.

      Delete
  13. Hi B

    Currently I still have 3000 shares of SCI at 4.20. The price has been going south this week.I am holding this shares for a long term investment, but seeing the shares keep dropping make me fear if I am making the right choice of holding it. Do you think that I should sell it away or continue to hold on this stock for the next 3 years till it recover in the market. Understand that you have sell away your SCI shares for a profit before the market turn bad for sembcorp.

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