Market Thoughts
Links | Sitemap | Search:   
  Home  > Commentary  > Archive  > Market Commentary  

What Type of Investor are You?

(February 17, 2005)

Please note that we switched to a neutral position from a 100% long position in our DJIA Timing System on the morning of January 12th at DJIA 10,530. No new signals as of now. My partner, Rex Hui, is currently in Hong Kong and so the new section on our DJIA Timing System won't be finished until he gets back from Hong Kong (middle of next month).

Good news - our charts section is now interactive! We still currently provide only two studies - the % deviation from its 50 & 200 DMAs for the DJIA and for the NASDAQ Composite. But this will change as we seek to improve our website further and as we get more subscribers!

Note: Going forward, our charts section will be updated on Wednesday and Sunday evenings - concurrent with the updating of our regular twice-a-week commentaries. I personally feel these charts are invaluable. One can also do historical studies on them - as well as to see how the DJIA and the NASDAQ are currently doing relative to their 50 DMAs and 200 DMAs.

Again, we will need all the subscribers that we could get! Current subscribers: Please continue to forward this to all whom you think will be interested in reading our commentaries going forward. New subscribers can subscribe here.

Dear Subscribers and Readers,

Like I have said many times before, I will continue to try to devote more space in our commentaries to individual stocks and industries in 2005 and going forward. There are many basically three ways to make money in the stock market, as I outlined in my Monday night's email to our subscribers. There is perhaps a more important one - but one which most people don't have the necessary skills to follow. That is, if one has the vision and the correct perspective, then one can make an immense amount of money by buying the next Microsoft or Coca-Cola - holding those shares thick and thin through bull and bear markets. Huge fortunes have been made this way, but not only does one need to have the vision, one also needs a certain temperament and confidence in order to hold a common stock for the long-run. Unlike the three methods that I discussed in my email, one cannot hope to do this by purely just devoting an immense amount of time to studying stocks or by crunching numbers. People are inherently emotional beings, and having the ability to hold a common stock through the ups and downs of the economy, wars, and financial crises is an ability that 99.99% investors do not have.

Okay, you may wonder: Why am I discussing this concept if I personally believe that 99.99% of investors cannot do this? Well, remember Warren Buffett's "20 punches and you're done" concept? Basically, it means that every investor should treat his investing career as a punch card with a limit of 20 punches. After 20 punches/investing decisions, then you're done for life. Always put this at the back of your mind, dear readers. Sometimes, we find ourselves getting into stocks that we are really sure about just because we have idle cash lying around. Don't tell me you haven't made this mistake before. Buffett made this mistake when he bought a significant portion of convertible preferred stock of USAir in the second half of 1989. Buffett knew the dynamics of the airlines industry. He had previously remarked that as a whole, the airline industry has never made money. The violation of his investment principles cost him dearly. Jesse Livermore, the legendary late 19th and early 20th century "Boy Trader," has also made these mistakes numerous times - and often paid dearly for it. Bernard Baruch, a trading friend of Livermore, would often remind Livermore that "it's time to go duck hunting" whenever they both felt that there were no obvious opportunities in the stock market.

Again, I would like my readers to always keep this "20-hole punch card" analogy at the back of your minds whenever it comes to investing. Having this thought would always cause you to be more selective in picking stocks - and would more likely than not to induce you to do more fundamental research before pulling the trigger.

Each of the three money-making methods that I outlined in my Monday night's email is not applicable in all situations. There is a time for everything. Momentum investing was not a good play in March 2003, and yet value investing was. Similarly, value investing was definitely not in vogue during most of the late 1990s. One of the more popular trades in the last few years - the carry trade between the short and long end of the yield curve - is also now disappearing. However, this fourth method that I have outlined is timeless, and can be "used" successfully in every trade that you make. I personally believe that most investors don't have this in the back of their minds when they are buying a certain stock. Warren Buffett does. And you should as well - as it will give you a huge advantage when it comes to investing successfully in the stock market.

Given what I have said above, another useful endeavor for the investor who wants to be successful going forward is to find out what type of investor one is. Learn about your strong points and try to adopt a trading methodology that takes advantage of your strong points. Work on your weak points. Being able to successfully manage a portfolio is very similar to managing the human body. If any one of the many organs should fail to function, then the whole body suffers a great deal. That is the same with investing. If you are very good at finding good companies at good prices but are very emotionally when it comes to enduring the bumps in the major indices, then perhaps you can do better by not watching the financial news every day. The image of the successful trader who watches the ticker screens all the time on an intraday basis is merely a myth. Buffett does not have a stock ticker in his office and neither did he have one in his younger days. Soros actually had better performance once he started writing "The Alchemy of Finance" in the late 1980s - primarily because he was forced to write down his thoughts and think about the big picture instead of focusing on the day-to-day movements of his investments or speculations.

Another "big picture" study that may be useful to your investing health is to study financial and stock market history. For example, in the years before World War II, a lot of investors made fortunes by betting on the business cycle and relying on insider information. Names like Jay Gould, Daniel Drew, Bernard Baruch, and Jesse Livermore were the more notable names. Even figures such as Andrew Carnegie made some money by trading on insider information (along with his boss, Tom Scott, he would buy the shares of his suppliers just before a major contract was announced) during his early days at the Penn Railroad. With the rise of the Federal Reserve and the SEC, money-making opportunities that were very profitable in the 19th and the early parts of the 20th century are mostly no longer valid. It may be fun to read about the exploits of the pools, the 1901 Northern Pacific Corner, or Livermore's shorting of the market during the Panic of 1907, but such scenarios are nearly no longer valid today. True, the days leading up to the 1987 crash was a great money-making opportunity for people who had bet on stock market cycles. So was the 2000 to 2002 tech crash. However, such scenarios (and thus money-making opportunities that bet on these scenarios happening) occur much less frequently today. The intervention of the Federal Reserve has meant longer business trends, less financial crises, and less power being exerted by individuals or trading houses. The creation of the SEC, meanwhile, has created more transparency and accountability. Today, companies are much better run in general. Research material can be more easily obtained - especially with the advent of the information age and the internet. Buying and holding truly great companies at good prices such as Coca-Cola or Starbucks has turned out to be a great strategy and should continue to be a great strategy for the 21st century.

In short, a great investor has to find an edge above all other investors and be able to take advantage of his strong points and work on his weak points. Know your stock market history, and you will learn how to adapt to changing times. Constantly ask yourself questions and reflect upon them, such as: Why doesn't Livermore's strategy work as well today as it did one hundred years ago? How about the classic Benjamin Graham way of investing? Given the rise of the age of advertising in the post World War II era, brand names can now make up a majority of the wealth of a company - even though that number may not be easily calculated. For example, according to Interbrand, the brand name value of Coca-Cola is approximately $67 billion - equal to about two-thirds of the company's total market capitalization. Studies such as this would driven Graham & Newman nuts back in the 1920s and 1930s. The value of selected brand names will continue to increase as the consumer markets in places such as China and India becomes more developed over the next few decades.

There is a time for everything - and there will be a time when the final top of this cyclical bull market will arrive - but until that happens, I believe we should focus more on studying individual stocks and industries and finding the great investments through this method instead. We will see.

Signing off,

Henry K. To, CFA

Article Tools

Subscribe to this FREE commentary

Discuss this page

E-mail this page to your friends

Printer-friendly version of this page

  Copyright © 2010 MarketThoughts LLC. | Privacy Policy | Terms & Conditions