Sunday, August 31, 2008

Ping Pong, Patience, Psychology

After 48 years, the Singapore women table tennis team finally got through the nerve-wrecking semi-finals to end the medal drought. It was the most fascinating experience watching the semi-final game live. And hence the inspiration to draw parallels between table tennis and investing.

For those who missed the game (btw it was office hours, so most diligent, career-focused Singaporeans were actually working hard), let me just briefly summarized what happened. Feng Tianwei won the first match easily and it looked like the rest of the game should be a breeze for Singapore. But Li Jiawei lost the 2nd match after 5 tough games. Singapore came back to win the doubles, then Wang Yuegu lost the 4th despite putting up a very strong fight and it has to come to the 5th match. Of course our heroine Feng battled all out in the last match and finally broke the Koreans.

The Koreans are very defensive players, they sliced the balls all the time and simply waited for the Singaporeans to make mistakes. That was how Li Jiawei lost. She was not on form and her successful smash rate was definitely below par. But needless to say, when she succeeds, the smash was a sure killer. Feng, on the other hand, smashes with higher accuracy but seldom kills the opponent, ie they managed to defend. Feng is also definitely more patient, only smashing when she gets a good angle.

In investing, this concept is actually pretty important. Buffett used to remind us, "Imagine you only have 15 bullets in your life, do you shoot everything that pops out, or do you go for the big turkey?" Li Jiawei goes for the kill at the slimmest chance, she misses a lot but when she hits, its a grand slam. Yes, the opponent get killed spectacularly, but it's still just one point.

In investing, Jiawei's strategy can work if that grand slam is a 10 bagger, and you recover all your losses from the other 9 losing bets. This is how Venture Capital (VC) works. But my guess is you will have better luck with Feng's strategy. And this ties in with patience. Don't simply buy stuff on a spur. Cosco has dropped 50%, it is definitely a buy now! SPC dividend yield is 10%, buy! There are reasons why they dropped so much in the first place. Exercise patience, strike when your chances of success are very high, not just when it is hot.

Back to the matches, it occured to me that it should be quite unlikely whereby someone is down by 2 games and then comes back to win the next 3 games and win the match. Similarly, if you are lagging by even just 2 or 3 points and your opponent is at game/match point, it is quite difficult to win. Psychology is at work here. In order to counter this, a lot of mind training is needed. In this aspect, I would say the Singapore team was quite good, but the Koreans were better. Of course, world No.1 Zhang Yining, is probably the best at this.

In investing, your opponent is the market. Most of the time, you are down by 2 to 3 points bcos it is very hard to beat the market. 90% of all professional fund managers underperform the market. So you need to train your mind and be calm. Otherwise, emotions cloud everything and you make stupid mistakes. Trading rules some times help. E.g. stop loss levels, profit taking levels. Needless to say, right-sizing the bets is equally important. If your investment is too big and you are losing sleep, you need to scale it down.

Of course, most true blue value investors don't believe in trading rules and sizing of bets. They believe that if the stock is down, you should buy even more since it's cheaper now. And you should bet your house and car on it bcos that's how you maximize returns.

10 comments:

  1. hi, I hv a quesiton on listed company that declare divident (say $0.01) and using the divident to offset rights (1:1) subcription price (say $0.01). There is no real cash payout to the shareholders at the end. This is no difference to shareholders if the listco delcare bonus issue 1:1. Then why the listco bother to carry out the previous corporate action instead ?? is there any financail impact on the listco? how it is affect the balance sheet & it cash flow for the listco ?? thks

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  2. I try to answer your question with my humble knowledge.

    1st. The timing of the dividend and right issues is important, there could have an impact on cash flow if this two actions fall into different period.

    2nd. There are many reasons for a company to declare dividend, the major one would be to 'Maintain' the yearly dividend level in order to provide investors some form of confidence. ( I feel that is funny)

    3rd. There is cost involved in right issues,which can be expensive, there is an avoidable expense in the process.

    4th. Citibank has been raising capital since subprime (one of the big lender is Temasek), but the company also declare dividends at the same time.

    5th. There is a big different between bonus issue and dividend. Bonus issue there is no real cash outflow from the company.
    _________________________________

    Ya, psychological factor will determine whether we can become a successful investor. Be patience.

    I don't think value investor will bet their house and car on stocks... haha..

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  3. I like your ping pong & investment analogy, great work!

    On the part on trading rules, I'm a non-believer too. So long as one diversify sufficiently & rationally, (i.e. no all-eggs-in-one-basket even if a seemingly good opportunity... one might be wrong...), there is no reason to lose sleep, and definitely no reason to bet one's life just on that 'golden' opportunity.

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  4. Sechai, thanks for the very apt answer. I concur your every points.

    Market uncle, I believe in diversification as well. But it is also true that you should bet big when the odds are in your favour.

    The problem is with the markets, you can never know the odds right? Not like Singapore Pools, hehe.

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  5. I would like to clarify my opinion regarding the 'bet their house and car in'...

    I agree with Mr. 8%, we should bet big when we really identify a good company which is undervalued. And i do not think that there is a real need of diversification if you know what you are doing.

    Simply diversify your portfolio for the sake of diversification can be known as 'Poor' diversification.

    I remember Benjamin Graham once said in the last chapter of The Intelligent Investor, one of the requirement of value investor is to be
    Courageous - have confidence in your own analysis'

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  6. I think it is not the usual "either-or" argument. It is right to diversify and it is also right to bet big when your odds are good.

    So you diversify when your odds are so-so. Nobel prize winners have proven that this is as close as you can get to a free lunch in investing. In most times, you should do this.

    You bet big when your odds are very good. The problem is
    1. You never really know the odds, not like it is listed on a screen at Singapore pools.
    2. Odds that are good comes rarely. And most people, even the experts, only knew that odds were damn good after the fact. E.g. property prices in 2003, River Valley Condo at $400 psf! Or maybe now, Hang Seng China PER at 10x.

    Then again, what are the odds that you buy HSC now and still lose money in 5 years? 10%? or 50%? Cannot tell right? But damn shiok if you get it right.

    That's the beauty of investment I think.

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  7. I missed the game, but thanks for the interesting analogy!

    Investment, however is the same as sports, end of the day..you have to win. Maybe not this round but ultimately.

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  8. Thanks for the advice on diversification, probably diversify over a portfolio of undervalued stocks is acceptable to me.^^

    We will never know the odds, and we do not need to bother. In my humble opinion, part of the odds are due to undervalue and (major) part of it is due to the Mr. Market. I will tend to focus on the first part, although the problem is there is no clear boundary.

    Probably, Cost averaging will be a good way on HSC.

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  9. Yes at the end of the day, we need to win. ie make money if not then wat's the point right? But don't give up, the road is very long, IMO, 10 yrs or more. So keep learning and keep trying.

    That is very true, the odds are determined by the margin of safety to a certain extent. But sometimes also about timing.

    Interestingly, timing may be crucial in the HSC index. Most bubbles never recover to their previous peak of a long period of time. Which means that it may be cheap enough to buy HSC now. But it may stay cheap for a long time. So if you invest now, the compounded return may not be that great.

    But at least, you won't lose your capital lah.

    ReplyDelete
  10. Yes at the end of the day, we need to win. ie make money if not then wat's the point right? But don't give up, the road is very long, IMO, 10 yrs or more. So keep learning and keep trying.

    That is very true, the odds are determined by the margin of safety to a certain extent. But sometimes also about timing.

    Interestingly, timing may be crucial in the HSC index. Most bubbles never recover to their previous peak of a long period of time. Which means that it may be cheap enough to buy HSC now. But it may stay cheap for a long time. So if you invest now, the compounded return may not be that great.

    But at least, you won't lose your capital lah.

    ReplyDelete