Random Thoughts on Investing – September 2011

I have a lot of thoughts on investing I want to share with you guys. As you may know, I prefer to write long posts, and none of these individual thoughts take a long time to describe. So I’ve decided to group these thoughts together into Random Thoughts on Investing – September 2011. You may or may not agree with my thoughts, but that’s ok. It’s always good to read about others’ opinions. In the comments section, I hope to read your opinions too about my thoughts.

There are old investors, and there are bold investors. But there are no old and bold investors (all the old and bold investors are dead!).

Investing is all about risk management (we’ve all heard about that before). Know you’re level of risk comfort, the experts say, which is true. But there’s no way I’d cover all of this within a few paragraphs. There are entire university degrees devoted to understanding risk management. Anyways, the basic principle is that it’s better to control your risk than to go after a wildly profitable (and wildly dangerous) investment opportunity. If you lose 50%, you’re going to have to earn 100% to make that money back.

When I don’t see a good opportunity, I go 100% cash.

In times of financial downturns, a lot of hedge fund managers say “we just want to preserve capital and not lose any money this year.” So they invest in things, hoping that the value of what they invested in doesn’t go down. I never really understood these people. If all they want to do is preserve capital, why not just go 100% cash? One simply cannot take every opportunity that presents itself: just take the best opportunities, and squeeze as much investment returns as you can from it.

Don’t invest short term-wise in a volatile market.

Sometimes the markets can get volatile. They move up 4% a day, down 5% the next day, up 6% the next day, and then down 4% the day after that. This kind of volatility especially attracts short term investors. After all, you have the chance of adding a couple of extra percentage points to your portfolio in one day! But you shouldn’t invest in non-trending hugely volatile markets. You never know if tomorrow the markets will be up or down. Once you’ve lost money in the non-trending volatile market, losing begets more losing.

Technical analysis doesn’t work when there’s no clear trend.

It’s true. If you apply technical analysis to non-trending markets, prepare to lose money.

Why I don’t do dividend investing.

Dividend investing has never really made sense for me. Some people say that dividend investing gives them a regular stream of income. Yea, like a regular stream of 5% a year, which can easily be cut when the stock markets head south. There is no such thing as “regular income stream” in the stock markets. A company that’s handing out dividends of 6% this year can easily cut that to 0.1% next year when they realize that the economy has gone down, and they need to conserve cash. Invest in a stock because you believe the value of it will go up, not because it hands out big dividends (which incidentally, aren’t so big compared to the 20% + a year a lot of good investors are earning).

One’s greatest enemy is thyself.

An investor’s greatest enemy is himself/herself. Everyone preaches the “buy when others are fearful, and sell when others are greedy.” That’s far easier said than done. When others are fearful, it’s only natural that you will be fearful too (hence your greatest enemy is yourself, because you are trying to fight off the herd mentality in your mind). But you need to fight against yourself, conquer your emotions, control your feelings, and go against the common belief.

Do not be creative when investing!

The one thing that I really love about investing is that there is no need to be creative. No need to find the new “gee-whiz cool” thing. So remember, every time there’s the “this time is different” talk going the rounds, fight off that mentality. There is nothing new in the realm of investments.

3 thoughts on “Random Thoughts on Investing – September 2011”

  1. “One simply cannot take every opportunity that presents itself: just take the best opportunities, and squeeze as much investment returns as you can from it.”

    Definitely agree with that statement there. Furthermore, it is easy to spread yourself thin across more investments than you can really track and control. I would rather invest in a company that I have a solid investment thesis about, even if I just expect it to return just 10-15% for my time horizon. Of course there is always some uncertaintly, that is the nature of the game. But, it’s like the lottery at times. The temptation is to go in deep on a hunch/intuition and take a big risk for a big potential reward.

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