Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday, 9 December 2014

Confession of an undisciplined investor

This is a confession post of an undisciplined investor that sought to cut corners in investing. From what you already know, the market is ruthless and it only reflects your performance to the amount of work you put in. Once you are complacent and assume that you are better at beating the market, it will whip you till you beg for mercy.

Being a young investor, similar to all beginners, I had beginner's luck (sort of). I made some wise investment decisions and made a decent rate of return. While it is not fantastic, I am still proud as I had beaten the market average.

However as time passes, I began to slack off and took shortcuts in evaluating my investment choices. I was not prudent in checking the ratios and analysing the company's strengths and weaknesses. The market knew it and began its punishment.

Slowly, it took away my previous profits and gradually reduced my rate of return. Mistakes began to pile up and more profits were eroded.

The previous trainings on discipline and risk management were off my mind. I lost focus. Then, came the moment when I had to admit my faults. I cut my losses, which was supposed to be done earlier on.

From this humbling experience, I paid a price - my hard-earned profits. However, I gained back several lessons of which I would like to share.

1. Never to cut corners
When times are good and your investment decisions are proving to be on-spot, never let your guard down as you will never know when the market will reach out its paws and claw back your cash. Always analyse the companies well before making any investments.

I was browsing an online article and found this to be useful.

Questions to ponder:

Financials. Are there any potential red flags amidst its financials?

-Ratio of Total Receivables to Revenue (Channel Stuffing?)
Related Party Transactions (Tunneling?)
-5 Year Earnings Trend vs Industry Trend (Does this company consistently keep growing revenues when all companies in the industry are showing otherwise)
-Margins (Comparing the margins of the company to peers to understand the average)
-Management. Is management one that is transparent or dubious?

-Transparency of Annual Reports (Does the CEO only report positive announcements every year?)
-Board of Directors (Country of Origin)
-Chairman vs CEO positions managed by separate individuals (Problems of family-owned companies)

2. When things go wrong (and they usually do), turn to your risk management procedures and follow through. No one is perfect and you have to cut losses sometimes. If not, in order to earn back your losses, you will need to recuperate 2x of it.

While this setback is disappointing, I have gained something in return. The only consolation I have.

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1 comment:

  1. Thanks. That's true words lots of people won't share.