Be it in life or investment – Just "know and understand" is NOT good enough!

In life

One of the commonly heard phrases "I know, I understand....."

Yet, when it comes to making decision and taking action, we are often 口是心非！(translated: affirm on lips but deny in heart!)

"Errr.. but because... of this and that Bla Bla Bla... “

Or

"This time is different!"

How many times in life have you feel that you know and understand the situation and yet, when you compel to respond and take action, you shy away!

Then when the outcome turns out otherwise, you will say "I already know and tried." Somehow, the result is always the same or worst without any improvement.

Or you keep repeating the same mistakes, even though you already know and understand?

Why?

Ask yourself:

How important is "what you know and understand" to you?

Did you really try with your heartfelt effort? Is your heart right?

Did you have the discipline to implement what you know, or just finding excuses each time?   

Do you admit the mistake, accept the responsibility and become better the next time?

Investment

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful!" - Warren Buffett.

Do you feel that you understand entirely above phrase, even blog about it and wear it on your lips and often proclaim that you are value investor?

Then how come, for some reasons when the stock market is high (E.g. STI hit 5 year high on Apr 2015), you still feel "itchy" and continue to buy.

And when stock market or STI index already approaching to 5 year low now, you reckon it will drop further and now is not the right time to buy yet? And advocates hold on to your cash!

Hmmm.... Do I chicken out when but it comes to the real battle?

Is knowledge really power?

Napoleon Hill wrote in his bestseller book "Think and Grow Rich" there are two kinds of knowledge;

1.General and 2.Specialized. General knowledge no matters how great in quantity or variety it may be, is of but little use in the accumulation of money or success. Knowledge will attract money or success only if it is organized, and intelligently directed, through practical plans of action to the definite end of accumulation of success.

Many people thought "knowledge is power". It is nothing of that sort! "Knowledge is only potential power" it only becomes power once it is organized into definite plans of action and directed to a definite end!

Read Napoleon Hill "Think and grow rich" - Summary

Rolf's thoughts

In order not to commit to the mistake of "understanding only" and no result to speak of, I impose the below three steps to myself, be it in life, in career or in investing.

Step 1: Learn

Have the passion and discipline to read, understand and acquire as much knowledge as possible.

Step 2: Remind and Relate

Consistently remind myself either by writing it out, or constantly communicate the philosophy/theory to people around you. It can be blogging, commenting on blogs or speaking to family members, friends and colleagues to share/exchange philosophies. Over time, you will be so good that you can explain so simply the philosophies/theories for others to understand. 

For instance, you will realise how great investors always like to be interviewed by journalists. During the interview, they always repeat the same philosophies they believed in!

Step 3: Implement, Fail and Learn

Practise what you know by devising a plan way ahead. Be sensitive and anticipates. Next, layout timeframes and set criteria for the execution of the plan. Do not “show-hand” during the first round! Preferably to fail early "small stake" and still can come back stronger and better in the many rounds ahead. You need to expose and have many experiences the real battle before you can really become good.

Do not worry about mistakes in life. It is good to lose money and go broke at least once, preferably twice. But does it early so that you are talking about US$20k not US$20mil, which you still can come back.”  - Jim Rogers

Read “Street Smarts - Jim Rogers” (Part 2) Investment Advice

Over time you will realize, not only you know and understand, but now you can truly implement what you know to achieve a set of positive results!

Related posts:

Know yourself and define your own success!

What can we learn in stocks from boxing?

Diversify OR Not?

Relationships – What It Means to You Financially?

When to Buy, Hold and Sell a Stock - Contrarian Approach

My "VALUE?" stocks keep plunging. What should I do?

Offshore, bank or telco stocks, which were glitter with success in the last few years, are seeing signs of precipice decline in one of the most difficult times since the last GFC.  

Since the start of the year, blue chips such as Keppel, Sembcorp Industries, Sembcorp Marine, Singtel, Starhub, M1, DBS, OCBC and UOB are all having their stock prices battered down.  Sembcorp Industries during the peak in Apr 15 was priced at $5.25, but is now lingering less than halve at $2.23. Keppel suffers the same fate with high of $10.42 in Sep 14 and now sensing bottom at $4.77.  From rallies to peak during periods of 2Q-3Q, 2015 to seeing a drop of between 25-36%, the local three banks were not spared lightly either. Even the usually reliable two telcos - Singtel and Starhub are seeing significant declines of 20% and 22% respectively, with M1 being hit hardest diving close to 40% since its peak early last year. 

What if you are the unfortunate one who buy into even these “normally safe” blue chips during their peaks of 2013/14/15? What should you do now? This can be particularly worrying in a period where even famous and most successful investors such as Ray Dalio and George Soros are warning of an impending crisis ahead.

Average down? 

The biggest worry is to keep doubling down on your so-called value stock that your single stock is now so big that it is more than 30% or even 50% of your entire portfolio. 

In fact, there is nothing wrong with having a heavily tilted stock, as long as you know stock so well and is confident of its value over the long term. Just as Warren Buffett put it,

"My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings."

With that in mind, you should actually average down your value stocks strategically and patiently over time. By doing so, you ignore the erratic behavior of the market volatility and focus on the fundamental / value of the business over the longer-term horizon.

Sell my losers? Admit my mistakes!

Counter-intuitively, consider that you already started losing sleep and have grave doubts on the fundamentals of a stock you own, then you better spend time doing more intense research. If your thesis is proven right, put a halt to averaging down immediately. Logically speaking, you should consider selling the stock at a loss immediately, in order to find better alternative investment. Rather than have your money hoard inside a potential long-term loser. Admitting your mistake takes a lot of courage and this is what divides the mediocre from the skilled.

If you do not need the money now, and if the stock you owned is a cyclical stock, which you are very confident that the uptrend will return, then it is perfectly fine to hold on to the stock for now. One reason why you should sell is also probably because you believe the stock will sink further down, and intend to buy back the same amount at a cheaper pricing later. PS: this tactic is comparable to trading then!

Adequate diversification not diworsification 

If Warren Buffett’s philosophy of concentration is not your cup of tea, then you can turn to Benjamin Graham and Peter Lynch who suggest diversification. In my theory of diversification, I will try to limit my biggest holding to be less than 30% of my equity portfolio. The exception is when my biggest holding is my stalwart pillow stock, which I am so familiar with and confident of.

With diversification at the hindsight, it can be disastrous to fall into the trap of buying too many companies in the same industry/sector. Furthermore, while diversification is good, there should be adequate but not excessive diversification. 

“This might mean a minimum of ten different issues and a maximum of about thirty.” - Benjamin Graham

Otherwise you can always buy into index / ETF funds, which is one very good way of diversification too!

Diworsification is the phrase made famous by Peter Lynch in the investing classic “One Up On Wall Street.” By Diworsification, Lynch is referring to companies who attempted to diversify their business and by doing so, dragged down their overall returns. This is often a common mistake made by individual investor too. 

Last but not least, do diversify into different asset class outside just equitiy alone. Aside from stocks, you should own cash, bonds, precious metals, and properties (if possible) at any one time. Learn how different asset class can hedge against each other during difficult times. Ray Dalio's All weather fund is proclaimed to have this risk management, resilient characteristics. Yes, as the name suggest "All Weather"!

 

Eat slowly, be patient and don't get indigestion 

When you attempt to average down or diversify your stocks, remember to have patience!

Stock market climb the stairs but take elevator down. It can plummet fast beyond your control, but make sure you do not dish out your cash as fast in tandem too! Do not be so “Kan Cheong”. This is exactly what happened during the start of the year, when many committed this erroneous act. The last thing you want is to dispense all your cash at the onset of a decline, where the bottom is nowhere in sight, any sooner. You can also refer to my earlier post here, providing further explanation.

Sunk cost fallacy 

This is the fallacy when you have price-bias on a stock and keep averaging down on a plunging stock, not because you are confident of its value in the long term, but because you feel the need to make back your paper losses. This is known as sunk cost fallacy, and is best explained by my blogger friend Andy of Tacomob! Refer to his well-written article here. 

Andy also quoted Phantom of the Pits, the trading legend,

“Accept the fact that losses (ideally small ones) are part of the game of trading and investing.  The most likely long-term winner is the person who is the best loser.”

I will end with Peter Lynch 12 advices on the most silliest things people say about stocks extracted from his famous book “One up on Wall Street.”

12 Most silliest things (dangerous) people say about stocks 

1. If it’s gone down this much already, it can't go much lower anymore! 

2. You can always tell when stocks hit the bottom!

3. If it’s gone this high already, how can it possibly go higher?

4. It's only $0.1 a share, what can I loose more? 

5. Eventually they will always come back!

6. It's always darkest before dawn!

7. When it rebound to $1, then I will sell. 

8. Conservative stocks don't fluctuate much! 

9. It's taking too long for anything to ever happen.

10. Look at all the money I've lost. I didn't buy it!  

11. I miss that one, I will catch the next one!

12. The stock's gone up, so I must be right or the stock has gone down so I must be wrong.

Bought DBS and OCBC today! How I hedge my bets!

Bought in few hundred shares each of DBS@14.19 & OCBC@7.84 today.

1^st Scenario - Technical Rebound

Not that I am bullish about banks now, but for reasons of speculative trading and hoping for a technical rebound after I think banks were truly oversold since the start of the year. This period also see the local three banks go below their book values, which is unheard of even during the GFC. Need to set sell price though in case there are truly rebounds up in pricing. I shall let you to decide on your own sell price! J

2^nd Scenario – Plunge further down

Don’t get me wrong, I still have lots of faith about Singapore banks in the long term, but just that I am not too sure if taking a long time view now about our banks NOW is the correct timing. Ok, Warren Buffett says you cannot time the market. Duh L!

Read : Is this a right time to buy: DBS, OCBC, UOB or Keppel and Sembcorp?

Well, in case my speculation is wrong and markets are to tank further down, and my bank stocks tumbles in tandem, then the second layer of safety for me is not overly committed in this purchase with reference to my entire position. And yet still in a manner, which I am still comfortable to average down later. When? I left this difficult question for you to ponder for yourself.

Rolf’s hedge against both scenarios

The thing about investing is you are never certain to be right all the times even if you are value investors Warren Buffett and Peter Lynch, or famous hedge fund managers George Soros and Ray Dalio.

The most important thing for average investor like me is to be right for most of the time. Perhaps 7 out of 10 is great, or even 6 out of 10 is good. 8 out of 10 is definitely a bonus.

And even if I am wrong, I should already have a prior strategy what should I do next. The whole idea is to be in control in your positions and emotions, despite the violent swings in the market.

Is oil price really sustainable below $30? (Part 1)

Sustainable at $30? 

In case you are unaware, there aren’t many countries extracting oil for under $30 per barrel. Looking at the chart below, only Saudi Arabia, Iran, and Iraq will continue to produce if oil is $30. We wouldn’t have much crude oil if only these countries produced oil.

Most oil companies will probably then produce KFC instead of oil. Haha?

How about alternative energy? 

Yes, it is a threat, but it will take time. The world today is definitely nowhere near a point where we can continue to function without adequate supply of oil, coal and natural gas.

Demand & Supply 

Price is a function of demand and supply dynamics - simple as that! Yes, Iran sanctions have been lifted and more supply is going to flood the market. This is definitely one of the main reasons causing the steep descent of oil price. As for demand, seriously aside from China slowing economy which will result in less demand globally, demand in USA is still relatively strong. India is also seeing significant growth of oil demand. Overall, demand fundamentals are still stable. 

The depressed price has already led to the decline of capital expenditure from oil companies. For offshore oil, it takes years from FEED (front end engineering design) to exploration, to actual production. Unless shale oil can replace offshore oil in a short period of time or we discover other more efficient methods of extracting oil soon, we are going to see serious shortage of oil in the next few years! 

When will oil price stabilise? 

Nobody knows. It is almost impossible to predict the price of oil forward in the short term. Refer to my previous article “Which directions will oil price head? What should I do now?” written last August.  Yes, you can be so analytical that you may get the demand and supply figures fairly accurate, but can you predict the sentiments of people? 

Compared 1986 to 2015 – Lower for longer?

Many compared the oil peak-to-trough situation today to what happened in 30 years ago.  Then, in Sep 1986, OPEC was worry by the discovery of oil in the North Sea, and increased production and lowered the price to preserve market share. This time it was Shale oil in USA. The oil decline in 2014-2016 is proven to be longer in duration as well as larger in scale compared to what happened 30 years ago in 1986-1987.

The negatives

Persist low oil price will result in lower capital expenditure (CAPEX) in the energy sector. Therefore there will be a decline in non-residential structures investment in the energy and mining segment. This means lesser construction of oil-rigs and related offshore construction and support vessels as well as mining related activities.

Oil export-led countries will also see a huge decline in their revenues which result in budget deficit.

According to an article by CNN:

Venezuela who has the world’s largest oil reserves, depended hugely on revenue generated from oil to pay for pensions, health care, social benefits and even to subsidize housing and grocery stores. But now, the economy is on the brink of collapse. Inflation soared over 150% in 2015 and is expected to rise over 200% next year. The government is unable to pay its bills, and food and basic supplies are in short supply.

Saudi Arabia has oil accounting for 75% of the country’s revenue. It ran a nearly $100 billion budget deficit in 2015 and announced tough austerity measures for next year. "That's a reminder that even the world's lowest-cost oil producer relies on high(er) prices to balance its budget and current prices don't come anywhere close," Kit Juckes, global strategist at Societe Generale, said.

Nigeria, Africa's biggest oil producer has oil accounting for roughly 75% of its revenue, and almost 90% of the country's exports. The plunge in oil prices has left the government unable to pay its bills. Local media reported that in some regions, state employees haven't received salaries in months. The country is suffering from power cuts and fuel shortages.

Russia has almost half of Russia's government revenue coming from oil and gas exports. Russia’s budget is based on an oil price of $50 per barrel. With oil trading so low now and the country who already suffered from the Western economic sanctions, IMF expects Russian GDP will shrink by ~4.5% in 2016.

Malaysia has until 2014, about a third of government revenues came from Petronas. Its budget this year was also based on assumed oil price of US$48. Each US$1 drop in oil prices slashes RM300 million from its annual revenue.

The current oil volatility will definitely create lots of uncertainty in the economic outlook going into the course of future. This is going to affect many decisions of policy makers including Fed decision to raise rates. With oil price at all-time low in the last decade or so, many governments are likely to revise the numbers of their economic assumptions for the 2016 state budget.

A list of energy-related companies in Singapore such as Keppel O&M, Semb Marine, Ezion, Ezra, Swiber, Nam Cheong, Pacific Radiance, POSH, Marco Polo, Swissco, MTQ, have all seen their stock prices battered down.

The positives

On the flip side, lower oil price will result in a steady source of cost savings for many businesses who are largely dependent on fuel and electricity.

The low oil price will greatly benefit transportation companies who can consume lower priced fuel. Airlines and transportation companies may see this as a good time to upgrade or grow their fleets. Companies such as Singapore Airlines Ltd and Comfort Delgro will see reduced fuel costs to their benefits. For SIA, fuel costs contributed to 37% of overall expenses in FY2015. Other companies who sell trucks or involve in delivery such as FedEx, UPS etc will be beneficiaries as well.

Spending on services such as having meals away from home and domestic travel can increase as well. In some way, companies in the travel, consumer/retail and F&B segments can possibly benefit from the current low oil price environment.

Investment in manufacturing structures will potentially see a huge increase over time. For countries who took a long term view, this may be one of the best opportunities to invest in infrastructure and connectivity as well.

Other than countries who are net importer of oil, major producers of refined fuels in Asia include South Korea, Singapore, Japan and Taiwan that rely on crude oil imports to supply the sector will stand to benefit as well.

Stay tuned to part 2 for Rolf's views and the Dos and Don'ts in this crisis. 

STI goes below 2630 - Second benchmark breached, Scoop Again!

Refer to my previous post here where I discussed a simple method of dispensing my warchest. 

Consider 3100 as benchmark, and using 10% drop as the first reference, STI at 2,790 is the first signal for firing. The next reference is 2635, a further 5% dip of STI. 

In your own designed spreadsheet, you can create your own benchmark. Warchest amount listed below is arbitrary and not my Warchest amount.  

Yes, 2635 was breached today! STI closed at 2630 today. According to plan, I initiated my second scoop today as follows.

• M1 @2.66
• SGX @6.88
• ASX : CCL @8.26 AUD

Today's scoop only begin briefly and was hugely incompleted due to my busy work schedule. I shall continue next Monday! 

Hmmm.....will the next trading day be a "Black Monday?" It is left to be seen!