Archives of “January 10, 2019” day

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Lessons Learned

  
  Education
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Lessons learned from the past few years… Taking smart risks means cutting back when necessary and getting back in the game when the opportunity arises. To borrow an example from sports psychology, the fear of re-injury is a feeling experienced by athletes long after they have been hurt and are on the road to recovery. The same holds true for investors who saw their holdings collapse in 2008.

 

True top performers train themselves to rely on their short-term memories, avoiding a mindset of fear that leads to missed opportunities to grow and prosper. The average person can learn from the example of elite investors and traders — never take winning or losing personally – especially when it comes to money. View each situation on its own merits. If there is a great opportunity for success, then take the risk. If not, then don’t. The formula sounds simple enough, but emotions continually cloud our better judgment.

Jim Chanos on Investment Sytle ,Short Selling ,Contrarian Trading & China

  
Analysis, Education
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Graham & Doddsville, a Columbia Business School investment newsletter, has recently scored an interview with Jim Chanos, the founder and Managing Partner of Kynikos Associates and one of the world’s most successful short-sellers. His most celebrated short-sale of Enron shares was dubbed by Barron’s as “the market call of the decade, if not the past fifty years. Obviously, he’s still bearish on China’s property market and banking sector and his positions are starting to move his way. In this long (though very insightful) interview with G&D, Chanos talks about his background, investment style, short-selling, contrarian trading and, of course, China.

Here is an excerpt of the original interview (full interview below that… it’s long but it’s worth the read).

On Wall Street ethics:

“… I handed out a two page memo to the senior banker discussing the impact of buying back stock. The senior banker looked at me with an icy stare and stated that we were not in the business of recommending share buybacks to our clients; we were in the business of selling debt. This was my first douse of cold water regarding Wall Street and I became pretty disillusioned after that episode. I had learned that Wall Street wasn’t necessarily doing things in their clients’ best interest…” 

On timing a short-sale:

“I recommended a short position in Baldwin- United at $24 based on language in the 10-K and 10-Qs, uneconomic annuities, leverage issues and a host of other concerns. The stock promptly doubled on me. This was a good introduction to the fact that in investing, you can be really right but temporarily quite wrong… I went home to visit my parents for Christmas and received a phone call from Bob Holmes telling me that I was getting a great Christmas present – the state insurance regulator had seized Baldwin-United’s insurance subsidiaries.” 

On being a contrarian:

“… numerous studies have shown that most rational people’s decision-making breaks down in an environment of negative reinforcement… You’re basically told that you’re wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they’re hearing is not.” 

On shorting:

“We try not to short on valuation, though at some price even reasonably good businesses will be good shorts due to limitations of growth. We try to focus on businesses where something is going wrong. Better yet, we look for companies that are trying — often legally but aggressively — to hide the fact that things are going wrong through their accounting, acquisition policy or other means. Those are our bread-and-butter ideas…. Valuation itself is probably the last thing we factor into our decision. Some of our very best shorts have been cheap or value stocks. We look more at the business to see if there is something structurally wrong or about to go wrong, and enter the valuation last.

…You need to be able to weather being told you’re wrong all the time. Short sellers are constantly being told they’re wrong. A lot of people don’t function well in an environment of negative reinforcement and short selling is the ultimate negative reinforcement profession, as you are going against the grain of a lot of well-financed people who want to prove you wrong. It takes a certain temperament to disregard this.” 

On China:

“This is a bubble that has a long way to go on the downside. Residential real estate prices, in aggregate in China, at construction cost, are equal to 350% of GDP. The only two economies that ever saw higher numbers at roughly 375% were Japan in 1989 and Ireland in 2007, and both had epic property collapses. So the data does not look good for China.”

…In China, everyone is incented by GDP. They are fixated on growth. In the West, we go about our economic lives, and at the end of the year the statisticians say, this year your growth was 3%. But in China, it’s still centrally planned. All state policy goes through the banking system. They decide what they want growth to be and then they try and figure out how to get there.” 

Full interview below. (more…)

Big Mistake Done By Traders

  
  Education
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The big mistake traders make is labeling challenges as problems.  A challenge is a function of growth, pushing one’s boundaries, becoming more than you presently are.  A problem is a shortcoming, a deficit, something to move past.
If you are never anxious, you are never pushing your boundaries.  Growth requires movement outside our comfort zones.  That brings uncertainty, nervousness, and doubt.  
The big mistake traders make is trying to eradicate uncertainty, nervousness, and doubt.  They want to trade with confidence and conviction.  They want to fearlessly pull the trigger.  So they stay in their comfort zones and they never grow and they never adapt to changing market conditions.
The trader who wants to develop embraces uncertainty, doubt, and fear.  Growth comes from mastering those, not erasing them.
The big mistake traders make is justifying stasis by calling it “sticking to a process”, “controlling emotions”, and “staying disciplined”.  Every uncertainty is a challenge.  Every challenge is an opportunity for growth.  Mastering challenges means we continually evolve our processes and make growth our discipline.  
If you want to overcome a “problem”, find the developmental challenge it brings to you.  Your problem is a gift.  Unwrap it.  Figure out how it will make you better.  Then tackle one small piece of the challenge and set yourself up for success.  Once you’ve gotten that under your belt, tackle the next piece, then the next.  Bryan was right: confidence comes from doing the things we fear, not from living a static life free of uncertainty.  

Sir John Templeton’s 16 Rules for Investment Success

  
  Education

Sir John Templeton’s 16 Rules for Investment Success

  1. If you begin with a prayer, you can think more clearly and make fewer mistakes.
  2. Outperforming the market is a difficult task.
    • The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
  3. Invest – don’t trade or speculate.
    • The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, the market will be your casino. And you may lose eventually -– or frequently.
  4. Buy value, not market trends or the economic outlook.
    • Ultimately, it is the individual stocks that determine the market, not vice versa. Individual stocks can rise in a bear market and fall in a bull market. So buy individual stocks, not the market trend or the economic outlook.
  5. When buying stocks, search for bargains among quality stocks.
    • Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
  6. Buy low.
    • So simple in concept. So difficult in execution. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic. But if you buy the same securities everyone else is buying, you’ll have the same results as everyone else. By definition you can’t outperform the market.
  7. There’s no free lunch. Never invest on sentiment. Never invest solely in a tip.
    • You would be surprised how many investors do exactly this. Unfortunately there is something compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
  8. Do your homework, or hire wise experts to help you.
    • People will tell you: investigate before you invest. Listen to them. Study companies to learn what makes them succesful. (more…)
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