Can you become a super investor?
by Koon Yew Yin
Many investment psychologists do not think an adult can master all the following 7 traits if he does not have them in his genes or learned them when he was young and become a super investor, like Warren Buffet.
I started serious investing in public listed shares when I retired from executive work with IJM Corporation Bhd in 1983 at the age of 50 years. I was not an accountant nor have I a MBA degree. I was just a civil engineer and I hardly knew how to read a balance sheet at that time.
I started by reading to understand the basic fundamental principles of share selection as practiced by Warren Buffet, Peter Lynch and other great investment gurus.
Trait 1: Be a contrarian investor, the ability to buy stocks while others are panicking and sell stocks while others are euphoric. In 1983 when China declared that they wanted to take back Hong Kong, the people were selling as if there was no tomorrow because the Communists were coming. The Hang Seng Index plunged to about 700. Currently it is around 18,500.
In such a situation at that time, would you buy Hong Kong Shares?
I use all the money I had and I bought H.K. Realty and Trusts at $ 3.60. Its price was $13.60 before the crash. When the former British Prime Minister Margret Thatcher went to Beijing to negotiate the sovereignty of Hong Kong, Beijing rejected the appeal and the stock market plunged further. I bought more H.K. Realty at $ 3.00 with margin finance. Most investors would not buy and they would say that I was mad to try to catch a falling knife. This was the most agonising period when HSBC was selling below $ 7.00.
After several months of negotiation, Beijing granted another 50 years extension of capitalist system. The market rebounded immediately and H.K. Realty & Trust went rapidly back to $13.60. As the value of my holding went up, I bought more and more shares with increasing margin. In 1986, I even bought 47% of a stock broking company, called Kaiser Stocks and Shares Ltd. How I took advantage of the rising trend is history.
Trait 2: Obsession in playing the game and wanting to win. These people don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they are still half asleep, is a stock they have been researching. They are thinking about selling, or what the greatest risk to their portfolio is and how they are going to neutralize that risk. They are obsessed in enhancing the value of their holdings and they have very few friends.
Trait 3: The willingness to learn from past mistakes. Most people would much rather just move on and ignore the dumb things they’ve done in the past. I believe the term for this is repression.” But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career.
Trait 4: An inherent sense of risk based on common sense. Most people believe analysts’ reports which are often ‘a buy’ recommendation. It is very seldom they recommend ‘a sell’ because they would lose the business from the company he has recommended ‘a sell’. You must always take any analyst report with a pinch of salt. I believe the greatest risk control is common sense which is not so common sometimes.
Trait 5: Confidence: Great investors must have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship. He was proven right when the dot com bubble bust.
Trait 6: Clear thinking. When considering a share, you must try to understand the nature of the company’s business and its inherent difficulties so that you can evaluate your risk exposure. There are a lot of people who have genius IQs who cannot think clearly, though they can figure out bond or option pricing in their heads.
Trait 7: And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do. When the market makes a severe correction, most people dare not buy more shares to average down or to put any money into stocks at all when the market is plunging. People do not like short term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss. But most people just cannot see it that way; their brains won’t let them. Their panic instinct steps in and shuts down the normal brain function.
Many investment psychologists do not think an adult can master all the above 7 traits if he does not already have them in his genes or learned them when he was young.
By that time, your potential to be an outstanding investor later in life has already been determined. It can be improved, but not developed from scratch because it mostly has to do with the way your brain is wired and experiences you have as a child. That does not mean financial education and investing experience are not important. Those are critical just to get into the game and keep playing. If you cannot become a super investor, you would still earn more than the average earning of most people.
3rd Jan 2012