Thursday, May 08, 2008

My Investment Journey So Far

I haven't traded in the stock market in the last couple of years - the last time I checked, my trade history was probably about 3 years ago, which only amounted to just about 4-5 transactions.

To tell you the truth, I started investing without knowing much about anything at all, and had a lot of apprehension to the idea of putting money into the stock market, given that I had neither any prior experience, nor knowing anybody who could help me with learning how to invest in the stock market.

And what complicates matters, it is an area that I wasn't going to get much familial support from - mom had taught me the virtue of being sensible and frugal with money, but she has regarded the stock market as nothing more than just a big glorified casino, and would had probably balked at the idea of me throwing money into buying stocks.

Anyhow, since I was quite intent on taking control of my own financial matters, I was rather tight-lipped on what I was doing, and saving off a portion of my salary even though it would have been more tempting to spend it, and learning about whatever I can about stock investing from books and off the Internet.

The investment world to me then, was still an enigma. Names like Benjamin Graham, Buffett, and Munger were relatively new to me, but for all that they had been saying, I had distilled it down to a single rule to follow - 'buy good companies, at a good price'. But I didn't know what 'a good price' was, and certainly did not understand much to know what to look for.

At that time, P/E, Beta, Black-Scholes or various esoteric methodologies were just funny sounding words that were totally alien to me. Even though I have better conceptual understanding of certain financial indicators now, things like the Black-Scholes model still remains just a financial buzzword - till today, I still am clueless to what its significance is.

The only homework I did, was to understand what business the company was in, looked at their financial reports to find out if they were or going to be profitable, did a bit of comparison among their peers to see how they fared, and decided if the sector would do well on the whole based on the social-economic factors that would influence the business the company was in. The last point was probably my strongest and my only saving grace, given that I have an avid interest in keeping up with current affairs. There wasn't really any fixed form or methodology in the way I picked my stock. I guess the only thing I was really looking for was that I was comfortable that the company was having a productive business that I understood.

So far, my hazy, hodgepodge methodology hasn't been too bad - one stock has grown into a two-bagger, and another, from relative obscurity into a mid-cap company that's now in the ASX200. Given that my investment capital was from my hard earned savings from my initial few years of employment, it has been a bit of a personal vindication.

But I should still thank my lucky stars, given that 'Mr. Market' had been rather merciful in the last few years, without going into too many schizophrenic bouts volatility we've been seeing since the tail end of 2007. I am probably quite risk-adverse by nature, and if the market had been as tumultuous as it currently is, the volatility itself might have just made my stomach turn enough to put me off from investing altogether.

Well, at least now I can somewhat justify myself as being an investor, rather than a speculator after 3 years years of holding onto my stocks, and watching them grow. And I'll likely to continue holding them unless I really needed the money, or when the sentiment of the company's prospect changes.

These days, the financial markets have caught my interest once again, mostly for the second reason of the rule - 'good price'. The markets have been battered quite badly, especially the financial sector, from credit crunch that the US sub-prime crisis has caused.

Admittedly, even with the downward-spiralling market sentiment, 'good price' may still not be 'good enough' yet, as I'm mindful of the words of Buffett, Soros, and the various problems caused by rising oil prices, its ripple down effects on inflation, interest rates and the economy in general, the effects from the largest reset of sub-prime loans in the US and the ramping down of China's economic activity from the Olympics that are set to occur simultaneously post-August. To it all, we may have yet to encounter the next 'perfect storm' that's brewing ahead.

I can only hope that my foresight is 'right enough', given it is tempting to start accumulating 'bargains' during this period of negative market sentiment. I can't be certain if I am able to avoid stomach churning volatility that may be ahead, and that the good run I had for the last few years will continue, given that it is not the typical of the maniac-depressive behaviour that I've often read about stock markets. Hope I'll have the conviction to hold it on if things do get rough and not lose my pants in the process!


Widge said...

You might want to look at USG that is around $36 at the moment. Warren Buffet bought some more last year between $40 and $45 so you get a discount. Of course since it is a commodity business, no more than 1% of your portfolio (Berkshire holding: 0.89%)

Vincent Liu said...

Thanks for the tip, and while it is interesting to know that Mr. Buffett has invested in the company, I'm more interested to know his rationale behind his purchase - it is the wisdom he possesses that makes it more valuable that the choices he's made.

If there is a cardinal rule that I follow, it is that I do not buy stocks based on tips, and for a good reason - the tipster gets no share of the credit, but will certainly get my vitriol if it doesn't! If I choose my stock instead, there's nobody to blame but myself - which is a good thing, I'm
sure you don't want flying chairs to be hurling at you!

Manufacturing and distribution of building materials is certainly something that I have little knowledge about, and I'm not sure how essential USG's materials contribute to the construction industry - generally, I do not invest in what I don't understand [that's one of Buffett's rule].

But what I do know, is that I'm in the opinion the housing crisis is anything but over, and the systemic excesses caused by years of unrestrained spending from low interest rates and cheap credit has caused a huge bubble in housing prices, and while the economy may have averted a depression style disaster from US Federal Reserve's actions, it's almost a certainly that the housing prices need to take time to unwind - and that will certainly affect the construction industry on the whole.

Also, the US is heavily in debt, and still accumulating it - its trade deficit has been growing for years, and the rapid reduction in interest rates has certainly weakened the US dollar immensely. Given that I don't receive paychecks paid out in USD, there are more currency exchange risks that I'm having by investing into a currency that's more likely to see further weakening than not [Even Gisele Bundchen know's that!].

America really need to show more fiscal prudence, which hopefully what the next president will do when he (not a typo - yes he!) gets into the White House!

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