Who doesn’t want to become a rich tycoon from investing in the stock market? Raise your hand please!

This article is a response to some interesting comments from the last article I have written about “Is debt good? When is it good?” in the link below:

http://klse.i3investor.com/blogs/kcchongnz/91556.jsp

Posted by Desa20201956 > Feb 22, 2016 06:57 AM | Report Abuse

But I can tell you something. If you organise a seminar with the title " Secrets of the tycoons revealed" or " How to borrow more and more money" Your seminar will be full house.
There is no credit in being like those ancient sifus of China.
That is what you are teaching.

Yeah, he is right. I have been teaching the conventional investment principles and methodologies for building up long-term wealth, not “How to make you investment tycoon”. You can clearly see what I am talking about by reading my 205 articles posted in i3investor here so far:

http://klse.i3investor.com/blogs/kcchongnz/

Here is a suggestion by the same person on what to teach “" Secrets of the tycoons revealed". It is very “enlightening” and “motivating”.

Posted by Desa20201956 > Feb 23, 2016 01:47 PM | Report Abuse

Two kinds of skill sets
One, the stock picking skill sets. The ones followed by internet gurus and sifus , the self taught investors, those who read some books about Warren Bufett
Two, the skill sets needed in managing portfolios. The kind of stuffs universities and CFA courses spend a lot of time on.
Once you are on borrowed funds and margin accounts, once you buy more than one stock , you are in this territory.
If done well, it can be a popular course. The people wants margin accounts.....what they need are some basics of modern portfolio theories.....even Koon Ywe Yin soon attend. His portfolio is too focused and therefore too high risk for a margin account. But how do you tell a guy that unless you are equipped with all the knowledge of modern portfolio theories?

What he basically said is the Holy Grail on investing success is " To borrow more and more money" and must know the application of Modern Portfolio Theory. He even made this suggestion below to me.

Posted by Desa20201956 > Feb 23, 2016 07:13 PM | Report Abuse

chong...after reading all your replies, I still think you need to register yourself for a course in Finance as much as newbies to the stock market need to register to your course.

This gentleman below got fed up and challenged him.

Posted by Icon8888 > Feb 24, 2016 10:23 AM | Report Abuse

I challenge Desa to write an article about Modern Portfolio Theory and how it can be used in Bursa

However, we haven’t seen any article presented yet. I would think it will be in vain waiting for his article.

Well, having been a has-been before learning about investment in the university, I would like to share my personal experience on the learning about investment, in particular “Modern Portfolio Theories” in the university and whether this knowledge can make you to become multi-million tycoons as suggested. I will leave this claim of " How to borrow more and more money" in order to become a tycoon from investing for the next topic to write, although I have written numerous articles about it.

The Efficient Market Hypothesis

One of the big topics of investment learned in the university is the Efficient Market hypothesis which states that “At any given time and in a liquid market, current security prices fully reflect all available information. Any attempts to outperform the market are essentially a game of chance rather than one of skill. Investors cannot earn extra-ordinary return from the market unless they take additional risk.”

Tell me learning how can an investor become a rich tycoon from investing in the stock market after being instill this mind-set of the Efficient Market hypothesis from a finance course in university?

Is the stock market efficient?

I have written some articles below which you can make your own judgment if the market is efficient.

http://klse.i3investor.com/blogs/kcchongnz/50988.jsp

This article shows that there is a certain school of thought in investing, the value investing school, and how all followers of this school have made extra-ordinary return over an extended period of time, and the investing strategies they used are still working, and the reasons why they will still be working in the future.

And my latest article on my experience in Bursa is telling the same story, that this school of thought in value investing also works in Bursa, even for the short and medium term.

http://klse.i3investor.com/blogs/kcchongnz/89516.jsp

“EMH is one of the most remarkable errors in the history of economic thought.”  Robert Shiller

The Sharpe Ratio

One measurement on measuring risk and return taught in university is the Sharpe Ratio, SR. SR is

SR can be used to measure the return per unit risk of a stock. More versatile than some other risk measurement tools, it can be employed to compare investments from different asset classes.

However, the shortfall of the risk used is the standard deviation of the return of a stock, which equates risk to volatility of the share price movement, instead of the more intuitive measure such as the financial performance and the financial position of the company.

This is also true for other performance measures such as Jenson Alpha, Treynor index, all using the volatility of stock price with standard deviation or BETA, relative to the movement of the broad market.

Theoretically, the Sharpe ratios of different securities or different stocks should have quite similar SR as higher risk, or stock price volatility should logically provide higher return according to the EMH.

But is that true?

My experience in investing in Bursa is definitely not the case as shown in this link here.

http://klse.i3investor.com/blogs/kcchongnz/44334.jsp

Good stocks selected using fundamental approach performed much better than what the SR tells us. Those stocks which have much higher return are not riskier than the overall market in term of the volatility of their share prices.

Capital Asset Pricing Model (CAPM)

One of the offshoots from the Efficient Market Hypothesis and also one of the biggest topics in investment theory taught in university is the very famous CAPM. The CAPM says that the only way to outperform the stock market averages is by taking greater risk. Risk, according to the theory, is synonymous with volatility of stocks in relation to a broad index and is typically expressed by a measurement called beta.

CAPM is most often used to determine what the fair price of a stock should be using this formula.

r_a = r_rf + B_a (r_m-r_rf)

where:

r_rf = the rate of return for a risk-free security 

r_m = the broad market's expected rate of return 

B_a = beta of the asset, or the movement of the stock in relation to the broad market

Does the knowledge and the skill of this CAPM able to make you an instant investment tycoon as proposed above? How can it do that?

In 1993, Josef Lakonistok presented an academic paper, “Is BETA Dead or Alive”. He used those stocks which were traded in NYSE and AMEX from 1926 and 1991 and found little evidence of a link between BETA and returns over the period. He declared that “Beta is dead”.

What is my experience investing in Bursa using this BETA? BETA is not only dead, but rotten in Bursa as shown in my experience here:

http://klse.i3investor.com/blogs/kcchongnz/44336.jsp

There is totally no correlation between BETA and the return of individual stock in the above portfolios.

How about other assets pricing model such as that of Fama’s Three Factors Model?

I have also written a little about it from my investing experience in the link below:

http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/39934.jsp

It doesn’t happen to be that useful too.

What else is useful from studying investing in the University?

Let us talk about the big thing here, the Markowitz Efficient Frontier as expounded by our friend above.

Markowitz Efficient Portfolio (MEP)

Modern Portfolio Theory by the Nobel Laureate Harry Markowitz has shown that when you have stocks that have low correlations together in a portfolio, you may be able to get more return while taking on the same level of risk, or the same returns with less risk as shown on the efficient frontier in Figure 1 below. The less correlated the assets in your portfolio, the more efficient the trade-off between risk and return.

Figure 1: Efficient Frontier

Modern portfolio theory attempts to account for risk and expected return mathematically to help the investor find a diversified portfolio with numerous assets classes and individual assets to obtain the “Optimum portfolio”. A Markowitz efficient portfolio represents just that: the most expected return at a given amount of risk, or the same expected return but with a lower amount of risk.

Stocks diversification won’t ensure gains or guarantee against losses but strives to smooth out unsystematic risks of companies in a portfolio which are not perfectly correlated so that the positive performance of some companies will neutralize the negative performance of others.

The concept of diversification as that of Modern portfolio theory works in its simple form for individual investor by diversify into a portfolio of about 10 stocks as shown in my experience here:

http://klse.i3investor.com/blogs/kcchongnz/48946.jsp

But how can knowing the complicated Markowitz Efficient Frontier or any other Modern Portfolio Theory make you an instant investment tycoon?

I used to laugh to myself those financial planners carrying their laptops with the Efficient Frontier software, trying hard to impress their potential clients with the MEP, telling how good they are and advising them to diversify into a number of funds for alleged higher return, those funds themselves are already highly diversified.

Summary

The above is just a brief summary of what you will learn in investing course in the university, and we have just touched the surface of it. We haven’t touched on the more interesting topics, but useless materials such as Value -At-Risk which helped almost destroyed the financial system permanently in 2008 during the US financial crisis. Discussion in detail is beyond the scope here.

In general, modern portfolio theory may be, I say may be, useful for big fund managers, and financial planners, to earn extra-ordinary return for themselves or the MEP software’s providers, not you as an individual investor, by charging lucrative fund management fee, upfront fee and high annual wrapped fees.

It’s time to delete the CAPM, MEP, Value-at-risk etc. from investment textbooks. These theories have done more harm than good for investors. It is better to learn the analysis and interpretation of financial statement in more details, and learn more about time value of money and valuation, and more valuations. And of course some behavioural finance.

For individual investor in i3investor, it is better to read the analysis of stocks by cephasyu, icon8888, Bursa Dummy, YiStock, LCChong, Serious Investing etc. I have a few of my previous course participants who are very knowledgeable in stock picking in Bursa and in the regional markets too. They are good, and they share their knowledge unselfishly and for free.

However, you still have to do your homework and make your own judgment. Remember,

“There ain’t no tooth fairy in the stock market.”

How can you do your homework and make your own assessment?

Of course you must know the language of the business; i.e. know how to read, analyze and interpret financial statements to identify good companies, and also make sure its true value has not been incorporate into the price yet; i.e. you must know how to estimate the value of stock and buy only they are selling at a high margin of safety.

Well, many investors invest tens, hundreds of thousands or even million in the stock market. Don’t you think it is crucial that you should have this knowledge in order to be successful?

And this I can help you, with a small fee.

Please contact me if you are interested at

ckc14training2@gmail.com

Otherwise hoping to become a tycoon from investing will sure remain as an illusion like what this gentleman said:

Posted by Frank Soweto > Feb 22, 2016 07:52 AM | Report Abuse

Desa: You want to be teacher, please teach people "the hidden secrets of tycoons."

LOL those r no teachers those are snake oil salesman :)

No, I can’t promise to make you a multi-million tycoon from investing. Please refer to Frank saying above. But I am very certain, with this important knowledge of fundamental value investing, you would have a much higher probability of success in this jungle of stock investing.