INVESTMENT IDEA BOARD

The main function of this INVESTMENT IDEA BOARD is to sharing investment idea and investment information among investors in order to become a better investor. Here are some strategies and concepts that have been repeated used by smart investor to achieve their financial goals. If you are new investor, hopefully it will assist you expose in investment world. If you are existing investor, hopefully this board information can complete your existing investment strategies. The aim is to help you reach your financial goals so you can achieve financial abundance all while having fun.  Reader can post any comment or feedback to this board to make it more complete.

Investing does not have to be hard. You will achieve better results by thinking outside the box and applying alternative ideas and concepts to investing. You just need do investment as your own business.

The idea is here, if you are businessman intend use your spare cash to invest in other people business, what kind of business and company you will choose? And what thing you need to care to make sure you investment can success?

Investing requires hard work. It takes time, consistency, and patience. Investment is not a difficult task. All requires a correct investment concept in your mind. Second requirement is stick to your strategies or plan (don’t follow rumors).

Many successful smart investors like Warren Buffet having Contrarian Investment Idea. And this idea even run counter to the mainstream financial wisdom sometime. It is contrary because you do not make money in the market by following the crowd. The way to make is to lead the crowd. All that is required is an open mind and some common sense.

For new investor, you must bear in mindset, treat your investment as your own business. The only advantage you do investment through stock market is you not need run the daily business activities. However, you have the responsible take care your company financial healthy.

Companies issue stocks which are pieces of paper representing ownership of his company, although today it is all digital numbers on a computer screen. Public companies, like MAYBANK, IOI, SIME DARBY, TENAGA, NESTLE, etc, issue stocks to raise money when they need extra cash. The money is used for starting new projects, upgrading equipment, expanding business among other things. The companies need money to grow and expand so they offer you ownership of their company in exchange for your money. This is the purpose of the stock exchange in a nutshell.

The stocks issued are traded on a stock exchange. There are multiple stock exchanges worldwide. For example BURSA MALAYSIA is the stock exchange in Malaysia. After the stocks have been issued they are traded (bought and sold) between private buyers and sellers. If you no longer want to own a stock you have to sell it to someone else in open market at the current market price on the stock exchange.

Why do stocks go up in price? Stocks go up in price based on supply and demand. If people feel good on the company future prospect, company share demand will rise and push up in price. If company future prospect is bad, people will sell off its shares and drop down it share price.

Contrarian Investing

What is contrarian investing? Contrarian investing is an investing approach that often runs counter to conventional wisdom. To do well you must adopt a strategy that is different from that of the mainstream. You cannot expect to earn a lot of money just follow at the back what majorities investor do.The maximum outcome is just average earning. To do better than average you must do something different than that of the average investor. The first thing you need to do is refuse to be average if you want outstanding.

Legendary investor and contrarian Warren Buffet says most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You cannot buy what is popular and do well. Many of the most successful investors on the Wall Street such as Warren Buffet, Marc Faber, Jim Rogers, and John Templeton are contrarian investors.

Contrarians look for crowd behavior among investors that lead to exploitable mispricing of equities. Crowd behavior in the market leads to mispricing of equities both on the upside and the down side. Widespread pessimism can lead the market to understate a company real value and widespread optimism results in excessive prices and bubbles. The contrarian investing approach seek to take advantage of mispriced asset caused by the over optimism and over pessimism.

We humans are prone to stumble into metal pitfalls and according to legendary Ben Graham, the father of value investing; we are our own worst enemy in investing.

As investors we are over confident and we far too often make decisions based on our emotions rather than facts. The result of our psychological pitfalls can be found in the Dalbar study.

Why such a poor performance for the average investor? There are many explanations and they all link back to our behavioral biases and mental pitfalls. We all have biases and blind spots but it is easier to discover them among other people then ourselves. To illustrate this point a survey at an American university was taken with participants being asked a how likely the average person was to make a particular mental mistake and how likely them themselves were to make the exact same mistake. The overwhelming result was that the participants thought the average person was more likely to make the mistakes then them themselves.

Another group of students were asked three questions in a survey:

1.       Are you an above average drive?

2.       Are you an above average student?

3.       Are you above average game player?

How would you answer these questions? If you are like the majority of the respondents you would have answered ‘yes’ to all three questions. Over optimism and a self-serving bias seems to be embedded in the human mind. It may feel good to be confident but it often clouds our judgment.

It is far better to be skeptical when you are investing and adopt a contrarian mindset. Don’t rely on other people opinions and don’t let other people do your thinking. You are much better off by coming to your own conclusions even though you may be wrong from time to time.

Do your own research!

It is easy to find an investment that looks attractive at first glance. Once we have an investment we like it is not difficult to find conforming evidence to our initial judgment. Our mind is programmed to look for evidence supporting our original hypothesis. We have a behavioral deficit and a self-serving tendency of turning any information into supporting facts. Here are a few common examples

1.       All news is good news. If it is bad news it can always be better.

2.       The investment we picked is cheap (even if we have to make up new valuation methods.)

3.       This time is different. Don’t let some pesky facts get in the way of a good story.

We are far more likely to seek out information that confirms our views. We choose what we read and what we watch on television. We also choose our friends and we are more likely to get along with people that share our views. Most people are not confrontational by nature and it makes us more comfortable to be around people that agree with us. And even if our friend does not agree with us they may just go along with our conclusion rather than to be confrontational. So to find unbiased views we must talk to people with different opinions. Warren Buffett appropriately said never ask a barber if you need a haircut.

Karl Popper, the great philosopher of science, developed a better method for finding unbiased facts and testing hypothesis. He used a contrary method and argued that the only way to test your hypothesis is to try to disprove it. Instead of looking for confirming information you should try to seek our information that disproves you evidence. If we finally come across an investment that we can’t disprove we may really be on to something.

As shown above we are subject to many behavioral pitfalls and it is easy to get caught up in counterproductive behavior. When we are asked in the cold light of day how we will behave in the future, we turn out to be bad at imagining how we will actually act in the heat of the moment.

To reduce the risk of falling prey to our emotional behavior we can prepare by pre-commit to a strategy. That is mean that we need to do our investment research when we are in a rational state of mind when there is little happening in the market. By pre-committing to a strategy we are less likely to fall prey to our own emotional behavior and we are more likely to follow through on our plan when the market is irrational.

It may be difficult to keep a clear head during a physiologically challenging event like a sharp market selloff but that is why we commit to our plan of action beforehand. Warren Buffett provides a good example of his strategy we simply attempt to be fearful when other are greedy and to be greedy only when others are fearful.

By strictly following our plan we can remove a lot of the emotions and invest with a cold and rational mind. Using the strategy we can decide at what price to buy and sell beforehand and avoid suffering from mental pitfalls such as loss aversion and over optimism. ­

Market Cycles:

The market moves in cycles. There are market cycles for all asset and throughout a market cycle an asset typically goes from being undervalued to being overvalued and revert back to its mean again. Some market cycles can last for a very long time, up to 20 years, and they are called secular bull markets or secular bear market.

It can be very profitable to invest in a bull market cycle with positive upward movement. If you invest in commodities during a commodity bull market cycle you will do very well simply by buying and holding commodities. The same is true for stocks in general during a stock bull market cycle. You can make a lot of money by just buying and holding an index. A market would eventually turnaround so it is important you understand what stage of the cycle you are in.

If you invest in a market cycle on the top or on the way down you are in for trouble. Prices in general will be falling and it will be ever more difficult to make a positive return. You can still make money during a bear market but the level of difficulty increases substantially. Would not you rather go with the tide than against it?

What investors ought to know?

1.       Stock always go up in the long term?

Unfortunately it is not true. For more companies has fail than success. Many more stock exchanges fail than success. Russias stock exchange disappeared in 1918 after the Bolshevik revolution and all the Eastern European stock markets disappeared after 1945. The shanghai stock exchange was closed in 1949 and the stock exchange in Egypt was closed in 1954.

Even if the stock exchange does not fail the inflation adjusted market return does not increase over time. The chart below shows the US Dow Jones Industrial Average (DOW) market return over the last 80 years priced in gold. I price the market in gold instead of dollars because gold hold it value throughout the ages and it’s a better constant than dollars. The US dollar is only worth 2% of its dollar in 1913.

So much invest for long term. If you had bought the DOW in 1929, held it for 80 years and then sold in 2009 you would be down 49%. If you had on the other hand invested in the stock market 1980 at the low point and then sold in 2000 you would have made a return of 4600%

2.       Real Estate always goes up in the long term?

This is not true either. The US housing market moves in cycles and fluctuates in value. The chart below shows the US housing market over an 80 year time period priced in gold. It has gone through several cycles with a low of 100 oz gold and a high of 700 oz gold.

Enormous transfers of wealth take place between the top and bottom of secular long term market cycles. So investors must understand each stock its business cycle and market cycle which is believed will help you make fortunes.

Investing strategies:

Investing is not an exact science like math or physics, it more like art. The market is made up of individuals with different opinions, expectations, and mindset. The market is a dynamic place representing the sum of all buyers and sellers.

Markets are forward looking and change based on people expectations. Markets do not care about the past and they are only interested in tomorrow news and tomorrow earning. Changes in expectation will quickly move stock prices whether those expectations are real or not.

Market are not perfect. But free market is the best practice process currently available for allocating capital and far better than centralized control. Market are based on the latest public sentiment and they often misprice assets both on the upside and on the downside. If market were perfect there would be no opportunity for investors to make an above average returns.

Market follows fundamental law which is based on supply and demand. Supply and demand of stock will determine the stock or market price.

There are various of investing strategies, here will mention several example:

1.       Value investing: investing stock based on the company intrinsic value.

2.       Cycle investing: investing stock based on market cycles. By studying market cycles and understanding the characteristics of a cycle an investors can estimate where investment is heading in the future.

3.       Focus investing: investing stock based on the idea of keeping a close watch on a narrow stock selection. Only picking the very best companies and researching that selection carefully.

4.       Macro investing: an approach that attempts to anticipate and profit from global trends and shifts in world markets.