Saturday, 1 June 2013

The Biggest Mistake An Investor Can Make

This is the worst mistake you're probably making -- and here's how to fix it.

You're probably making the worst mistake an investor can make. I know I am. And after the bull run we've been enjoying, that mistake probably got a lot worse.

The French author André Maurois once said: "Everything that is in agreement with our personal desires seems true. Everything that is not puts us into a rage."

That's the mistake. "Rage" may be far too strong a word for most of us. But you'll see plenty rage around the investment discussion forums on the web -- particularly when someone presents a sensible bear case for an individual stock.

Maurois also said: "We appreciate frankness from those who like us. Frankness from others is called insolence." And therein lies the key to overcoming this mistake.

One big mistake -- lots of names
The mistake is in deciding that an investment is great for whatever reasons, then closing oneself off to alternative viewpoints. Some call it "falling in love" with a share, whilst the behavioural economists refer to it as confirmation bias; is the tendency of people to favour information that confirms their beliefs or hypotheses.

It's closely related to other ways to lose money on shares such as anchoring, overconfidence and availability bias (the tendency to give undue weight to more prominent facts).

I'd say it's also related to what Peter Lynch describes as the greatest single fallacy of investing; the feeling of being "right" when your shares have risen.

"If I had to choose a great single fallacy of investing, it's believing that when a stock's price goes up, then you've made a good investment," says Lynch.

In short, we really want to be right -- and we really don't give fair weight to the opposing viewpoints. And if anyone but a friend presents the opposing viewpoint to us, we don't like it one bit. It's an innate part of our psychology. But it's still a mistake.

How to beat it
So how do you overcome it?

Undoubtedly the most difficult thing is to set aside one's emotions. This is easy to say but harder to do. But if we can gather facts in an impartial and objective way, and weigh them well; then it has to be a good thing for investing.

There are a few useful tactics you can use to achieve this:
* One is to pretend you're collecting the bullish and bearish points to present to other people to let them decide for themselves in a balanced way.

* Another is to explain to a true friend who understands a little about the market why you think as you do -- and to let him/her punch a few holes in your case.

* A third way is to try to present only the opposite side of the case -- as would a barrister, for example, in trying to paint an opposing picture. It's surprising how often this one cools your ardour.

* And finally -- do try the discussion boards with your reasoned analysis, but promise you'll be without "rage" whatever flak your ideas attract.

Do something
But eventually there comes a time to act. When you've done all the analysis you can, and weighed the pros and cons; then act on your information. Dither no longer. Either buy, sell, or walk away without regret whatever happens next.

You decided what you decided in the best and most objective way you could with as much factual information at your disposal as you could muster. That's it. Que sera, sera. There's a time to act and not to look back.

If you're proven to have been right -- great. But judge your decisions on a reasonable timescale and don't be fooled into thinking you were right by virtue of macro market direction alone.

Short-term fluctuations mean nothing. If you were wrong and are looking at the same investment again down the line -- then it's a new day.

What was done, was done. So the process needs to be repeated in light of new evidence or at least a revised valuation.

By David Holding

Quote for the day

"Confidence equals security equals positive emotion equals better performance," - Tony Schwartz

Market loses steam owing to profit booking....

The week concluded on a negative note with the All Share Index shedding 25.8 points WoW to close at 6,463.1 points (-0.4%), whilst the S&P SL 20 Index shed 19.7 points WoW to close at 3,646.3 points (-0.5%). Indices lost mainly on the back of the losses made in John Keells holdings (-3% WoW), Sri Lanka Telecom (-2.9% WoW), Nestle Lanka (-1.9% WoW), Aitken Spence (-3.2% WoW) and Dialog Axiata (-2.1% WoW).

Colombo Bourse fluctuated on a narrow range whilst the daily turnover levels were predominantly dominated by few notable transactions. During the week profit booking was evident which diminished the exorbitant price gains witnessed over the past week. Furthermore, week witnessed the release of 4QFY13 earnings of several blue chip companies where most conglomerates posted mixed results in their cumulative FY13 earnings on the back of the macroeconomic shocks witnessed in the country. 

The week also marked a change in ownership in JL Morrison Sons & Jones when Hemas Holdings acquired a controlling stake. As per CSE disclosure, approx 4.1mn voting shares of JL Morrison that represents 71.51% of voting shares and approximately 872K of nonvoting shares which represents 50.06%, was directly purchased by Hemas Manufacturing (Pvt) Ltd which is a fully owned subsidiary of Hemas Holdings PLC. 

Subsequent to the aforementioned deal JL Morrison Sons & Jones spearheaded the weekly turnover contributing a circa 64%. John Keells Holdings also emerged amongst the top turnover list backed primarily by institutional and retail participation. As a result of the above strategic deal on JL Morrisons, the Chemicals and Pharmaceuticals sector made the highest contribution of circa 34% to the week’s turnover tally, followed by the Banking, Finance & Insurance sector with a 16% contribution supported mainly by heavy buying witnessed in Nations Lanka Finance and its Warrant 21. 

During the week crossings were also recorded in counters such as Carsons Cumberbatch, National Development Bank, Asiri Hospitals Holdings and Lanka Floor Tiles. As a result of these transactions, the week posted an average turnover of circa LKR 1.1bn and an average share volume of 40.1mn. 

Furthermore, Nations Lanka Finance, Nations Lanka Finance (Warrant 21), Panasian Power, Environmental Resources Investments and Blue Diamonds topped the list in terms of volume traded during the week. The week saw foreign purchases amounting to LKR 1,067.4 mn whilst foreign sales amounted to LKR 493.7 mn. Market capitalisation stood at LKR 2,478.8 bn, with an YTD performance of 14.5%.


Launch of the 30-year bond is likely to ease treasury yields in the long run.

Both indices showed signs of consolidation during the week while strong retail participation continued to drive the All Share Index and activity levels of the Colombo Bourse. The first 30 year bond worth LKR 2.0bn issued by Sri Lanka was oversubscribed over three times settling at a cut off annual yield of 12.5%. This indicates a general flow of savings towards government debt market from private investments, a trend that was apparent in financial markets from towards the end of 2012. On the flip side however, the launch of the 30-year debt instrument will expand the scope of government securities market and more importantly will provide added fiscal space to continue its growth agenda led by infrastructure spending, amidst moderating state revenue growth in the face of contraction in economy’s external trade. 

Furthermore, Central Bank’s target of achieving 3.5 – 4 years range in average time to maturity of domestic currency debt by 2016 from the current figure of approximately 2.4 years will be assisted by the launch of the 30-year bond. Hence, we are of the view that the long-term outlook on government bond rates would turn favourable given that government’s cash outflows in the form of capital repayments would be significantly delayed through the introduction of the 30-yearbond. This would assist to limit government’s borrowing requirements to refinance debt repayments. 

Given the fact that a strong negative correlation exists between the ASI and treasury yields, we are of the view that the launch of the new debt instrument would prove favourable towards equity trade in the long run.
Source: Asia Wealth Research