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7 Investment Lessons Learnt The Hard Way

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If we are to become better as an investor, we have to learn from mistakes made. So these are some that I either experienced myself or seen with my own eyes.

7. Not Knowing What You Are Investing In

While I was in between jobs, I took up an offer to become an investment advisor. With my grounding in economics and after passing the necessary tests, I became a qualified advisor. There were weekly investment talks held by the bank, from which I was supposed to suddenly become an expert.

So in 2007, my manager told the group to try to push products like the Minibonds series and Pinnacle Notes and said that they were selling well. The only thing I remembered of them was that it was tied to the fortunes of a group of underlying securities. Some were well known companies, like Citigroup, Ford Motor, Bear Stearns etc.

The question I asked myself was whether if I will sell it to my own dad who’s retired. I decided I wouldn’t. It looked too complex and I could not understand some of what it was trying to say. So it would not pass my dad, who was liable to ask plenty of questions I could not answer. And we all know what happened subsequently. I sold unit trusts instead to people I know. And I knew I am not suited for a sales job. Because I cannot sell something I don’t understand.

6. Unit Trusts/ Mutual Funds/ Managed Funds Are Expensive For Investors Like Us

The unit trusts that my wife bought are all underwater. The ones I bought are through dollar averaging and they are profitable, but not by much. The only time unit trust were good for us is when I bought it again through dollar cost averaging from 2002-2005 in China. It earned a tidy profit, but then again, who didn’t do well investing in China during that period?

Through book written by John Bogle, Common Sense on Mutual Funds, and other investment books out there lay the basis on which costs can eat a big chunk out of your investment returns. This is again borne out through personal experience of our investment journey. There are better forms of investment at much lower cost. Look at ETFs, index funds or just buy some stocks through internet.

5. Speculating/Investment Using Leverage Is Highly Dangerous

In my first job with a brokerage, I got to interact with remisers and dealers and saw first hand the dangers of being in close proximity with stocks and shares everyday. At the same time, I was in the margin department which offers leverage for customers pledging their collaterals with the company so that they can use the borrowed money to buy more shares and earn more. I saw the list of margin calls each day, which meant that these people have to top up with cash else their stocks will be force sold.

Suffice to say that if they had the money, they wouldn’t have use the margin services. So their stocks were force sold. You may earn more through leverage, but you have an equal chance of losing everything too and investing is already challenging enough without adding danger to the mix.

4. Lack Of Proper Planning For Investment

In 2004, I sold off my stocks holdings at the time for a loss because I wanted to have cash in hand for the next stage in my life. I was getting married and need money for holding the dinner, buying the house, furniture, renovation and so on. In hindsight, I could have sold off less and the stock position of those stocks would not have to suffer a loss. In the end, the only thing I needed a loan for was for the house, which I stretched to the maximum years available.

For this, I am thankful that my significant other is also thrifty and managed to save a pile of money to help out in all those expenses.

So sometimes when you sell your investment is not determined by the market prices at the time but by your needs which may change so you will need a proper plan and look ahead to anticipate these future expenses which are coming.

This time around, I sold off the Breadtalk position early to have a cash buffer for next two year’s need as I would be taking some courses to improve myself. So a bread company has helped me to defray a whole chunk of my further education expenses.

3. Small Details Can Hurt You

As regular readers would have known, I made a mistake in selling my Breadtalk position as I didn’t read the computerised mailer from CDP carefully about the allocation of bonus shares for Breadtalk to a special counter. So I became an unintentional short seller.

In investing, small details, small footnotes, small costs that are hidden are significant items that will erode your investing returns if you don’t pay attention.

2. The Past May Not Repeat In Future

It hurts as a ex-history teacher to say that sometimes history does not repeat itself. But for investors, that is a big caveat that you have to take note of. Disclaimers of this are emblazoned on marketing materials of unit trusts that warn you that the past staggering returns doesn’t indicate that the future is as rosy.

1. Mindset and Discipline Is More Important Than What You Know

You may know that in a bear market, there are many opportunities to buy. But do you have the mental strength to buy when almost everyone you know is selling and looking at you as if you are nuts? Berkshire Hathaway’s Warren Buffett was said to be past it when during the 2000-2001 dot com boom, he was not invested in the latest cool fad and his company’s returns was way behind those who invested in them.

Michael Burry was buying as many credit default swaps as he could get hold of by using his investor’s money while the housing boom was going on. His analysis was that the housing boom was due to crash and it would get ugly and he used the credit default swaps to bet against the whole subprime market. Before this, he sat in an office and read about all the subprime bonds reports and made sure he understood it thoroughly. He had the mindset and discipline to constantly seek out new things and analyse stocks.

Source:

1. Learning From Michael Burry.

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3 comments:
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Anonymous said...
July 23, 2010 at 3:22 AM  

I have to say this was a good post

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Musicwhiz said...
July 23, 2010 at 1:12 PM  

Thanks for sharing Lemizeraq! Very useful indeed. I very much agree with the discipline and mindset part. It's very important for an investor.

Regards.

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Lemizeraq said...
July 27, 2010 at 11:27 PM  

Hi Musicwhiz,

Thanks for visiting.

Regards
Lemiz

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