Short Term Trading vs Investing, What's the Difference?

[candy_chia]

Both arguments by Alvin & Ray are right from different sides of the coin.

Our family belongs to the Middle income category, so the millionaire dream may takes another decade to realise, (seems rather tedious as the cost of raising 2 kids & fulfilling the financial obligations to our elderly parents will burn a sizeable chunk of our savings) if we rely solely on cash flow.

Conversely, a high income earner who spends a great portion of their humongous income on big-tickets items can still be "poor" compared to the Average Joe.



Don't agree totally with Li Ka Shing's argument that working for others is a brainless investment. (not everybody has the business acumen)

However, he raised a valid point that majority of people didn't realise that each of us possess a "shapeless Asset" (你身上就有着一座金山- 无形资产).

It is really up to us to utilise our unique talent to create the opportunity towards fulfilling our goal (financial freedom) by stretching to the maximum we can.

李嘉诚演讲：打工是最愚蠢的投资
Li Ka Shing: Working for others is the Most Foolish Investment


打工才是最大最愚蠢的投资。 人生最宝贵的是什么？除了我们的青春还有什么更宝贵？很多人都抱怨我穷，我没钱想做生意又找不到资金。多么的可笑！

其实在你身上就有着一座金山(无形资产)，只是你不敢承认。宁可埋没也不敢利用。


http://www.cnblogs.com/know/archive/201 ... 39641.html



NEVER Give Up UNTIL However Long that is.

- Jim Rohn

http://www.masteryourfinance.com/forum/ ... 6&start=15

打工王帝. There are so many people in earn > $1 millionaire annual just working for big organization.

or earn income > $250K annually. You will be millionaire soon.

So, one sure way is to work for people. Not necessary owning business. No?

Conclusion

The best way for the Average Joe to become rich is to invest for CAPITAL Gains

You need to have sizable investment capital in order to have gains that would make a difference to your net worth


Cashflow alone will take a long time for you to become rich. So you still have to invest for capital gains.
Trading is cashflow and investing is for capital gains.
If you have an income, you should invest and not trade.

[ngtfook]

Just sharing ...

On hindsight, buy the right stock and hold. You might become millionaire for doing it right the 1st time.

You don't really need sizable investment capital.

For example, someone invested RM1000 in 1971 and hold till 2011, his share worth is RM3.3 Million while collecting RM290K as dividend!

打工王帝. There are so many people in earn > $1 millionaire annual just working for big organization.

or earn income > $250K annually. You will be millionaire soon.

So, one sure way is to work for people. Not necessary owning business. No?

Conclusion

The best way for the average joe to become rich is to invest for capital gains
You need to have sizable investment capital in order to have gains that would make a difference to your net worth
You need to have positive cashflow to grow your capital
A positive cashflow is established when your expenditure is less than your income
To increase the cashflow, you can decrease your expenditure, increase your income, and/or setup more sources of income
Cashflow alone will take a long time for you to become rich. So you still have to invest for capital gains.
Trading is cashflow and investing is for capital gains.
If you have an income, you should invest and not trade.

[alvin]

How many people can be a millionaire by picking one stock?
We all know the odds is not high.
Will you put all your money in one stock?
Let's say it is possible for the person to pick the right stock to be a millionaire, how is he going to survive for 40 years without cashflow (income)?

Both cashflow and capital gains are important in my opinion.

[walkinepark]

How many people can be a millionaire by picking one stock?
We all know the odds is not high.
Will you put all your money in one stock?
Let's say it is possible for the person to pick the right stock to be a millionaire, how is he going to survive for 40 years without cashflow (income)?

Both cashflow and capital gains are important in my opinion.

40 years is indeed too long.
Quoting Keynes, "In the long run, we are all dead.". If we are not dead, we will also be too old.


But fret not, thanks to intervention from central bankers, rest assure we will see hot money flowing here and there.

Look at Osim, 16x within 4 years.

[candy_chia]

Investors Should Be Nervous When Greed Overcomes Fear In Stocks
6/19/2013, Mitchell Eichen

With the S&P 500 still less than 2% below its all-time high, some investors are questioning the value of a diversified portfolio. In my view, diversification still greatly matters and a brief discussion of investor psychology may help explain why investors often are influenced by recent performance and throw caution to the wind.

(1) A Strong stock market Rally, such as the one we have experienced since the March 2009 lows,

==> often creates a sense of Thrill and Excitement among investors.

===> Risk considerations take a backseat to the prospect of not being left behind while others appear to earn large returns.


(2) Conversely, during bear markets, the reverse is often true,

==> with RISK control being the chief concern among investors



====> and Potential Returns a distant afterthought.



In this cycle, as equity prices rise, the typical investor feels a sense of optimism. If equities continue to rise, the feeling of optimism progresses to excitement, thrill, and ultimately euphoria. In hindsight, the euphoria stage is often the point of maximum risk. Eventually, an event or catalyst turns the tide from euphoria to anxiety as stock prices decline from their peak.

According to this theory, the emotional state progressively worsens as anxiety evolves into denial, fear, desperation, panic, capitulation, despondency, and ultimately depression.

Once again in hindsight, the depression point in the cycle represents the moment of maximum financial opportunity.

The cycle begins anew with depression morphing into hope, relief, and back to optimism, the starting point.

In rising markets, investors’ desire to participate in the upward movement

===> often causes them to become complacent in terms of potential market risks, which are camouflaged by the near-term trend.

However, it is at such times of complacency that investors are often most vulnerable to market reversals.

It is our role to balance some upside participation with ongoing vigilance.



Despite the low levels of volatility, as measured by the CBOE Volatility Index, there remain large macroeconomic risks to the global economy.

The frightening and unexpected 40% tax/seizure of large customer banking deposits in Cyprus reminds us that risk is alive and well. The global financial markets, shrugged off these unprecedented events in Cyprus, likely due to the minuscule size of its 0.2% contribution to Eurozone GDP.

In my view, the consensus may be missing the relevant point of the Cyprus debacle from a risk management perspective.

A dangerous precedent has been set with respect to the sanctity of bank deposits.

If a similar action occurred in Spain or Italy, it might wreak havoc on the world financial markets because of the size of their respective economies.

The U.S. economy, despite incremental improvement and better relative performance compared to most of the developed world, is clearly not off to the races.

- With its sluggish retail sales,
- persistent federal deficit,
- growing debt problems,
- stubbornly high unemployment,
- a subpar 2% GDP growth rate
- and a divided political system that seems unable to solve any of the above,

we believe that the economy remains vulnerable to unexpected events. The recent tragic terrorist attack in Boston reminds us that unfathomable and unknown risks continue to exist.

A diversified portfolio is always needed for investors, but particularly at this present time when complacency is relatively high.



Investors should not take the “kitchen sink” approach to diversification, but rather craft a portfolio of investments with different return drivers and downside protection.

http://www.forbes.com/sites/advisor/201 ... in-stocks/

Note:
"kitchen sink approach" means using all kinds of different options or methods to solve a problem or achieve a goal.

[candy_chia]

In the absence of sizeable capital, one may still be able to attain millionaire status by Buying RIGHT and Hold Tight, with virtue of time as demonstrated by Ray's example.

5 golden rules of common sense investing
Last updated on: July 27, 2010 15:48 IST

Don't be deceived by this simple-sounding emphasis on common sense investing. These simple rules are the distillation of a lifetime's stunning investment achievements and wisdom. You will profit from them.


1. There's no escaping risk

Once you decide to put your money to work to build long-term wealth, you have to decide, not whether to take risk, but what kind of risk you wish to take. 'Do what you will, capital is at hazard', just as the Prudent Man Rule assures us.

Yes, money in a savings account is dollar-safe, but those safe dollars are apt to be substantially eroded by inflation, a risk that almost guarantees you will fail to reach your capital accumulation goals.

And yes, money in the stock market is very risky over the short-term, but, if well-diversified, should provide remarkable growth with a high degree of consistency over the long term.


2. Buy right and hold tight

The most critical decision you face is getting the proper allocation of assets in your investment portfolio - stocks for growth of capital and growth of income, bonds for conservation of capital and current income.

Once you get your balance RIGHT, then just HOLD Tight, no matter how high a greedy stock market flies, nor how low a frightened market plunges.

Change the allocation only as your investment profile changes. Begin by considering a 50/50 stock/bond balance, then raise the stock allocation if:

You have many years remaining to accumulate wealth.

The amount of capital you have at stake is modest (i.e., your first investment in a corporate savings plan).

You have little need for current income.

You have the courage to ride out the booms and busts with reasonable equanimity.

3. Time is your friend, impulse your enemy

Think long term, and don't allow transitory changes in stock prices to alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is 'a tale told by an idiot, full of sound and fury, signifying nothing'.

Stocks may remain overvalued, or undervalued, for years. Realise that one of the greatest sins of investing is to be captured by the siren song of the market, luring you into buying stocks when they are soaring and selling when they are plunging. Impulse is your enemy. Why? Because market timing is impossible.

Even if you turn out to be right when you sold stocks just before a decline (a rare occurrence!), where on earth would you ever get the insight that tells you the right time to get back in? One correct decision is tough enough. Two correct decisions are nigh on impossible.

Time is your friend.

If, over the next 25 years,
~~ stocks produce a 10 per cent return
~~~ and a savings account produces a 5 per cent return,

$10,000 would grow to
===> $108,000 in stocks
====> vs. $34,000 in savings. (After 3% inflation, $54,000 vs. $16,000). Give yourself all the time you can.

4. Realistic expectations: The bagel and the doughnut

These two different kinds of baked goods symbolize the two distinctively different elements of stock market returns. It is hardly farfetched to consider that investment return - dividend yields and earnings growth - is the bagel of the stock market, for the investment return on stocks reflects their underlying character: nutritious, crusty and hard-boiled.

By the same token, speculative return - wrought by any change in the price that investors are willing to pay for each dollar of earnings - is the spongy doughnut of the market, reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism.

The substantive bagel-like economics of investing are almost inevitably productive, but the flaky, doughnut-like emotions of investors are anything but steady - sometimes productive, sometimes counterproductive.

In the long run, it is investment return that rules the day.

In the past 40 years, the speculative return on stocks has been zero, with the annual investment return of 11.2 per cent precisely equal to the stock market's total return of 11.2 per cent per year.

But in the first 20 of those years, investors were sour on the economy's prospects, and a tumbling price-earnings ratio provided a speculative return of minus 4.6 per cent per year, reducing the nutritious annual investment return of 12.1 per cent to a market return of just 7.5 per cent.

From 1981 to 2001, however, the outlook sweetened, and a soaring P/E ratio produced a sugary 5 per cent speculative boost to the investment return of 10.3 per cent.

Result: The market return leaped to 15.3 per cent - double the return of the prior two decades.

The lesson: Enjoy the bagel's healthy nutrients, and don't count on the doughnut's sweetness to enhance them.

5. Why look for the needle in the haystack? Buy the haystack

Experience confirms that
~~ buying the Right Stocks,
~~~ betting on the Right Investment Style, and
~~~~ picking the right money manager

- in each case, in advance - is like looking for a needle in a haystack.

http://www.rediff.com/money/slide-show/ ... 0727.htm#5

Just sharing ...

On hindsight, buy the right stock and hold. You might become millionaire for doing it right the 1st time.

You don't really need sizable investment capital.

For example, someone invested RM1000 in 1971 and hold till 2011, his share worth is RM3.3 Million while collecting RM290K as dividend!

[candy_chia]

Atul Gawande, a surgeon and writer, has an interesting piece up at the New Yorker which is a transcript of a commencement speech he recently gave at Williams College.* Although he is discussing medicine his perspective on failure is worth contemplating. Here is a quote:

So you will take risks, and you will have failures. But it’s what happens afterward that is defining. A failure often does not have to be a failure at all.

However, you have to be ready for it—will you admit when things go wrong?



===. Will you take steps to set them right? —because the

===> difference between triumph and defeat, you’ll find, isn’t about willingness to take risks. It’s about mastery of rescue.



7 Lessons Learned From Losing $739,135 In Bad Investments
by Neil Patel on May 13, 2013

losing money

Have you ever read a story on TechCrunch that talked about how some angel investor made a few million bucks investing in a hot startup like Dropbox or Airbnb? And when you read all of these stories, what does it make you want to do?

Invest, right?

I got into investing years ago because I thought it was sexy and all of the cool kids were doing it. When I first started I lost a lot of money, but eventually I figured out how to make money.

Before you start throwing your cash around, here are a few things you should keep in mind:

(1) Invest in what you know



Warren Buffett has a great investing rule, in which he only invests in things he knows. If he doesn’t understand the business, he doesn’t touch it.

I took a much different route when I first started, in which I invested in whatever I thought was sexy. A lot of those sexy businesses seemed cool, but they lost me money.

You should only invest in things that you know. If you want to start investing outside of your knowledge base, that’s fine as long as you are willing to lose some money to learn a new space.

(2) Don’t get too greedy


When it comes to making money, I used to be one of the greediest people out there. I always wanted to sell during the peak and if I didn’t time things right, I would get upset.

Because of my greed I lost money in a few cases when I could have made money. Guaranteed money is always better than potential earnings.

It’s very difficult to maximize your potential earnings. If you have an opportunity to cash out on one of your investments, and you would be happy with the return, take it. You can’t predict the future, so unless you have data to show that you should keep the investment, sell it if the price is right.

(3) Profit is more important than revenue

The biggest investment mistake I used to make was that I invested based off of revenue growth. If they had great growth, I would instantly write a check.

The issue with this is that not all business models are profitable. Even if a business has great growth, it doesn’t mean they will be able to turn a profit in the future. You need to analyze the business to make sure their margins are good and that they have a potential to turn a profit in the future.

There is nothing wrong with investing in high revenue companies with fast growth, but you have to make sure their business model has the potential to turn a profit in the future.

(4) Ideas are a dime a dozen



It doesn’t matter how good an idea maybe, if the team behind it sucks, the business won’t go anywhere. Do yourself a favor and don’t invest in ideas… invest in people.

In an ideal scenario a business should be a good idea, it should be run by awesome entrepreneurs, and by a team who is fast at executing. If you can’t find an investment that fits that criteria you should reconsider the investment.

Companies typically pivot from their original business model they original thought would do well. They will have to adjust their strategy and come up with new ideas. But if the team isn’t good, you’ll lose your money because they won’t be able to pivot.

(5) You Make Money on the BUY, not the sell



It’s rare that someone is going to pay more than market price for something. For this reason you should try to get the best possible deal when you first make the investment.

And if you think there are no good deals, think again. There are always good deals, you just have to search for them.

For example, I was able to pick up a penthouse condo in Las Vegas in the highest rated building on the strip for only $250 a square foot. All of the other comps where showing that people were paying a bit more than $600 a square foot.

I know the deal may seem too good to be true, but the developer wanted to move the inventory so they sold all of the penthouses to a group who could buy them all… I happened to know one of the individuals so I was able to pick one up.

I now have the option to sell that unit for $350 a square foot and it hasn’t even been 30 days since I bought it.

If you hunt for good deals, you will find them. As an investor you have to keep in mind that you are only as good as your last deal. So make sure you choose them carefully.

(6) Don’t spread yourself too thin



Both from a financial standpoint and a time standpoint you shouldn’t spread yourself to thin. I currently have over 30 investments because I used to take a spray and pray approach with my investing.

The issue with this is that investments aren’t as passive as you think. The more time you spend on each of them, the more likely they’ll succeed. So if you have 100 investments, it’s very likely that you won’t have time to help most of them.

And from a financial perspective, many of your investments will require more capital in the future… even if don’t seem like they will it right now. You should always keep a good portion of your cash in the bank incase you have to dump in more money into some of your investments.

A good example of this is a realtor named Neil Schwartz, who owns dozens of rental properties in California. During the recession most real estate owners got in trouble because tenants couldn’t afford to pay their rent and property values plummeted. Neil did well during this time because he was sitting on enough cash to continually pay the mortgages on his properties when they were sitting vacant.

(7) Don’t put all of your eggs in one basket



If you are just starting out and you don’t have a lot of cash, sure put all of your money into 1 business… because that’s what can help you become rich. But if you already have built up a nice nest egg spread your money out into multiple investments, this way if one goes wrong, you won’t lose all of your cash.

But you already know that.

What I really meant by “don’t put all of your eggs in one basket” is that you need to diversify your risk profile. Don’t only invest in risky investments or safe investments. Make sure you spread your money out in different risk profiles.

I used to only invest in revolutionary ideas that are likely to produce big returns, but those ideas are really risky and most of those investments will fail. It doesn’t mean that you shouldn’t invest in big, bold ideas, but you should also invest in safe bets.

These days I have my money in real estate, Internet companies, the stock market, and a handful of other sectors.


Conclusion

Hopefully you wont make the same mistakes I’ve made because it lost me a bit too much cash. I eventually learned how to pick better investments over time, but hopefully you don’t have to waste a lot of time and money like I did.



In addition to that if you want to get into the investing game, make sure you do it only if you are willing to continually make bets over the next 5 or 10 years. Investing isn’t a short-term game and over time you’ll be able to increase your odds of succeeding.

What other mistakes should you avoid when investing?

http://www.quicksprout.com/2013/05/13/7 ... vestments/

[candy_chia]

Understanding Risk
Risk and Reward are Part of Investing

By Ken Little, About.com Guide

“No pain, no gain.” How many times have you heard that cliché to describe something you really didn’t want to do? Unfortunately, investing carries a certain amount of risk and with that risk can come some pain, but also some gain.

You must weigh the potential reward against the risk of an investment to decide if the “pain is worth the potential gain.”



Understanding the relationship between risk and reward is a key piece in building your personal investment philosophy.

Carry Risk

All investments carry some degree of risk.

The rule of thumb is “the higher the risk, the higher the potential return,” but you need to consider an addition to the rule so that it states the relationship more clearly: “the higher the risk, the higher the potential return, and the less likely it will achieve the higher return.”

To understand this relationship completely, you must know where your comfort level is and be able to correctly gauge the relative risk of a particular stock or other investment.

Will I Lose Money?

Most people think of investment risk in one way: “How likely am I to lose money?” This statement describes only part of the picture, however. You should consider that risk and others when evaluating an investment:

- Are my investments going to lose money? (Is safety of principal more important than growth?)
- Will I achieve my investment goal? (Under-funding retirement, for example.)
- Am I will to accept more risk to achieve higher returns?(Are my investments going to keep me awake at night with worry?)

Let’s look at these concerns about risk.

1) Am I Going to Lose Money?

The most common type of risk is the danger your investment will lose money.

You can make investments that guarantee you won’t lose money, but you will give up most of the opportunity to earn a return in exchange.



For example, U.S. Treasury bonds and bills carry the full faith and credit of the United States behind them, which makes these issues the safest in the world. Bank certificates of deposit (CDs) with a federally insured bank are also very secure.

However, the price for this safety is a very low return on your investment. When you calculate the effects of inflation on your investment and the taxes you pay on the earnings, your investment may return very little in real growth.


2) Will I Achieve My Financial Goals?



The elements that determine whether you achieve your investment goals are:

~~ Amount invested
~~~ Length of time invested
~~~~ Rate of return or growth
~~~~~ Less fees, taxes, inflation, etc.

If you can’t accept much risk in your investments, then you will earn a lower return as noted in the previous section.

To compensate for the lower anticipated return, you must increase the amount invested and the length of time invested.

Many investors find that a modest amount of risk in their portfolio is an acceptable way to increase the potential of achieving their financial goals. By diversifying their portfolio with investments of various degrees of risk, they hope to take advantage of a rising market and protect themselves from dramatic losses in a down market.

3) Am I Willing to Accept Higher Risk?

Every investor needs to find his or her comfort level with risk and construct an investment strategy around that level.

A portfolio that carries a significant degree of risk may have the potential for outstanding returns, but it also may fail dramatically.


Your comfort level with risk should pass the “good night’s sleep” test, which means you should not worry about the amount of risk in your portfolio so much as to lose sleep over it.

There is no “right or wrong” amount of risk – it is a very personal decision for each investor.

However, young investors can afford higher risk than older investors can because young investors have more time to recover if disaster strikes. If you are five years away from retirement, you probably don’t want to be taking extraordinary risks with your nest egg, because you will have little time left to recover from a significant loss.

Of course, a too conservative approach may mean you don’t achieve your financial goals.

Conclusion

Investors can control some of the risk in their portfolio through the proper mix of stocks and bonds. Most experts consider a portfolio more heavily weighted toward stocks riskier than a portfolio that favors bonds.

Risk is a natural part of investing.



Investors need to find their comfort level and build their portfolios and expectations accordingly.

http://stocks.about.com/od/riskreward/a ... ndrisk.htm

[candy_chia]

Have Investors Finally Cracked the Stock-Picking Code?
THE INTELLIGENT INVESTOR, March 1, 2013



Believe it or not, there could be a new holy grail for investors.

"Great ideas come along maybe once every 20 years or so," David Booth, chairman of Dimensional Fund Advisors in Austin, Texas, which manages more than $262 billion, told me this week.

Lately, he and other leading investors have gotten excited about a financial measure called "gross profitability" or "quality." The measure appears to identify companies that will earn even more money in the future. New funds are launching based partly on it. What should you know before you consider joining in?

Research to be published soon in the prestigious Journal of Financial Economics by Robert Novy-Marx, a finance professor at the University of Rochester, shows that bargain-priced "quality" stocks outperformed the overall market by more than four percentage points annually between 1963 and 2011. This stunning margin is even higher than that earned over the same period by traditionally measured cheap "value" stocks, but usually with less severe losses in market downturns. Quality also tends to do well when value does poorly—and vice versa.

"There's something there, and I don't think it can be ignored," says William Bernstein, a money manager and investment theorist at Efficient Frontier Advisors in Eastford, Conn. "We don't know exactly why it works, but it works."

Most investors zero in on the bottom line: a company's net earnings. But here, it is what is near the top line that matters: total revenues minus basic expenses. When a company's goods and services take in a lot more money than they cost to produce, that is a high gross profit margin—and a strong signal of quality.

"You get much more informative signals about the health of firms" this way, Mr. Novy-Marx says.

That partly is because many of the investments that companies make for their long-term future growth can result in short-term hits to reported net earnings. A firm that spends on research and development, for example, is seeking to bolster its future profits by ensuring that it won't run out of new products to sell. That spending rise will hurt this year's net earnings. But the quality measure doesn't penalize companies for spending on R&D—and thus might be more effective at identifying tomorrow's more profitable firms today.

Over the past four quarters, for instance, Amazon.com AMZN +0.51% generated $61.1 billion in revenues. Its cost of goods sold, or basic expenses, amounted to $44.3 billion, leaving gross profits of $16.8 billion on total assets of $32.6 billion. But, largely because the company spent nearly $14 billion on R&D and marketing, its reported net income was negative $39 million.

Focus only on net earnings and you might miss the massive investment Amazon is making in its future—which could well pay off in years to come. Remember that the quality measure is designed to capture this kind of raw profitability. (Amazon didn't respond to a request for comment.)

As Warren Buffett has long shown with his stock picks, if investors underappreciate how much a company is likely to grow in the future, it can turn out to be a bargain even if it looks somewhat pricey by conventional measures.

Cliff Asness, managing principal at AQR Capital Management, a firm in Greenwich, Conn., that runs more than $71 billion and is launching funds that use the factor, says taking account of quality is "a great way to make a more accurate value measure."

Fund companies have noticed. Last December, Dimensional Fund Advisors introduced four funds that combine quality with pricier "growth" stocks. Later this month, AQR is expected to start three funds that blend quality, cheap "value" and fast-moving "momentum" stocks. As for annual expenses, the DFA funds will charge 0.2% to 0.55%; AQR's haven't been disclosed yet.

Funds or ETFs investing purely on the basis of quality can't be far behind, say industry analysts, although none are available yet.

Picking stocks this way isn't something you could pull off on a weekend morning in your pajamas. For each potential investment, you would need to subtract the company's cost of goods sold from its revenue, then divide by its total assets.

In general, says Mr. Novy-Marx, you want that ratio to be 0.33 or higher. You then would look for a low price-to-book-value ratio, available on most financial websites—ideally 1.7 or below. You would have to stick to big companies and diversify across many industries and dozens of stocks.

There's no rush. Let the funds launch and get seasoned. See whether the managers can deliver. Then wait some more, sitting out the inevitable boom in popularity. Before long, investors will be complaining that quality is overrated and that other investing styles work better.

Mark my words: At that point you will be able to get quality in quantity.

http://online.wsj.com/article/SB1000142 ... 68844.html

[candy_chia]

This article aptly described irrational human emotions in investing, the survey result validated the fact that fear prevented most from investing in bear market (for me, I exit too early for negligible gain due to inappropriate investing method).

How do you control you fear, refer to the link for Ray's (ngtfook) insightful advice:



Survey: Holding period for your stock portfolio
http://www.masteryourfinance.com/forum/ ... =14&t=2831

What Drives Investor Behavior?
JULY 2013 BY JOHN

The American Dream is, “If we can dream it, we can do it”. Too often we take this mindset into stock trading and it fails us. When we read and hear success stories of the rich and famous it always includes their tales of how they never gave up. They followed their heart (emotions) and it got them to the top. In the complex world of trading this is not the investor behavior you want. If you have it, dump it!

What Drives our Emotions?

Greed
Who invests in the stock market to lose money? No one.

When we get too greedy we make poor financial decisions.



We chase the bull market and buy more than we can afford.

This is similar to too much house or too much car.



The exact recipe that contributed to putting our nation into a recession a few years ago.
Fear
Your stock is tanking so you decide to sell. Fear leads to panic and selling; guaranteeing a loss.
Ego
We all know the idiom, Pride comes before a Fall, but many think it’s advice for the other guy. We learn from our mistakes. That’s wisdom too. Right? Are you willing to bet your life savings on that?

Following the Crowd
Everyone’s buying so it must be a smart choice. This actually does seem to make sense…until we remember that much of the stock market is emotion (investor behavior) driven.
All investors look at performance first. Some choose to buy or sell based off of that. Only a few do further research. We all should be.

Can Investors Guess Correctly?
No. Enough said. If you could you’d be winning at the casino. We all have emotions that drives our decision making.

Facts from Research
Back in 2001 a financial services research firm called, Dalbar, released a study called “Quantitative Analysis of Investor Behavior (QAIB)”. In this study they concluded that the average investor ALWAYS Fails to match market-index returns.

In the 17 years prior to December of 2000 the S&P 500 had an average return of 16.29%. Your average investor had 5.32% for that same time period. That’s a whopping 11% difference. For 2012 their report had the same findings. This only reinforced that the average investor does not know what they are doing.
Why the huge disparity? Part of the answer is that we’ll consistently have a Bull and Bear market.

Investor Behavior in a Bull Market

According to Dalbar, in 2012 the market was less volatile and investors took advantage of this. However, the average investor still couldn’t beat the market.
2012 was a bull market and the average investor underperformed by only 0.42%. This is very close, but it’s still under. What happens in a Bear Market?

Investor Behavior in a Bear Market

This is where Fear comes in and investors sell taking losses with them. There aren’t exact numbers of investor performances during these turbulent times. But we can gather that overall, bull and bear markets combined, that the average isn’t impressive. It certainly doesn’t put my mind to ease.

In a Bear Market the masses are Afraid to buy, the economy is suppressed and it takes awhile to climb back up the hill.



To conclude here are some Wise words from the authors of The Bogleheads’ Guide to Investing.

“When it’s time to make investing decisions, check your emotions at the door.
This is one area of life where acting on emotional impulses will likely lead you down a path of financial wreck and ruin.

- Playing your hunches, blindly

- following the crowd or an investment guru,



- trying too hard, acting on a hot tip,

- relying on supreme self-confidence,

- of other emotionally based investment decisions

===> will almost always leave you poorer.

The paradox of money is while most people are very emotional about acquiring it, Behaving Emotionally about money is a recipe for Losing it.”

http://allthingsfinance.net/what-drives ... -behavior/



Investing with Overconfidence
The human tendency to be confident is beneficial in many areas, including athletics, business and science. Mankind needs to have its dreamers; without them our rate of progress would be far less rapid and our outlook on life would be more pessimistic.
However, overconfidence is not a beneficial trait in the world of investing. It can lead us to Falsely Believe that we can predict the future movements of individual stocks or the market as a whole, that we can control the return on these investments, or that our activities involve little or no risk.

http://www.thelightmag.com/investing-wi ... onfidence/

[candy_chia]

The intriguing article is a stark reminder to investors to rid of the human bias to attain immeasurable wealth in stock investment.

Let me begin my sad story, some of you may have heard before:

My first trade enabled me to reap 100% gain about $1k (30% of my capital in 1997),


however over-confidence resulted in humongous loss of $50k in bull market (now you will wonder why anyone ever lost money in bull market).



That didn't stop my fighting spirit when I subsequently trimmed down the painfull loss to $30k over the decade.

Must express my deepest gratitude to a fellow graduate who encouraged me to reflect on my fatal mistake so i can recoup my loss with right investment.

A few recent winning valued stocks plus dividends accumulated had further reduced my loss to $20k, perhaps I could clear my debt before the finale of bull market.


The traumatic permanent loss incurred by a friend in his 30s who had quit the stock market scene:





3 Psychological Biases that Prevent Us From Making Sound Investing Decisions
By Jon

In order to make better decisions, we need to be keenly aware of the biases that affect our decision making. Here are three that every investor should constantly bear in mind.

1. Confirmation bias.

Let’s face it. We all want to be right as often as possible.

No one enjoys being told that they are wrong. Nobody likes to read about things that could imply that they are wrong.

None of us ever want to be wrong, if we can possibly help it.

Beside the psychological feel good factor about being right, being right is also economical on the thought process.



Being right is the end game, but Being Wwrong implies that there is a ‘RIGHT’ out there Waiting for us to recognize and process. It is tiring to be wrong, or even to entertain that thought that we could possibly be wrong.

Hence the confirmation bias.

We seek out evidence to confirm that we are right while at the same time denouncing other factors that could point to us being wrong.

This bias is abound in many aspects of our lives.

If you are a religious person and believe in the existence of a certain God, chances are you will not bother to study the teachings of other religions, but rather seek to confirm your already unshakable faith by attending services and ceremonies, reading material from the same source, and surrounding your cliche with friends of the same belief. The same goes for political and sporting affiliation, where we would be resistant to, and constantly downplay any negativity surrounding the parties and teams we are rooting for.

The bias is unmistakable in investing. Alvin and myself were trading in Research in Motion (RIMM – BBRY) shares about a year ago. He was optimistic and considered the stock to be undervalued and irrationally sold down considering their huge cash stash. I was fully negative on the prospects of the company and considered it to be going the way of the Dodo – extinct soon. BBRY happened to be followed by many analysts and I ended up spending huge amounts of time on the web reading reports of the company. On hindsight, I realized that the reports and analysts I followed were all bearish. The effort I put in to make me feel good only served to make myself feel better but did nothing to enhance my overall awareness of the company and did nothing to allow me to make better trades.

2. Loss Aversion bias

Another undisputed fact: We all hate losing.



Some of us more than others, but basically, we all hate losing.

Imagine the following scenario.

You have bought shares of Creative Technologies a decade ago when it was the undisputed market darling and breaking new highs every week.

Unfortunately it has since fallen on hard times and the share price is barely a fraction of what it used to be. However, the loss is just too painful to bear and you have put off selling the stock for years and years on end.

One day however, you receive a statement from your broker stating that a trading glitch occurred and that you Creative Holdings have been mistakenly disposed off. The brokerage is offering to buy back the shares for you at no charge and just needs your consent. Would you give the consent? My guess is that you would simply let it pass. Chances are you would be relieved that someone else has pulled the trigger for you and happy for the extra amount of money you find in your bank account from the sale.

That is Loss Aversion at work for you. Losses are deemed much more painful than unfulfilled gains, and we tend to Avoid them at all cost.



Because of Loss Aversion, we end up hanging on to our losing trades when we should have cut our losses and moved on. Such behavior is unbecoming, but sadly, extremely common amongst investors.

3. Overconfidence Bias

As the name suggests, the bias occurs because human beings tend to be more confident in our subjective judgements than the actual objective accuracy.



This happens across all aspects of our lives. We tend to think that we are better drivers than most people around us, we figured that we are the better workers in the company/department, and we are all extremely certain that the stock that we just bought will be a multi-bagger.

In reality, our driving skills are average at best, others work just as well as we do, and our stock picking abilities certainly do not rank higher than most otherwise we will be making a very good living out of it.

In Conclusion
As traders and investors it pays to constantly remind ourselves to search for disconfirming evidence,

maintain proper cut loss levels and take losses when necessary



and most importantly, guard against overconfidence.



Being Aware of and Overcoming these biases will lead us to make better financial decisions!

http://www.bigfatpurse.com/2013/08/3-ps ... decisions/

How Warren Buffett Avoids Getting Trapped by Confirmation Bias
5/07/2013 @ 11:31AM

Employing specific strategies to avoid confirmation bias isn’t new for Buffett. An article by Jason Zweig, author of the excellent Your Money & Your Brain, pointed me to a lengthy Fortune piece written by Buffett a dozen years ago. He wrote,

"Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience–a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation."


There’s a lesson here for all of us – to avoid making bad decisions about investments, political candidates, and many other topics, we must do two things:

- Be aware of the danger of confirmation bias, and acknowledge that our judgment can be clouded by it.
- Aggressively seek out and understand information that disagrees with our existing belief.

http://www.forbes.com/sites/rogerdooley ... tion-bias/


7 Lessons Learned From Losing $739,135 In Bad Investments
http://www.masteryourfinance.com/forum/ ... 964#p27964

[walkinepark]

Warren Buffet’s joke: Don’t believe your own hype.

A few times when investing, we drive ourselves to accept that we have discovered the ideal stock in spite of the fact that we haven’t done the right measure of research it merits. Warren Buffet imparted a joke making us comprehend how exposed we are to our own particular lies.

Warren Buffet once shared this joke:

A very successful oilman dies. He faces Saint Peter, who says, “You’ve been a good man and normally I’d send you to heaven, but heaven is full. We only have a place in hell.” The oilman says, “Any chance I could talk to other oilmen who are in heaven? Maybe I can convince someone to switch places with me?” Saint Peter says, “It’s never happened before, but sure, I don’t see any harm in it.” The oilman goes to heaven, finds an oilmen convention and yells, “They found a huge oil discovery in hell!” Oilmen are stampeding out of heaven to hell, and our oilman is running with them. Saint Peter asks him “Why are you going to hell with them? I have a spot in heaven, you can stay.” The oilman answers – “Are you kidding, what if it’s true?

*Things to retain from this story: Don’t believe your own hype. Take informative decisions and once made stick with them with everything you got.


Cheers!

[chuajinyi]

Applicable to the market situation at this present moment.

Thanks for sharing - shall stick to my portfolio

[candy_chia]

Lim & Tan Securities, 4 Sep 2013

While Singapore’s STI index’s 13% decline has almost matched its average decline of about 14% in the past 3 years, we note that investor sentiments in the local market have turned speculative in recent times with SGX having queried Rowsley and Informatics as their share prices were chased up on higher than normal volumes.



-Speculators have also been lapping up on obscure names such as Albedo, China Environment, Tritech and CNA.


- This is despite key insider selling shares in these companies.

- This is what famous investor Jeremy Grantham has
termed “dash for thrash”.

- We are thus turning cautious on the Singapore market, notwithstanding that the index having already declined 13% from its Aug’13 peak.



Investors' dash for trash
Financial Times, May 16, 2013

Wall Street traders are calling them 'the bonds formerly known as high-yield'. FT markets reporter Stephen Foley goes behind the rally in junk bonds and asks why fixed-income investors are taking on more risk for less reward.

http://video.ft.com/2384987225001/Inves ... sh/Markets

[candy_chia]

FINANCIAL MARKETS
Lim & Tan Securities, 30 Sep 2013

Meanwhile, the continued feverish punting of penny (low priced) stocks



have seen continued sales by company insiders / major shareholders.



~ Edward Lee who is a substantial shareholder of IPCO and has been a consistent buyer of the stock since Jan’13 (low of 2.4 cents and high of 3.3 cents) has turned seller for the first time this year.

He sold 73.216mln shares last Friday between 3.6-4.1 cents a share, reducing his holding to 462.381mln shares or 9.065% of the company. IPCO has done well this year, rising from around 2 cents at the beginning of the year to last Wed’s high of 4.4 cents before correcting to 3.7 cents last Friday.

~~ Gary Loh, the Deputy Chairman of Sunmoon Food continued to reduce his holding in the company with last Friday’s sale of 1.3bln shares at 0.001 Singapore cents a share, reducing his holding to 12,464,482,258 or 39.1% of the company. The stock has been stuck between 0.001 and 0.004 cents this year.

~~~ Ms Doris Chung Gim Lian (the second largest shareholder after Chairman Quek SP) continued to reduce her stake in ACMA Ltd. Last Thursday she sold 30mln shares at 3.2 cents, reducing her stake to 554,212,750 shares or 13.188% of the company. Since peaking at 5.2 cents in Feb’13, the stock has been declining and hit 3.1 cents last Friday. Doris last sold close to 10mln shares at 3.2 cents in Mar’13. This nevertheless is still higher than the 2.1-2.6 cents range it was trading at in Jan’13.

~~~~ The Deputy Chairman and Executive Director of Ntegrator International Han Meng Siew sold 2mln share at 7.6 cents, reducing his stake in the company to 33.391mln shares or 4.52% of the company. Han MS’s share sale is notable as he last sold 3.44mln shares at 12.1 cents in Mar’13 and his latest share sale was done at 7.6 cents, significantly lower than his last sale.

~~~~~ The Chairman and CEO of Asia-Pacific Strategic Investments Ltd Choo Yew Ming sold 3.66 mln shares between 43-47 cents each, reducing his holding in the company to 27,500,804 or 22.4% of the company.


Ipco leads charge of low-priced stocks
Blue chips flounder on Wall Street's continued slide, a weak HK and Europe's flaccid opening
Business Times, PUBLISHED SEPTEMBER 26, 2013

PENNY stock fever ran high yesterday as nine billion units worth just $1.5 billion were traded for an average of just 17 cents per unit.

Blue chips, in the meantime, sagged in line with a fourth consecutive drop on Wall Street overnight, weakness in Hong Kong and a soft opening in Europe in the late afternoon. After rising 20 points in the morning, the Straits Times Index eventually sank to a net loss of 3.17 points at 3,208.58.

For most analysts the main topic of conversation was when the US Federal Reserve might start tapering its monetary stimulus but this appears to be of only passing interest to punters in penny stocks, such as Ipco, SingHaiyi, HanKore and Albedo.

Ipco, in particular, stood out with a one-cent or 29 per cent jump to 4.4 cents on an astonishing volume of 2.1 billion, which alone was about one quarter of the entire market's unit business. Turnover in the 30 STI components was $514 million or about one-third of dollar volume.

Brokers noted that interest in low-priced issues - many of which are loss-making - has been building for a while on the back of rumours of reverse takeovers, the participation of influential and well-connected persons and various other speculative reasons.