Sunday, October 14, 2012

Stocks Investment is NOT a ZERO sum game

I have heard of stocks as a zero sum game. Trading stocks is. Investing in stocks isn't. In trading stocks, players are wary of the owners, management, syndicates, investment bankers etc. In investments, one should not fret these people. Owners, management are friends, not foes. If stocks are zero sum, how do we explain investing in BAT 30 years ago. How do we explain putting your money into Nestle 20 years ago, Digi 10 years ago, Public Bank 15 years ago, Dutch Lady 10 years ago, IJM 15 years ago, Top Glove 10 years ago etc. etc. Are these zero sum? Can these stories be replicated? Yes, of course.

In investing, you do not treat your fellow investors as an enemy. In trading, you may have to treat your fellow traders as your enemy. Why? Because in a zero sum game, one wins while another has to lose. In trading, the "fools theory" applies, as you would hope for another fool to pick up the stock that you intend to sell. As a trader, you would want to make the first move, in investments it does not matter who has found a better stock earlier. A great company will continue to do well. Among the Nestle, the Digi, the Public Bank, the Dutch Lady, the BAT, the Top Glove who dare to bet that these companies would not continue to be a winner in the next 10 years or more? As for some trading stocks, I would not bet past next month, the next 6 months or 1 year.

In investing you can sleep, in trading you probably can't if the game is still on. In trading, you fret that the owner majority shareholder has and will continue to cheat you. Rightly so, they can and probably will. They have the upperhand.

Now, from investment, I have a good story to tell of a very average family. May not be the best story but it is a good story nevertheless. Back about 20 years ago, just before I was to take my STPM, my parents had just RM25,000 in the bank account. We were not poor but the savings was barely enough for much more. The housing loan was already paid off, but not the little Proton Saga. Hence, for a tertiary education my only choice if any after my STPM during then was only a local university or probably TAR College. I had no choice, but I was lucky enough to get into a local U as anything beyond the local university would probably costs my parents much more than RM30,000.

I had of course heard of parents who borrowed more, re-mortgaged their house or sell one of their houses, if they have more than one just to send their kids to do tertiary overseas or some local twinning programmes. Hence, we were considered lucky as my brother later was admitted into a local U as well. However, if I were in my mum's position during then - with RM25,000 at 50, I would be worried for my old age. Mind you, both my parents do not have EPF.

During then was also the time when I gained interest into stocks - probably from seeing the gains that people (mainly colleagues during my part time job) were making during the 1992 - 1993 run. As I had already gained a place in the local uni and my study loan / scholarship taken care of, I asked my mum to put some of her money into the stock market. She and I probably went in at the time when KLCI was around 900 points. Gains were quick as it was a crazy run during then, but guess what we were putting our money into? Bank Islam was (considered) the good one. The bad ones, plenty - Kemayan, Idris, FACB, Ancom, AP Land, Menang to name a few as I cannot even remember some of them (these companies are no longer around).

My mum's RM25,000 probably reached RM100,000 within a year i.e. end of 1993. Early 1994, that was when, the market collapsed and it came back down. Her savings probably was reduced by half from its peak. Still a gain but it woke me up as I had my personal gains and later losses as well.

It was the time when I started to learn about finance, accounts, management and the school library was the place to go as it has tonnes of books about investments which very few students borrow. Books by Peter Lynch, Benjamin Graham, on Warren Buffett of course and our own local investment book by Neoh Soon Kean was read. Read that, its still very relevant and good.

It was the time when fundamentals was learned but not fully appreciated. Why was it not appreciated? I could not apprehend the (additional) value of great companies. Companies to me was valued via PE, ROE, PEG etc. - i.e. your usual investment ratios. The more attractive the better. EV and EBITDA was not even that popular yet. Stocks during then, was also about macro economic strength of the country. It should not necessarily be so.

Now, after the 1994, of course there was the 1998. It was when, some losses were felt from the stocks she held, but it was also an opportune time. Post 1998, there were few other rounds of market's downturn - 2001, 2008 were probably the bigger ones. We nevertheless, continued to look for good stocks with good management with some sporadic stupidity in listening to rumours about some trading stocks. It may sound believable, but most of the time, it was never about buying a good company - just a so-so one with lots of hopes and all kinds of stories. Mind you, when we were trading, we were trading with available money (unlike some, who traded on contra) and even then we were losing most of the time.

Fast forward from 1993 to 2010, with little help from me and my brother, my mum is very much in the money and even from the dividends from the stocks she holds, it is enough for her and immediate members under her support to live through. That income is enough to support 3 elderly people - with mostly passive income from stocks and dividends from some government bonds. The same house is still lived in, the car has since been changed to a better car twice.

With that, tell me how is stocks investment a zero sum game for someone who is not within the circle of influence when comes to knowing the people behind the companies. She does not need to second guess what the management of the companies were going to do. In many cases, she does not even know who are behind the companies. As long as the companies are strong, believable and continue to be strong in the foreseeable future.

Which are the stocks she gained much from? Digi, Genting, Public Bank, IJM, Maxis (before the delisting), Axiata, KFC, UMW, Jobstreet, AEON, BJToto, Petdag. Which were the ones she does not gain from? Very Few, and probably the ones that we thought we knew well, but it was too complicated. Today, I gladly say none. Mind you, these are easy to comprehend and picked stocks - for any person. No PE, Moving Average, Candle Stick or any of that technical jargon!


Heineken Pilsener said...

Very inspiring post. I wish to add the concept of investing is pretty easy to understand. You own a small piece of a business which will grow in value as the business prospers. This concept may be easy to understand by many people but when it comes to execution, there are only a small group of market participants who could actually manage to practise the strategy.

The market traders are always going to bring up lotsa charts showing the demise of investing for the long term, such as the mega cap stocks on the Dow Jones which are basically flat throughout a decade and companies which went bust due to a flawed business model. Thus, investing is really a game of beating yourself. It is about how you manage your psychology when presented with painful paper losses and also how well you have done your homework in understanding the business which you are investing whether the owners work for the shareholders or themselves, whether the business model is sustainable, whether there is overcapacity in the industry or not and many more.

I have seen so many investors done well in the first psychological challenge while sucking in the second. What most investors do is they misunderstood or overestimated the earnings power of the companies that they invest in due to poor homework done. How often do you see novice or even experienced investors "invest" in a stock with the intention to buy and hold explaining how cheap, wonderful, and unique the companies are while you are scratching your head upon their ridiculous optimism? It is very important to separate your emotion from the facts that you will be receiving over time. Many investors have this "feel good" factor the moment their buy order got filled up. Well, this is not wrong. Who wouldnt be happy owning a piece of a perceived good business that is going to grow indefinitely? This is the situation when market traders might fare better as they could analyze information with more objectivity.

FreeMan_自由人 said...

Thanks Felicity & Heineken Pilsener for sharing your valued thought.

felicity said...

Well Heineken, I do not discount very well established traders who may have found some great formulas to beat the system but one cannot discount that many on the other hand suffered more than they have gained - although I do not have statistics.

Personally, I find that it is irresponsible on my part to promote something that defies what the main purpose of the market is for (although it may have been called a market) but the system is more of a value creating platform for those who are looking for a place to put their money while on the other side, for the companies' management to be involved in the market be it raising funds or any other purposes which the market is meant for. Allowing trading is one of them but it is not the most important purpose.

I target my blog mainly for those who may not have all the time into stocks as well as those who are not so well-versed into trading. The message is simple - you can start to make decent enough money from the market soon enough rather than trying to learn or discover the right trading system for those who manages to do so, if they managed to - while for some, they may have spent a long time continue discovering while still contributing to the market makers.

I have never promoted the "Hold Forever" message although I am more of a longer term "Buy and Hold" type of investor as although it may be fun to be in and out of the market every now and then, I found that the fundamental value of most good companies do not change overnight. Sometimes, certain situation or event may change the entire nature of the company and business but as in any businesses bumps are bound to happen.

For most traders, it may be fun to time the market but my blog is not about that.

Unknown said...

Hi how u all think KLCI now standing at 1650 point, is that still have chance to enter the market and hold for the next 3years++ ?? or shall wait after drop more only collect ?

felicity said...

I have to say, most of the good stocks are already on the pricey side.

For some stocks, their parent company are in fact cheaper overseas.

Nevertheless, you will have to pick the stocks not the index.