Strategy

1. What to buy
2. When to Buy
3. When to sell
4. Volume to buy - When to buy more
5. If wrong, what is the loses

Greed Drive up price up trend
Fear Drive down price down trend

Trend is my friend

Mount Theory
Use Bollinger Chart at 19/0.7
Parabolic SAR + DMI & ADX


Investor Mistakes
How to Avoid the 7 Most Common Investor Mistakes And Build Steady Profits...No Matter What the Markets DoBy Steve McDonald, Director, Oxford Club VIP Trading Services
One of the most least understood truths of investing is this: Success in the game of investing depends more on not making investor mistakes than it does on picking big winners. Period.
Of course, finding a neglected small-cap stock and riding it to the stratosphere is exhilarating. And nothing compares to the pure satisfaction of the hunt. But, as anyone who's been around the financial markets for a long time will tell you, it just doesn't happen very often. The real pros understand that success comes from sidestepping the traps—specifically, the mistakes that lure the unwary investor into unrecoverable disasters.
Day in and day out, these pros follow a disciplined approach. They're not swayed by talking heads and self-appointed market pundits who babble on about the next big thing. They're confident in their ability to stay out of trouble and ride through the rough spots as they wait for the next good opportunity.
This Investment U special report will help provide that same confidence by dispelling some of the myths that derail most investors at some point—but that can be easily avoided.
So let's jump right in and take a look at some of the top investor mistakes out there—what I call the "Seven Deadly Sins of Investing." These common misapprehensions will erode your profits and leach away your hard-earned capital. In addition, we'll show you a proven, time-tested approach to avoiding each and every one of them.
At Investment U and the Oxford Club, our only objective is to help you—and all of our members—prosper. You won't find any conflicts of interest here. We're not selling you stocks, bonds or other investments. Our only hope is that this special report will go a long way to ensure that your money continues to grow safely.
Investor Mistake #1: Following the "Saturday Morning Hero" Will Lead to the Promised Land of Investing Is there anything more exciting than a great pass that wins the game in the last few minutes of Friday night's big football rivalry? "The Saturday Morning Hero" is the star of the week. Unfortunately, in another week that star is completely forgotten.In the investment business it's pretty much the same game. Anyone remember Elaine Garzarelli? How about Michael Milkin? There was a time when a public sighting of either one of them would start a stampede. Not so anymore.Sometimes, Money Managers Really Are Just Lucky—Once Elaine Garzarelli was right about one thing, once: She happened to luck out and predict the 1987 crash. That was probably her last correct call. But she was hot for a while. She had her own radio and TV show, she was quoted by everyone, and as far as we can remember she was consistently wrong. She's one of those Saturday Morning Heroes. A lucky catch catapulted her into investing stardom. But it wouldn't last long.Mr. Milkin, at one time (before he went to jail), was the "Bond God." Remember the RJR buyout, and just about every other buyout of the '80s? Mr. Milkin was behind most of that business. He created a whole new idea in investing: Junk bonds. And folks stood in line to buy them . . . until they began living up to their name. After his bonds blew up, Milkin went from being a Saturday Morning Hero to Sunday Morning's Goat-and served some hard time as a result. The bad news in all of this is that the average investor is usually the first in line to follow the Saturday Morning Hero.
We love heroes. And the biggest danger in hero worship is backing our star long after his time to shine has ended. When investing, it costs us money to follow a hero whose day has passed.Most of us find it difficult to buy into a system and stay with it. We're always looking elsewhere trying to find the latest and the greatest. This is the beginning of what have proven to be very costly moves for a lot of investors. By the time you discover it's the latest and greatest, it turns out to be just another Saturday Morning Hero.As you move from service to service, or fund to fund, you begin to develop "Investing Scars." Each time you realize the most recent service isn't the answer to all your dreams, you blame the service or the manager.The fact is you were probably chasing past performance and got in at the worst possible time. We have all done this. It has a cumulative affect and, at some point, the scarred individual just quits.The answer to this dilemma is simple, but there may be no tougher thing to do than to choose an investment or trading service and stick with it through a tough period in the market.The best approach is to give your investments time to work. This takes practice and discipline. Most investors never have these qualities, but you can develop them with the help of VIP Trading Services. With these powerful tools, you can make time serve you and your profits.Investor Mistake #2: A Few Weeks Is Long Enough to Wait for Huge Profits Mark Twain once told a fabulous story about a 17-year-old kid who leaves home and returns eight years later-only to be stunned by how much smarter his father has become! If you're under the age of 25, you might not get the message above. For the rest of us it's a funny reminder of how the passage of time affects everything in our lives-including our investment choices.In investing, one principle always rings true: Time is the single most important element of investing. And for that reason, mismanaging time can have the most devastating effect on your money.Expand Your Time HorizonsRidiculous as it may sound, the average investor has a time horizon of between two and six weeks. This means that if an investment doesn't start to go the way the investor thinks it should-within about a month-the investor gets antsy and usually gets out. This is the most obvious and most common misuse of time.Of course, there's an important difference here between trading and investing. Traders exchange a much higher degree of risk for this much shorter time frame.In fact, every measure of investing is tied to some element of time. Running averages, charting, entry and exit points and so on. Many experienced brokers say a three-year time frame is a good perspective to use when making a decision to buy a stock. At the very minimum, you should look at the 52-week trading range. For mutual funds the recommended minimum holding time is three to five years.Investor Mistake #3: You Should Only Buy Soaring Stocks, Using "Insider Knowledge""I bought this supposedly hot stock and it dipped right after I got in!"If there were ever a universal investor complaint, that's it. So what's happening here?To begin, we need to think about why and when we invest in a stock. When: If you're like most people, you wait for the price of a stock to increase to such a point that you are convinced it's a good investment.Why: Let's start with an example. You have a friend, whose brother works for a guy . . . who owns a company that does business with a company . . . whose sales rep said the company is making money hand over fist. Based on this "direct" feed to the inside, we take our hard-earned money and buy stock in this company. But by the time we hear about it, the price has usually run up far beyond a reasonable buy range, and in effect we've just paid a commission to give our money to someone else.Mingled together, a wrong "why" and a wrong "when" can have some pretty strange results. What often happens next is right out of a bad joke. An otherwise normal, rational person becomes glued to MSNBC and the quote section of AOL. He spends every free moment watching this dog to see when-not if, but when-it's going to "take off."
As the obsession grows, the investor spends more and more time watching the stock price, almost as if that alone will make the price go up. He may even call the person who gave him the tip—and almost always will call the broker who placed the order for him. The investor believes the broker should have known better, the friend is an idiot, and he or she is really upset about the situation. This is "market timing" in the worst sense, and it can only lead to losing money.
Other investor mistakes sabotage us, too, such as:• Having an unrealistic concept of the market. Many Americans see the market as something exciting that makes people rich.• We don't understand how to get in or out of the market (although this has improved immensely in the past few years with online investing).• We have no idea how all the information that we are bombarded with relates to the market or even to individual stocks and their movement. • Last but not least, despite all the unknowns, we decide we can do it ourselves.Overcoming Your Fear of the Investment UnknownIn addition to the aura of excitement and wealth surrounding the market, deep down, many folks are afraid of it. It's something few of us know much about. As a way of overcoming our fear of the investing unknown, we watch and monitor until we are convinced that investing works. We watch stocks go up in value until our fear of the market has been momentarily eased, and then we jump in headfirst.The result is always the same. We pay too much for the stock, since we watched it go up, and it immediately starts to sell off to profit takers, or we get into something that never does anything.If we buy at the top and sell when it slides, we can only lose. It's good for your taxes and nothing else.
Be Emotionless: The Key to Profitable InvestingWhen to buy and when to sell are only two of the tough questions you must be able to answer if you are going to invest successfully. Doing both without allowing fear or any other emotion to get in the way is what separates the pros from the rookies. Why do we pay too much for stocks? It's because our fear keeps us from buying when it's smart to do so.
Investor Mistake # 4: Wall Street's Wizards Will Hit Home Runs for You Remember when Chicago Cubs slugger Sammy Sosa was suspended for using a corked bat?Why did he do it? Obviously because he could swing a corked bat faster, thus sending the ball farther. Plus, he thought he could get away with it. Fans pay to see Sosa hit homeruns. That's certainly what we expect him to do, too. Sosa felt the pressure. Wall Street's high-powered marketing mavens are using their own versions of corked bats to peddle high-flying tech stocks set to "go to the moon." Or swamp dwelling "value dogs" that are supposedly set for a big move. All we have to do is get out our wallets.And too many investors do it over and over again.That's exactly what the aggressive brokers on Wall Street are counting on when they try to sell us their get-rich-quick stock picks (make 10,532% profits overnight!), or currency plays that will "change our lives forever."Virtuoso Button PushersYou see, those brokers are smart. They know what pushes our emotional buttons. But we don't have to invest emotionally in things that ultimately might harm our portfolios. Instead, we can insulate ourselves from the Wall Street sales machine by following a sound, non-emotional investment strategy. How does Wall Street use your unrealistic expectations to fleece you? It simply offers mutual funds with hyped-up returns. Annuities that claim outrageous guaranteed returns. IPOs for tech stocks with wild, impossible expectations. Or biotech stocks with incomprehensible science behind them.It isn't hard to figure out what the average investor expects. He wants guaranteed investments that will return 400 to 500% per year. This is the reality of the small or novice investor. They usually won't admit this, but it's very close to the truth.Wall Street, for all its failings, is not staffed with stupid people. In fact, they are as sharp as people get. What they do best is figure out ways to get your money into their pockets. The Danger of Wanting to BelieveWhen the media finally started publishing information about how investors were lied to and cheated during the big run-up in the market in the 1990s, there were a lot of angry "reformers" on the warpath.The fact is, not one of the scams, not one phony research report, not one inflated IPO or dot.com could have ever seen the light of day if there weren't investors who wanted to believe in them. When the next Wall Street scandal hits the papers—and it will—think for a moment about how realistic the expectations were that allowed it to come to life.Hit for Singles and DoublesInvesting is a game of averages, not homeruns. Success depends on hard work and a disciplined investment strategy that includes:• Asset Allocation: making sure that no matter which way the market goes, you profit by having your investment dollars in non-correlated asset classes• Position Sizing: ensuring that you never suffer a catastrophic loss, by limiting the amount of your investment dollars in any single position• An Exit Strategy: giving you the ability to minimize your loses and let your winners run, such as The Oxford Club's 25% trailing stop system• Recommendations from qualified, independent sources: This ensures that the investment advice you receive is never compromised by brokers who need to satisfy their investment-banking clients-instead of making the best choices for you.
Once you have all of this in place, you'll never again lose money due to unrealistic expectations. Investor Mistake # 5: There's Always Another Tech Run-Up Just Around the CornerAt this writing, the market has made a big move, shaking off some of the bear doldrums of the recent past.Interestingly, the tech sector stocks-the same ones that lost investors so much money the last time around-are back in the saddle with big gains. So why are people jumping back into the same stocks that wiped them out just a few years ago? And an even better question is this: Should you follow them in or develop the discipline to tell a solid investment from solid waste? Here's your answer:No Earnings, No Products, No DiceThese tech companies, for the most part, have no earnings, inexperienced management (or just bad management) and a proven record of getting in debt way over their heads. Despite all this, despite their record of turning wealth into thin air, investors are standing in line to own them . . . again!When the telecom, Internet, chip manufacturers and computer stocks were in the midst of their crazy rally of the late 1990s, most experienced investors knew enough not to get overloaded in them. It didn't take an Alan Greenspan to know that we had to have a really bad crash if the market was running up so high, so quickly. It also doesn't take a genius to know that companies with no product or earnings, and with kids running the show, don't last long.Before the latest tech run-up, you would have been hard pressed to find anybody in the world who would have ventured into the tech sector. The wounds from the crash were still very real.But apparently time has healed many of them . . . or a lot of investors have forgotten how they got hurt before. If you're in this group, here's a reminder:Entire fortunes were wiped out because investors were led to believe that these fast-growing companies—-the tech sector in particular—had no top. These babies would go to the sky and then some. It was the digital-information age, and we were leading the world to limitless new heights. It's Déjà Vu All Over AgainBut things are better now, right? Well, not exactly. After several years of corporate scandals, indictments, sweeping changes in the SEC and tougher enforcement of the existing laws to protect investors, we're actually right back where we were when tech stocks looked like the deal of the century. The picture is already forming, and investors are again being set up like bowling pins, and knocked down again.Apparently, too many of us learned nothing over these mistakes. We still want to believe that we can make a quick buck in the market by taking crazy risks with our money. So that begs the $64,000 question: Will it happen again? Could we get ourselves in the same pickle we had been in for the last three years of the killer bear market? As a matter of fact, this looming disaster is entirely unavoidable.
Investor Mistake # 6: If You Listen to Enough Televised Investing Reports, You'll Learn Something Profitable About anyone who knows a stock from a bond can enjoy the televised financial reports that run daily in the media. Problem is, they provide just enough information to make them dangerous to your wealth.Most commentators have no professional experience in the financial markets. In addition, they essentially read scripts written by people who may have no, or little, professional experience in investing. The worst part is that most of what you hear in the media about the markets is not wrong—it's just incomplete. At best, you're getting less than 1/100 of the information you need to make a decision. And this creates the most dangerous situation of all: a false sense of knowledge.The average person watches this slurry of earnings information, opinions, biased positions from the featured talking heads, gold prices, crude oil prices, the Greenspan watch, the yen, the euro, you name it. And some actually try to manage their money with the crumbs of information they glean from these shows.Bottom line, investing is serious business. It is not about personalities in expensive suits, styled hair or even the pretty young women reading scripts in front of pictures of the CBOT. It is about getting solid, actionable information from reliable sources and putting that information to use.Investor Mistake #7: Watching the Markets and Predicting Them Is the Key to High Returns Smart investors are more interested in making money, not in what the markets are doing. Of course, if you invest in the indexes (DJIA, Nasdaq, etc.) then you need to follow them. However, if you are invested in companies, look at the companies, not the indexes.You can make money by investing in stocks that go up in price when the market is up, when the market is down, or when the market is flat. In this light, the answer to "What's the market going to do?" couldn't be less important when it comes to your portfolio. Understandably, we have been led to believe, by television for the most part, that the DJIA is the end-all, be-all of the stock market. And in the last few years the Nasdaq's performance was considered all-important. The fact is our fascination with the major indexes is one of the reasons many people get into the market too late. They think, or expect, the market index to be an indicator of when it's a safe bet to invest. This is a common investing mistake. They're wrong.The Reality and Myth of "the Run"Consider the Nasdaq during the so-called bull market of the late '90s. The lowly Nasdaq ran from a meager 1,200 to 5,000 in about four years. That's about 400%. The average Joe turned on his TV at night and heard this and assumed people who invested in the stocks on the Nasdaq were making a lot of money. What Joe didn't (and still doesn't) know is that 97% of the increase in the Nasdaq was the result of three stocks.The Nasdaq has 100 stocks and uses a market-weighted system to arrive at its average value. What's "market-weighted" mean? It means that if a stock represents a greater percentage of the total value of all of the outstanding shares on the Nasdaq, it will have a greater impact on the movement of the entire index. In other words, the larger a company's "float" (number of shares on the market) and the higher its stock price, the more it drives the average.So, in the mid-1990s there were three major Nasdaq stocks: Intel, Microsoft and Dell. They had a huge number of outstanding shares. And their shares were skyrocketing, for good reasons: sales and profits. The result is that they accounted for 97% of the yearly growth of the index. The average growth of the remaining stocks on the Nasdaq for the late '90s was 3% per year.How about the Dow Jones? The DJIA is an average of 30 stocks. It was originally designed to be an indicator of the results of industrial production. In case you haven't noticed, we are not into industrial output anymore. Still, everyday, all day, it's what most people think of when they think of the market.There are about 14,000 stocks listed on the NYSE and Nasdaq. Ever wonder what the other 12,970 are doing?There is a good use for the indexes. But they are used in conjunction with the other thousands of indexes, trend lines, fundamental data, technical data, etc. They are never the only indicators to be considered when you're buying or selling stocks.During the three years of the bear market, The Oxford Club VIP Trading Services managed to eke out small gains or break even. We would have loved to have made money every year. But considering the markets were down as much as 20% in 2002, breaking even looked pretty good. Unfortunately, too many members wouldn't take advantage of the recommendations they were paying for that could have worked for them. Why? Because the Dow and Nasdaq were down and that scared them off.When Mainstream Media Calls the Shots . . . Run the Other Way, FastHere's how you do it. Wait until the TV talking heads are saying we are in a recession; the market is going to drop like a rock, and they are predicting doom and gloom. At that point, stocks will be ready to go through the roof. When TV figures out that stocks are in trouble, it's time to buy.So, what's the market going to do? It's going to go up. Long term the market goes up. What you want to know is, "Will it go up within a certain time period after I put my money in?" Yes, but only if you stick with the tried and true methods, give it time to work, and use reliable information sources. By doing these simple things, you are doing everything you can to maximize your chances.Here's our short list of "Don'ts" when you're trading for short-term profits. If you want to make money, avoid:• Cherry Picking: Subscribing to a service and choosing just one of the recommendations based on your gut.• Elephant Hunting: Loading up on a single investment to a point where you are way over-weighted. A well-worn recipe for disaster!• Keyhole Perspective: Trying to make a decision about the worth of an investment or service based on a small amount of information.• An "Only Winners" expectation: Believing at some level that if you look long enough or switch services often enough you won't have any losers. Losers are part of the game, ergo diversification, balancing amounts invested, etc.• Gut Selection: If your gut has been wrong in the past, chances are it's not going to change.Good investing,

10 Biggest Mistakes Most Investors MakeThere's a lot of advice out there when it comes to investing: Buy low, sell high. Stay in for the long haul. Stocks with low P/Es offer the best chance for gains. Unfortunately, a lot of it is bad. This list of 10 common investor pitfalls may fly right in the face of conventional wisdom, but if you can avoid these mistakes, you'll be well on your way to becoming a better and smarter investor.Much of the investment advice we hear has become widely accepted, in large part because it is reinforced in the financial media. But a lot of these "truths" are responsible for creating some of the biggest losses for investors. Why? Because the stock market works the complete opposite way to what a person would think."There are two facts about the stock market that one must always realize," William O'Neil, founder and chairman of Investor's Business Daily once wrote. "First, the market is always right. Second, any accepted truth about the market is probably a myth."Why do so many investors keep following advice that history has proven to be false? Usually, O'Neil says, it's because the approach sounds logical or is the easiest one to take. But in real-world investing, logical or easy isn't necessarily the best way to go.A person would be wise to invest according to the rules of the market, not the rule of the crowd. This may require taking some steps that makes investors uneasy, such as taking a stock shortly after buying a stock, or passing on a stock with a temptingly low valuation. But the trick is to trust the market rather than your own gut or someone else's opinion.The best investors don't let past mistakes stop them from jumping into -- or back into -- a stock when the time is right. They develop a professional attitude and don't let emotions cloud their judgment. Stock investing sometimes make you excited and other times frightened. But don't act on those feelings; let rules guide your decisions.In our special report, "10 Biggest Mistakes Most Investors Make," we address some of the most common investing pitfalls. We've also provided a list of time-tested investing rules that all investors should follow.

Strategy

My strategy is based on one simple statement: If you -- as a retail investor -- approach the markets with the typical retail strategy of buy and hold, complete with dollar-cost averaging and indexing, you will by definition achieve a typical result: Average. Now, I don know about you, but as far as I concerned, average is not nearly good enough, especially when there are ample opportunities to achieve above average results every morning at 9:30 and the possibility of a comfortable, early retirement on a peaceful Caribbean island awaits. This is not to say that I don believe in long-term investing. I do, and would never advocate active trading in lieu of a long-term investment plan. Anyone who does is either a shyster or just plain na鴳e, in my humble retail opinion. Unfortunately, there are plenty of the former, and even more of the latter. I am, however, a strong advocate of complementing a conservative, long term strategy with an aggressive, short-term tactical plan. Let face it. It really the only way to achieve above-average results.Thus, the basis for my strategy lies in having a good, sound, long term investment plan. For purposes of this competition, please assume that in addition to my $100,000 trading account, Ie also got a decent size nest egg invested in some well diversified mutual funds ?quite possibly being managed by one of the pros in this competition. Let hope they do well. Now then, my short-term tactical trading strategy is based primarily on well-known, but often misinterpreted technical and momentum indicators. In a nutshell, that means identifying market trends and turning points, and capitalizing on them with aggressive positions. And most importantly, quickly realizing when I wrong. But let be honest. Knowing the difference between the real thing and a cheap knock-off is hard enough to do on Main Street. On Wall Street, it darn near impossible at times, and that part of the game. But at other times, it rather apparent, and that where the money is made. Any market technician worth his salt will tell you to look at volume for confirmation of a move, and that a great starting point. Throw in some other momentum indicators like the MACD and Money Flow, and a candlestick chart or two, and youe got even more information to base a trade upon. Add a pinch of luck and a stop-loss order, along with an unbiased view and a willingness to take some risks, and who knows?you just might make some money. If not, you take a small loss, admit that you were completely wrong and a big dummy for even placing the trade, and move on. I typically review anywhere from 50 to 100 charts per night, beginning with the indexes, then moving on to individual issues within the most attractive indexes. In other words, I'll search for a basket of stocks that appears to be on the move and then look for individual stocks within that particular basket that look particularly strong. I follow the "leaders of the pack," if you will. It's important to note that if, for instance, the Semiconductors HLDrs Trust (SMH, news, msgs) is not in a confirmed uptrend, I would most likely not be a buyer of Intel (INTC, news, msgs), or any semi stock for that matter, regardless of what its chart looked like. Likewise, I'd feel a lot more comfortable buying Chico's FAS (CHS, news, msgs) or Bebe Stores (BEBE, news, msgs) if the entire Retail HOLDRs Trust (RTH, news, msgs) was breaking out to the upside. The bottom line: Respect the power of the ETFs. In many cases, they are what moves the market. A good analogy might be an auto race. First, you look for a group of cars that are moving around the track at a faster pace than the rest. Then, within that pack, you look for two or three cars that look particularly good. In my reviews of both indexes and individual issues, I am primarily looking for specific trade setups that are confirmed by more than one technical indicator. For instance, if the candlesticks indicate an upside breakout move on a closing basis, I'll look at the volume for confirmation and then check the momentum indicators like the MACD, RSI, and Money Flow. If everything's in sync, I'll mark it as a potential trade. If not, it's on to the next one.In my real-life trading, I often a bit more conservative than I will seek to be in this competition, given the fact that there is a deadline and my goal is of course to beat the other players. Whether or not that will help or hinder my account balance remains to be seen, but above all else, I do hope to show readers that it is entirely possible to do this on your own, with at least a reasonable amount of success.

Common investor mistakes
August 31, 1998: 10:42 p.m. ET For many stock pickers, investing is a matter of trial and error, error, error

NEW YORK (CNNfn) - You'd think investors would learn from their mistakes. Instead, they more often choose to pursue a repetitive pattern of trial and error and error and error. Hints, tips, hunches and urges all work together, laying traps, which capture investors. But unfortunately, like a species that learns neither to fight nor flee, the unwary investor is doomed to fail. Many investors endanger their chances almost from the outset by neglecting to have a financial plan in place before they start throwing their money at stocks. Instead of deciding what their goals are, investors often feel the most important thing is to get their money into the market as soon as possible, a mindset that immediately puts their goals at risk. Investor goals act as constraints, but also guides, to how you will invest. If you have a long-term goal such as retirement in 30 years, growth stocks may be something you want to pursue. However, a shorter-term goal such as college for your grade school aged children would change your investment choices. Setting off without a map for these goals then becomes the first mistake that could lead to others

Investor myopia
Investors look at the market with myopic vision and even if they say they want to look at it more clearly, they often don't, according to Guy Cumbie, a board member at the Institute for Certified Financial Planners. Cumbie, a certified financial planner himself in Fort Worth Texas, says his first order of business with clients is to explain the ups and downs of the markets and coach them not to expect a steady, straight line of investment returns. This warning, said Cumbie, is often met with agreeing nods of the heads from investors but reality is much different. "It's far more easy to recognize this intellectually than to know it in your gut," said Cumbie, who said there is often a need for "hand holding" with the client when this acceptance of market volatility is put to the test. Almost every investment comes with a warning that previous performance doesn't guarantee future returns. This, too, is generally ignored. Investors make the mistake of believing too fervently in hot past performance by a stock or a fund, said Cumbie. Urging them along with this is a skewed vision, known as "periodicity," of what the actual investing climate is like. Investment returns can be subtly (and not so subtly) transformed by periodicity. Depending on what calendar period of time you slice out and look at, an investment can either look like a tremendous winner or a sure loser. For instance, a mutual fund over the past 3 years might have produced great returns. However, if you look at it over 10 years, it might have had much weaker returns. Since these time slices are arbitrary, investors are better off taking a long view, "The focus has to remain on the fact that there's a long-term upward march that you better have faith in or you're better off staying out of equities," said Cumbie. "If you go in expecting 10 percent annual returns and straight lines, it's not going to work."
Mental shortcuts
Investors who look at past returns and extrapolate them into the future are making a common investor mistake Gergory Lintner calls taking "mental shortcuts." Lintner, a chartered financial analyst at Yanni-Bilkey Investment Consulting in Pittsburgh, Pa., said investors are not inquisitive enough about their investments, choosing instead to rely on superficial impressions, or mental shortcuts, which require less work. "The intelligent investor is going to look behind what has driven a stock or fund higher and whether that's likely to continue," said Lintner. Oftentimes, he explained, a fund's strong performance can be attributed not to deft stock picking by its manager, but instead to its overall investment style being in favor. However, fund styles can go out of favor just as quickly, leaving investors with a fund that is yesterday's news. "It's just not predictable," he said.

Investors make big misjudgments in the area of risk, said Lintner. He explained they tend to judge their own risk tolerance based on what's happened recently. If they've had five years of good investing in a bull market, they'll say they have a high-risk tolerance. When put to the test in a bear market, they invariably feel less strongly about stocks. Common sense is often also jettisoned when the inevitable bear market hits. Lintner said investors often use a counterintuitive approach to buying stocks, which flies in the face of normal purchasing behavior. "At any other time, whether you're shopping for food, clothing or furniture, you're excited when things go on sale but when stock prices go down, people behave in the opposite manner," he said. "They should use the low prices to accumulate shares."

Blaming bad luck
Even investors who might wish to learn from their mistakes are often prevented from doing so by their own imperfect perceptions of themselves, academic research suggests. "They take too much credit for their success and blame bad luck for their failures," according to Simon Gervais, assistant professor of finance at the Wharton School of the University of Pennsylvania. Gervais' study focused on the behavior of investors and he found people who make a quick killing in the stock market think they have somehow found the key to financial success and become overconfident about their ability to play the market. Investor overconfidence is created by the initial success but the process isn't self-perpetuating, said Gervais. "Once a trader is overconfident --and wealthy -- he will tend to make bad decisions (based on that overconfidence) and will start to lose money, until he finally comes to assess his own ability correctly." Financial experts say you can avoid some of that "bad luck" by following some of the basic, boring tenets you adhere to in other parts of your life. Most importantly, don't jump into an investment based on a tip by a friend or relative. Instead, put in the time to research an investment and understand its risks and rewards. It's better to spend some time before you spend your money. The process doesn't stop once you've bought the stock either. You'll want to keep on top of your investment portfolio and be informed about any company developments, which could affect your stocks.
These guidelines don't necessarily mean you'll need to turn into a bloodless investor who can't set off toward a hot sector when the urge moves you. Just do it responsibly. "Investors typically want to carve out a small amount for uncompensated risk," said financial planner Cumbie. "You just need to know what you're doing and do it with the cognizance that you're taking a risk." -- by staff writer Randall J. Schultz

The Psychology Behind Common Investor Mistakes
in Psychology/Sentiment
common investor errors:
Overconfidence
Fear of regret/pain of regret
Cognitive dissonance
Anchoring
Representativeness
Myopic risk aversion
Van Eaton notes" A better understanding of the psychology of investor mistakes can reduce their effects on investment decisions. Here is a list of the most common psychological effects, and how you can reduce their impact and incorporate them into your own investment decisions."
The full piece is below.
"Behavioral finance, a relatively new area of financial research, has been receiving more and more attention from both individual and institutional investors. Behavioral finance combines results from psychological studies of decision-making with the more conventional decision-making models of standard finance theory.
By combining psychology and finance, researchers hope to better explain certain features of securities markets and investor behavior that appear irrational. Standard finance models assume that investors are unbiased and quite well informed. Investors are assumed to behave like Mr. Spock from Star Trek, taking in information, calculating probabilities and making the logically "correct" decision, given their preferences for risk and return. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes.
Six common errors of perception and judgment, as identified by psychologists, are examined in this article. Each has implications for investment decision-making and investor behavior. An understanding of the psychological basis for these errors may help you avoid them and improve investment results. And in some cases, market-wide errors in perception or judgment can lead to pricing errors that individuals can exploit. Understanding the psychological basis for the success of momentum and contrarian strategies can help investors fine-tune these strategies to better exploit the opportunities that collective mental mistakes create.
Overconfidence
A good starting point for a list of psychological factors that affect decision-making is overconfidence. One form is overconfidence in our own abilities. A great number of psychological studies have demonstrated that test subjects regularly overestimate their abilities, especially relative to others. Studies also show that people tend to overestimate the accuracy of information. With respect to factual information, research subjects consistently overestimated the probability that their answer to a question was correct.
You might expect that professional stock analysts are less prone to psychological biases than non-professional investors and the general public. With regard to overconfidence, however, this is not the case. A leading researcher found that when analysts are 80% certain that a stock is going to go up, they are right about 40% of the time.
How does overconfidence affect investment behavior?
Models of financial markets with overconfident investors predict that trading will be excessive. One recent study used a creative approach to see if overconfidence is related to high levels of trading. Many psychological studies have shown that men are more prone to overconfidence than women. If overconfidence causes overtrading, then men should exhibit their greater tendency toward overconfidence by trading more. The results of the study show exactly that-for a large sample of households, men traded 45% more than women, and single men traded 67% more than single women over the period of the study.
Is the active trading that overconfidence leads to actually 'excessive,' causing lower performance? A study of the trading activity and returns for a large national discount brokerage suggests that it is. For all of the households, returns averaged 16.4% over the period. However, those that traded the most averaged 11.4% in annual returns, significantly less than for an account with average turnover. Over the same period, the S&P 500 returned 17.9% on average.
What, if anything, can investors do about the general tendency toward overconfidence?
You can profit from this research only by heeding its message: Trade less. This is perhaps more easily said than done. Placing too much confidence in an analyst's buy/sell recommendation or earnings projection may lead to excessive trading even without any illusions about your own stock-picking abilities.
Other aspects of overconfidence are more subtle. People prefer to bet on the flip of a coin if it has not already been tossed. Psychologists relate this to a tendency for people to believe that they either have some ability to foretell the future or some control over the outcomes of future events.
Another behavior that is related to overconfidence in our abilities is the tendency to treat historical information as irrelevant and to place much more importance on current circumstances as a determinant of future outcomes. The psychological basis for such a tendency is called "historical determinism," the belief that historical events could or should have been predictable given the circumstances of the past. For investors, this translates to a belief that market events, such as the 1929 crash, could not have developed any other way. Only if we determine that current circumstances mirror those of some past time period will we be inclined to give history its due. Our collective social memory may tend to emphasize things that are seen as directly causing past events, and exclude circumstances that suggest a different outcome. The cry of "this time it's different" has a special place in investment lore. It is perilous to ignore stock market history based on a belief that present circumstances make historical market performance irrelevant to current decisions.
Fear of Regret
A second mental error that can affect decision-making is an excessive focus on the potential feelings of regret at having made a poor decision (or a 'good' decision that turns out poorly). This type of error is rooted in most individuals' (sometimes extreme) dislike for admitting they are wrong. The tendency to feel distress at having made a mistake that is out of proportion to the size and nature of the error is what psychologists label the "pain of regret." The fear of regret manifests itself when the potential regret from making an error has an influence on our decision-making that is out of proportion to the actual penalty an error would impose. Some behavioral models are constructed around the idea that people make decisions so as to minimize the potential regret that may result.
The fear of regret influences behavior when individuals procrastinate in making decisions. Studies have shown that people will postpone a decision, claiming that they are awaiting an upcoming information release, even when the new information will not change their decision (called the disjunction effect by psychologists).
The fear of regret can play an important role in our investment decision-making in other ways as well. In stock transactions, acting so as to avoid the pain of regret can lead to holding losing stocks too long and selling winners too soon. When stocks go down in value, investors seem to delay the selling of those stocks, even though they likely have not met expectations. Selling the position would finalize the error and the pain of regret is delayed by not accepting the purchase as an error. Winning stocks, on the other hand, contain the seeds of regret. The sale of appreciated shares removes the possibility that those shares will fall in value along with the potential for regret should this occur before the shares are sold. Besides avoiding poor decisions from too much focus on the fear of regret, you may also be able to improve performance by exploiting pricing patterns that result from behavior rooted in the fear of regret. A general tendency among investors to hold on to losers too long will slow the price declines, since less shares are offered for sale. Similarly, a tendency to sell winners too soon will increase the number of shares for sale and slow price increases. Both of these effects can enhance opportunities for investors.
Strategies based on price momentum and earnings momentum seek to exploit the fact that price changes occur slowly, over a sometimes prolonged period of time. Studies show that stocks that have performed the best (or worst) over six months to a year are likely to remain good (or poor) performers over the next year. There has been considerable research over the years showing that firms that announce surprisingly good (or poor) quarterly earnings tend to outperform (or underperform) for up to a year after the earnings announcement.
While the success of momentum strategies may also be a result of other psychologically driven behaviors, a tendency to sell winners too soon and losers too late will, in general, make price adjustments to a new equilibrium level a more drawn-out process than it would otherwise be. Investors can purchase stocks of firms that are in an established uptrend, with both earnings and price momentum, and hold them until the trend has reversed. For stocks that show a negative trend in earnings and price, the message here is: Get out. The deterioration will likely be longer and more severe than you think. Such discipline should reduce the tendency to sell winners too soon and hold losers too long, and improve investment results.
Cognitive Dissonance
A psychological characteristic that is related to the fear of regret is the desire to avoid cognitive dissonance. This psychological trait is one you might remember from Psychology 101. Without the jargon, the reference is to a desire to avoid believing two conflicting things. If one of the beliefs is supported by emotional involvement or attachment, the brain will attempt to avoid or discount a conflicting belief and seek out support for the preferred belief.
In the classic study of this characteristic, researchers found that once a person had made a decision and purchased a particular automobile, they would avoid ads for competing models and seek out ads for the model purchased. Avoiding the pain of regret may be the basis for this behavior. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Alternatively, people can minimize the importance of subsequent information that would call their original decision into question, if the truth can't be avoided or denied. Beliefs that we wish to maintain are defended by many mechanisms, even if the strong desire to maintain existing beliefs has a less-than-rational basis.
How can you adjust for the tendency to avoid or deny new, conflicting information? As in other areas, investment discipline can help. By writing down the reasons for purchasing a stock and re-evaluating their validity over time as dispassionately as possible, investors can force themselves to maintain a selling discipline. If the reasons for purchase no longer hold and the share price indicates deteriorating fundamentals, admitting a mistake may often be the prudent thing to do. Another disciplined approach is to set a time limit for a newly purchased stock to perform as expected. If, for example, the earnings and/or price expectations have not been met after three months, then the stock must go. While this is not necessarily a good rule for value investors (since that approach often requires longer holding periods before expectations are met), it can help those who pursue a growth strategy to avoid holding losing positions over a prolonged period of price deterioration.
Anchoring
The three psychological characteristics discussed so far are all based, to some extent, on feelings and emotions. But some decision-making errors result from mental shortcuts that are a normal part of the way we think. The brain uses mental shortcuts to simplify the very complex tasks of information processing and decision-making. Anchoring is the psychologists' term for one shortcut the brain uses. The brain approaches complex problems by selecting an initial reference point (the anchor) and making small changes as additional information is received and processed. This reduces a complex problem, evaluating all information as a whole as new information is received, to the simpler task of revising conclusions as each new bit of information is received.
In the case of bargaining, a salesman may begin with a high price to bias upward the final price. Research shows that the listing prices for homes influence estimates of their values. The listing price apparently serves as an anchor, even though it does not necessarily contain relevant information about the home's value. Recent prices or recent earnings performance may serve as a similar psychological anchor for investors, and may have predictable effects on subsequent returns.
Understanding the role of anchoring in the decision-making process can help you avoid some investment pitfalls. "Bottom fishing," the practice of buying stocks that have fallen considerably in hopes of getting them cheaply, can be quite hazardous to your wealth. The motivation behind this strategy is similar to the concept of anchoring. A higher recent price is taken as evidence of value, so that the new price seems cheap.
The old pros say, "Don't bottom fish," but they also say "Buy on weakness." What's the difference? If you have evaluated a stock and determined that you would like to accumulate a position, then you can and should time your buys to take advantage of the ebbs and flows in the market and price weakness in the stock when it goes below your buy price. If, on the other hand, a sharp price decline lies behind the decision to buy and a recent higher price looms large in the stock's initial attraction, beware—the odds are against you.
One effect of anchoring on investment decisions is similar to that of the fear of regret; losing positions will be held too long and improving stocks will be sold too soon. In each case the effect of a recent price as a psychological anchor in the complex process of stock valuation will slow the revision of valuation estimates. Losers will appear cheap and winners will seem to have gotten ahead of themselves. As with the fear of regret, anchoring can slow the process of revaluation and contribute to the gains from momentum strategies. In general, the less clear the underpinnings of a stock's value, the greater the importance of an anchor in the process of establishing value. The valuations of highly speculative stocks, such as Internet high flyers without visible earnings, will likely be more influenced by recent prices, than those of stocks with visible and predictable earnings.
Representativeness
Another shortcut that the brain uses to reduce the complexity of thought is called representativeness by psychologists. This is an assumption the brain makes that things that share similar qualities are quite alike. Classifications are made based on a limited number of shared qualities.
One example of representativeness in our thinking is the tendency to classify people as either "good" or "bad" based on some short list of qualities. When we do this, we gain in simplicity and speed, but at the expense of ignoring the much more complex reality of the situation.
The effect of representativeness in investment decisions can be seen when certain shared qualities are used to classify stocks. Two companies that report poor results may both be classified as poor companies, with bad management and unexciting prospects. This may not be true, however. A tendency to label stocks as either bad-to-own or good-to-own based on a limited number of characteristics will lead to errors when other relevant characteristics are not considered.
Representativeness may also be related to the tendency of stock prices to reach extremes of valuation. If poor earnings and share price performance has a stock branded as "bad," representativeness will tend to delay the reclassification of the stock as one investors would like to own. On the other hand, "good" stocks may continue to be classified as such by investors well after the firm's prospects for either earnings or price appreciation have diminished significantly.
Contrarian or value strategies seek to exploit just such erroneous classifications. If a firm has been classified by most investors as a bad one and the stock as a loser, initial changes in the company's outlook may leave the classification in investors' minds essentially unchanged. This collective classification can lead to stocks being unloved and underpriced. A value investor seeks to buy the stocks others classify as "bad," ideally at the time when the greatest majority holds this view. When fundamentals have started to deteriorate but the majority of investors have not yet reclassified the stock in their minds, it is often an ideal time to sell.
Myopic Risk Aversion
The term "myopic risk aversion" refers to the tendency of decision makers to be shortsighted in their choices about gambles and other activities that involve potential losses. Much research has examined what types of gambles people will accept, the effects of how the possible outcomes of the gamble are presented, and whether people make consistent choices.
As an example of how these results can apply to investment decision-making, consider an investor saving for retirement. Each year's investment in equities rather than a lower-risk alternative can be viewed as a single gamble. Unlike casino gambling, however, the expected payoff is positive, and the investor has the opportunity to invest in equities over a period of many years.
Two leading researchers in behavioral finance have concluded that investors in this situation tend to hold less than the optimal amount of equities because they place too much emphasis on the potential loss from a single year's investment in equities. They term this shortsightedness myopic risk aversion.
In one study, investors in a company retirement plan chose larger equity allocations after they were shown the actual results of investing in equities over many different 20-year periods. The research suggests that if investors focus on the distribution of outcomes for the whole period, they are more likely to make the correct decision."


Four Investing Mistakes to Avoid
Don't Become Your Portfolio's Worst Enemy
Investing Mistake 1: Spreading your investments too thin
Over the past several decades, Wall Street has preached the virtues of diversification, drilling it into the minds of every investor within earshot. Everyone from the CEO to the delivery boy knows that you shouldn't keep all your eggs in one basket - but there's much more to it than that. In fact, many people are doing more damage than good in their effort to diversify. Like everything in life, diversification can be taken too far. If you split up $100 into one hundred different companies, each of those companies can, at best, have a tiny impact on your portfolio. In the end, the brokerage fees and other transaction costs may even exceed the profit from your investments. Investors that are prone to this "dig-a-thousand-holes-and-put-a-dollar-in-each" philosophy would be better served by investing in an index fund which, by its very nature, is made up of many companies. Additionally, your returns will mimic those of the overall market in almost perfect lockstep.
Investing Mistake 2: Not accounting for time horizon
The type of asset in which you invest should be chosen based upon your time frame. Regardless of your age, if you have capital that you will need in a short period of time (one or two years, for example), you should not invest that money in the stock market or equity based mutual funds. Although these types of investments offer the greatest chance for long-term wealth building, they frequently experience short-term gyrations that can wipe out your holdings if you are forced to liquidate. Likewise, if your horizon is greater than ten years, it makes no sense for you to invest a majority of your funds in bonds or fixed income investments unless you believe the stock market is grossly overvalued.
Investing Mistake 3: Frequent trading
I can name ten investors on the Forbes list, but not one person who made their fortune from frequent trading. When you invest, your fortune is tied to the fortune of the company. You are a part-owner of a business; as the company prospers, so do you. Hence, the investor who takes the time to select a great company has to do nothing more than sit back, develop a dollar cost averaging plan, enroll in the dividend reinvestment program and live his life. Daily quotations are of no interest to him because he has no desire to sell. Over time, his intelligent decision will pay off handsomely as the value of his shares appreciates.
A trader, on the other hand, is one who buys a company because he expects the stock to jump in price, at which point he will quickly dump it and move on to his next target. Because it is not tied to the economics of a company, but rather chance and human emotion, trading is a form of gambling that has earned its reputation as a money maker because of the few success stories (they never tell you about the millionaire who lost it all on his next bet... traders, like gamblers, have a very poor memory when it comes to how much they have lost).

Money Management - Mistakes that All Investors Should Avoid
In this article, we will look at the mistakes that a lot of investors make, that lead to losses in the stock market, and look at the ways to avoid them. It is not an understatement, that investing is unlike any other profession or endeavor, and needs special attention. Lack of an Investing plan/strategy : Most people, when they enter a business, do a lot of planning, before diving in. Furthermore, during the planning process they consider, in details, factors that could affect the business, and appropriate contingency plans. In fact, a lot of such people take pride in their efforts, and the extent of their preparation helps them build confidence in themselves, and their chances for success. Finally, after much soul-searching and countless hours of planning and preparation, they take the plunge and attempt to succeed in your new business. There is nothing surprising in any of this. It happens all the time and is simply the way that people go about making their fortune. Except when it comes to Investing. In the field of investing, a surprisingly high percentage of people enter the markets without the slightest idea as to how they plan to succeed in the long run. Most people get lured by thoughts of easy money. But, winning traders have a well-thought out investing plan. Yet, for far too many individuals these issues are dealt with on an "as needed" basis, usually when there is money on the line, and usually after money has been lost. Such people make critical decisions based on emotion rather than on sound thinking. Winning investors adopt a system of investing, and stick to it. Whether it is technical (such as CAN SLIM®, or trend-following) or fundamental (a la Warren Buffett, or Ben Graham), some combination thereof, they have the necessary conviction and experience with their chosen system of investing, and they are comfortable with it. Failure to manage risk: The majority of investors don't get around to addressing money management issues until after they have suffered an unexpectedly large decline in their equity. Part of the reason for this is that when an investor starts a new investing program, his primary focus is the upside potential and not the downside risk. The best investing systems, such as CAN SLIM®, have a strict loss-cutting rule, and other sell rules as well. So, if any stock goes down (say) 7% from the buy price, it is sold immediately; no questions asked. The goal of employing any risk control technique is to reduce the amount of risk you expose yourself to, at any given point in time, and also to minimize the amount of volatility you experience on a day-to-day basis to a low-enough level that you can live with (and that you have decided beforehand) and keep trading through. Anything that reduces the magnitude of equity drawdowns goes a long way towards keeping an investor in the game for two reasons. First, it reduces the amount of money lost at any one time, thereby preserving capital. Secondly, it can relieve a great deal of emotional pressure for the individual investor, which in turn makes him far less likely to do something drastic in the face of a sharp drawdown. The costliest mistakes in investing are usually made when the pain of losing money (and/or the fear of losing more money) becomes too great. Overtrading and Leverage: Even though the stock market can be volatile at times, it is not the volatility of stocks or the markets that causes people to lose money. What causes most of the problems is overtrading and the amount of leverage (buying on margin, or simply buying more amount of stocks than the amounts favored by the current market conditions) that people use. There is nothing inherently wrong with overtrading or leverage, provided the trader using it is experienced, wise and disciplined. But leverage is the double-edged sword that makes a few people very rich and upon which the majority of traders fall. Winning investors size their individual stock positions. You want to use enough leverage to be able to generate above average returns without using so much leverage that you expose yourself to too much risk. The ultimate goal of sizing positions in an account is to limit any drawdowns in equity to as small a percentage amount, as possible. This is where the experience and intuition of a winning investor also comes in. In the right markets, such an investor takes larger position sizes, but in an environment with lower odds of success, the position sizes are smaller. Lack of Discipline: A lack of discipline in investing, is always a mistake. A lack of discipline is defined as failing to do what you should do in a given circumstance. There is probably not an investor who has not suffered because of his or her own lack of discipline at some critical moment. What separates those who make money in the long run from the others is (a) the financial and emotional capabilities to become aware of becoming undisciplined, and (b) the willingness to learn from mistakes and to never repeat a mistake already made. Discipline is what separates the best investors from the mediocre or losing investors. Discipline is key, even if the lack of discipline actually makes you money in the short-term (for example, if it allows you to capture a windfall profit by taking a trade against your approach, or doubling up on a losing investment or holding on after your trading method tells you to stop out of it). The most cruel paradox in investing is that an investor's short-term successes, as a result of not following his investing plan, can plant the seeds of his long-term failure. Failure to follow the investing system, leads to serious losses, sooner or later. The right breathing techniques and/or meditation are important here, as they lead to greater self-awareness, and therefore disciplined investing. Whether you invest on your own, or through a stock broker or money manager, make sure to spend time on self-development with trading psychology coaches, so as to master the psychological characteristics of winning investors.

The Seven Deadly Investment Sins
By Mark TierMost investors are hurt by mistaken beliefs about how to achieve investment success. These are beliefs that Master Investors such as Warren Buffett, George Soros and Carl Icahn don’t share. The most widely-held of these damaging falsehoods are what I call The Seven Deadly Investment Sins.The first step in putting these mistaken notions behind you is to see what’s wrong with them....Deadly Investment Sin #1. Believing that you have to predict the market’s next move to make big returns. Reality: Highly successful investors are no better at predicting the market’s next move than you or I. Don’t take my word for it.One month before the October 1987 stock market crash, George Soros appeared on the cover of Fortune magazine. His message:“That [American] stocks have moved up, up and away from the fundamental measures of value does not mean they must tumble. Just because the market is overvalued does not mean it is not sustainable. If you want to know how much more overvalued American stocks can become, just look at Japan.”While he remained bullish on American stocks, he felt there was a crash coming...in Japan. He repeated that outlook in an article in The Financial Times of October 14th, 1987.One week later, Soros’s Quantum Fund lost over $350 million as the US market, not the Japanese market, crashed. His entire profit for the year was wiped out in a few days.As Soros admits:“My financial success stands in stark contrast with my ability to forecast events.”And Buffett? He simply doesn’t care about what the market might do next and has no interest in predictions of any kind. To him, “forecasts may tell you a great dealabout the forecaster; they tell you nothing about the future.”Successful investors don’t rely on predicting the market’s next move. Indeed, both Buffett and Soros would be the first to admit that if they relied on their market predictions, they’d go broke.Prediction is the bread-and-butter of investment newsletter and mutual fund marketing — not of successful investing.Deadly Investment Sin #2. The “Guru” belief: if I can’t predict the market, there’s someone somewhere who can — and all I need to do is find him.Reality: If you could really predict the future, would you shout about it from the rooftops? Or would you keep your mouth shut, open a brokerage account and make a pile of money?Elaine Garzarelli was an obscure number-cruncher when, on October 12th, 1987, she predicted “an imminent collapse in the stock market.” That was just one week before October’s “Black Monday.”Suddenly, she became a media celebrity. And within a few years, she had turned her celebrity status into a fortune.By following her own advice?No. Money poured into her mutual fund, reaching $700 million in less than a year. With a management fee of just 1%, that’s $7 million smackeroos a year. Not bad. She also started an investment newsletter that quickly grew to over 100,000 subscribers.The business benefits of gurustatus made plenty of money for Elaine Garzarelli — but not for her followers.In 1994, the shareholders of her mutual fund quietly voted to shut it down. The reason: lackluster performance and an eroding asset base. Average return over the life of the fund: 4.7% per annum, vs. 5.8% for the S&P 500.Seventeen years after she first rocketed to the investing public’s attention, Elaine Garzarelli still maintains her guru/media celebrity status — even though her fund tanked, her newsletter went out of business and her overall track record of prediction has been dismal.For example, on July 21st, 1996, with the Dow at 5452, she was reported as saying the Dow “could go to 6400.” Just two days later she announced: “The market could fall 15% to 25%.”That’s called having 50 cents each way.Those were two of her 14 public predictions between 1987 and 1996 — as recorded by The Wall Street Journal, Business Week and The New York Times. Of the 14 predictions, a mere five were correct.That’s a 36% success rate. You could have done better — and made more money — by flipping a coin.Elaine Garzarelli is just one of a long line of market gurus who came and went.Remember Joe Granville? He was the darling of the media in the early 1980s — until, when the Dow was around 800 in 1982, he advised his followers to sell everything and short the market.Well, 1982 was the year the great bull market of the 1980s began. Nevertheless, Granville continued to urge people to short the market...all the way up to 1200.Granville was replaced by Robert Prechter who — unlike Granville — had predicted a bull market in the 1980s. But after the crash of 1987 Prechter declared the bull market finished and predicted that the Dow would plunge to 400 in the early 1990s. That’s like missing the side of a barn with a double-barreled shotgun.The dot.com boom of the 1990s produced another set of media “heroes,” most of whom disappeared from view soon after the NASDAQ began tanking in March 2000.If someone actually exists who can make accurate market predictions consistently, he or she has escaped the relentless hunt for such people by the world’s media. The sage “-Anonymous” was right on the money when he said: “Prediction is difficult, especially when it concerns the future.”Media “gurus” make their money from talking about investments, selling their advice or charging fees to manage other people’s money. But, as John Train put it in The Midas Touch, “the man who discovers how to turn lead into gold isn’t going to give you the secret for $100 a year.” Or give it to you for nothing on CNBC.That’s why Buffett, Soros, Icahn and other Master Investors who make money from actually investing rarely talk about what they’re doing or how they are thinking about the market. Quite often, they won’t even tell their own investors what’s happening to their money! Deadly Investment Sin #3. Believing that “Inside Information” is the way to make really big money.Reality: Warren Buffett is the world’s richest investor. His favorite source of investment “tips” is usually free for the asking: company annual reports.George Soros earned the title of “The Man Who Broke the Bank of England” when he took a massive $10 billion short position against the pound sterling in 1992.He wasn’t alone. The signs that sterling was on the brink of collapse were there for anyone who knew how to look. Hundreds, if not thousands, of other traders also cleaned up when the pound plummeted.But only Soros jumped in with both feet and took home $2 billion in profits.Now that they are famous, Buffett and Soros have ready access to highly placed people. But when they began investing, they were nobodies, and could expect no special welcome. What’s more, both Buffett’s and Soros’s investment returns were higher then, when they were unknown, than they are today. So if either now draws on insider information in any way, it clearly isn’t doing him much good.As Buffett says, “With enough inside information and a million dollars you can go broke in a year.”Deadly Investment Sin #4. Diversifying.Reality: Warren Buffett’s amazing track record comes from identifying half-a-dozen great companies — and then taking huge positions in only those companies.According to George Soros, what’s important is not whether you’re right or wrong about the market. What’s important is how much money you make when you’re right about a trade, and how much money you lose when you’re wrong. The source of Soros’s success is exactly the same as Buffett’s: a handful of positions that produce huge profits that more than offset losses on other investments.Diversification is the exact opposite: having many small holdings assures that even a spectacular profit in one of them will make little difference to your total worth.Highly successful investors will all tell you that diversification is for the birds.But that’s not a message you’re likely to hear from your Wall Street advisor.Deadly Investment Sin #5. Believing that you have to take big risks to make big profits.Reality: Like entrepreneurs, successful investors are highly risk-averse and do everything they can to avoid risk and minimize loss.At a management conference a few years ago, one academic after another presented papers on “the entrepreneurial personality.” The academics pretty much disagreed with each other except on one thing: entrepreneurs have a high tolerance for risk and, indeed, most love taking risks.At the end of the conference, an entrepreneur in the audience stood up and said that he was flabbergasted by what he had heard. As an entrepreneur, he did everything he could to avoid risk, he said. He also knew many other successful entrepreneurs and said it would be hard to find a bunch of people anywhere who were more risk-averse.Just as successful entrepreneurs are risk-averse, so are successful investors. Avoiding risk is fundamental to accumulating wealth. Contrary to the academic myth, if you take big risks you’re more likely to end up making big losses than banking giant profits.Like entrepreneurs, successful investors know it’s easier to lose money than it is to make it. That’s why they pay more attention to avoiding losses than to chasing profits.Deadly Investment Sin #6. The “System” belief: somebody, somewhere has developed a system — some arcane refinement of technical analysis, fundamental analysis, computerized trading, Gann triangles, or even astrology — that will guarantee investment profits.Reality: This is a corollary of the “Guru” belief — if an investor can just get his hands on a guru’s system, he’ll be able to make as much money as the guru says he does. The widespread susceptibility to this Deadly Investment Sin is why people selling commodity trading systems can make good money.The root of the “Guru” and “System” beliefs is the same: the desire for a sure thing.As Warren Buffett responded — in a scathing tone of voice — to a question about one of the books written about him: “People are looking for a formula.” They hope that by finding the right formula, all they’ll have to do is plug it in to the computer and watch the money pour out.Deadly Investment Sin #7. Believing that you know what the future will bring — and being certain that the market must “inevitably” prove you right.Reality: This belief is a regular feature of investment manias. Virtually everyone agreed with Irving Fisher when he proclaimed: “Stocks have reached a new, permanently high plateau”...just a few weeks before the stock market crash of 1929. When gold was soaring in the 1970s it was easy to believe that hyperinflation was inevitable. With the prices of Yahoo, Amazon.com, eBay, and hundreds of “dot-bombs” rising almost every day, it was hard to argue with the Wall Street mantra of the 1990s that “Profits don’t matter.”This is a more powerful variant of the first Deadly Investment Sin, that you have to be able to predict the future — but far more tragic.The investor who believes he must be able to predict future to make money searches for the “right” predictive method. The investor who falls under the spell of the Seventh Deadly Investment Sin thinks he already knows what the future will bring. So when the mania eventually comes to its end, he loses most of his capital — and sometimes his house and his shirt as well.Of all the Seven Deadly Investment Sins, coming to the market with a dogmatic belief is by far the most hazardous to your wealth.Beliefs Are Not Always EnoughWhile the wrong beliefs will inevitably lead you astray, having the right beliefs isn’t always enough.For example, when I was researching the IceBreaker’s strategy, one of my subjects was a charming Frenchman who was at ease talking to complete strangers. Like the IceBreaker, he believed that all people are interesting. Nevertheless, he still had to wait for a context, like being at a party or sitting at the same cafeteria table, before he felt able to start a conversation.The moment I taught him the IceBreaker’s mental strategy of hearing his own voice saying “Isn’t he/she an interesting person,” his need to wait for a context disappeared, and he began talking to every person who passed by.So each element of the structure of a mental habit — the belief, the mental strategies, the sustaining emotion and the associated skills — must be in place for any mental habit to become your own.The “Holy Grail” of InvestingWhen I entered the investment arena in 1974, I knew nothing about mental habits and strategies, but I was a committed practitioner of all Seven Deadly Investment Sins.I published a newsletter called World Money Analyst, and as a goldbug riding the inflationary waves of the 1970s achieved minor “guru” status myself.But I eventually discovered that...Of the dozens of fellow market “gurus” I got to know, none was any better at making predictions than I was.None of the fund managers I met was any good at making predictions either; and almost none of them consistently made money for their investors — or consistently beat the market, for that matter.One of them partially let the “cat out of the bag” when I asked him why, since he was so good at making predictions [at least, according to his own marketing], he didn’t just trade for himself rather than manage other people’s money.“No downside risk,” was his answer. “When I manage money, I get 20% of the profits. But I don’t share in the losses.”Another fund manager — hired at an enormous salary just after the fund he was managing tanked — completed the picture when his new employer stressed in an interview that the manager’s “recent [dismal] fund performance wasn’t nearly as important as his ability to pull new money into the funds he had overseen.”I’d met people who made their money selling investment and trading systems...but who wouldn’t dream of using those systems themselves. Every 18 months or so they’d be back on the market with a new system...another one they didn’t use.I’d developed my own system of making predictions [which I trumpeted in my marketing, of course] which worked for a while and then stopped working altogether when the era of free-floating currencies began.I started to think that, perhaps, the search for some “Holy Grail” of investing was futile.Paradoxically, it was only after I’d given up the search entirely that I came across the answer...and found that I’d been looking in the wrong place all along.The problem wasn’t ignorance. It wasn’t something I didn’t know. The problem was me: the poor mental habits I applied to my investment decisions.Only when I changed my mental habits did I discover how easy it really is to consistently make money in the markets. That’s what will happen to you when you adopt the Winning Investment Habits of Warren Buffett and George Soros.When you first stepped into the investment arena you brought with you all the unexamined habits, beliefs and mental strategies you’d built up over a lifetime. If they’ve been working for you, helping you make and keep money, then you’re one of the lucky few.For most of us, the mental habits we picked up somewhere — who knows where? — as we grew up have cost us, not made us, money.And if we drifted into any of the Seven Deadly Investment Sins, we unknowingly picked up some extra bad habits to add to any we already had.Changing your mental habits isn’t always easy — just ask any smoker. But it can be done. And the first step is to discover the habits we should adopt. Some trading rules to ponder about! Technical Analysis teaches traders to execute positions based on numbers, time and volume.This discipline forces traders to distance themselves from reckless gambling behavior. Through detached execution and solid risk management, short-term trading finally "works". Markets echo similar patterns over and over again. The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase:


1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming. 2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat. 3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool. 4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover. 5. Don't buy up into a major moving average or sell down into one. See #3. 6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble. 7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can. 8. Trends test the point of last support/resistance. Enter here even if it hurts. 9. Trade with the TICK not against it. Don't be a hero. Go with the money flow. 10. If you have to look, it isn't there. Forget your college degree and trust your instincts. 11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try. 12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel. 13. Avoid the open. They see YOU coming sucker 14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom. 15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it. 16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again. 17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action. 18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers. 19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight. 20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

A situation in which the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow index (MFI), are moving in opposite directions.

In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high

Brokers take their pick of top S'pore stocks
Offshore theme still strong for 2007; stable cash flow, earnings visibility also favoured
So getting into the new year, The Business Times asks local and foreign brokerages what their top three stock picks are for the Singapore market in 2007. And their choices?
We find their picks reflect a continued bias towards the oil-and-gas offshore sector, even though favour has shifted slightly away from blue chips like Keppel Corp and SembCorp Marine to up-and-coming players like Cosco Corp.
Another theme is a preference for stable cash flows and earnings visibility, as reflected in Citigroup's picks. And there is also a groundswell of varied picks across industries from food to property, banking, and even manufacturing.
Keppel remains a top pick for Citigroup, JP Morgan and Merrill Lynch, the stock having been included on Merrill's Asia Pacific Focus 1 list - its highest conviction 'buys' across Asia - since last October.
Citigroup says Keppel's three divisions - offshore and marine (O&M), property, and infrastructure - 'should power ahead in 2007' on secular trends. It likes the long-term visibility in the O&M sector and the continued recovery in the property segment. Keppel's infrastructure business should also grow from contributions from power barges, cogeneration plants, a NEWater plant and a recent waste management contract won in Qatar, says Citigroup.
OCBC Investment Research (OCBCIR) prefers SembCorp Marine. It says that despite the slow pace of orders, 'we cannot yet convince ourselves that a relatively established rig and offshore builder like SembCorp can suddenly lose its competitiveness'.
CIMB, however, feels that 'with spare yard capacity and beefed-up technological expertise, the upcoming yards are poised to take over the growth mantle from the top-tier yards in the next few years'. It believes Labroy Marine is ahead in rig-building. But it thinks Cosco has more capacity in the mid-term, with 'easily five times Labroy's land capacity for rig building when its Zhoushan yard is completed'.
DBS also picks Cosco. But OCBCIR turns to another stock with exposure to oil - rig refurbisher KS Energy - while Westcomb Financial Group likes Technics Oil & Gas.
Moving away from O&M, Citigroup's two other top picks are Singapore Technologies Engineering and Singapore Press Holdings. ST Engineering is favoured for its efforts to align its core operations and for its strong orders; SPH is liked for its cash-generating near-monopoly in print and significant non-core assets.
JP Morgan also likes ST Engineering, saying that, like Keppel, its robust earnings growth has yet to be fully priced in by the market. Morgan also believes the banks will continue to do well, and DBS is its top choice for the sector. It advises investors to avoid property stocks like City Developments, where domestic revaluation has pushed valuations too far ahead.
Merrill, however, likes exposure to property revaluation and has picked CityDev and OCBC as the two other local stocks on its Asia-Pacific Focus 1 List. It expects a catch-up between the mass and luxury housing markets in Singapore, projecting that an upside in housing values will benefit the two companies.
Meanwhile, DBS likes SIA as a 'beneficiary of continued strong regional air travel demand and integrated resorts in Singapore'. It also likes Sino-Environment, which it says will benefit from stricter enforcement of environmental laws in China and, backed by capacity expansion, will move into larger, more lucrative projects.
Among food-related stocks, OCBCIR has Pacific Andes Holdings as a top pick. The Malaysian-owned company with exposure to demand for fish in China has seen its share price stabilise after rising 46 per cent in 2006. The 'consolidation phase', says OCBCIR, is a good time to invest, as Pacific Andes' fishing operation 'remains a gem largely for its valuable quota to fish in Russian waters'.
Another top-pick China stock is potato starch maker China Essence, which Phillip Securities says has been expanding capacity. Phillip also likes Sino Techfibre, which it feels is a 'purer play on the fast-growing China synthetic leather industry' compared with Fibrechem.
Other consumer stocks are also favoured. Phillip likes Best World International, a direct seller of health products, whose expansion into Taiwan, China, South Korea, India and Japan is aimed at replicating its success in Singapore.
CIMB likes OSIM International, on account of its 'commendable reinvigoration of Brookstone', a once-ailing acquisition that has recovered same-store-sales year-on-year growth and incorporated two of OSIM's products into its top five best-selling ones.


Originally Posted by Dkit
I have been vested in genting since the days when it was 32 cents... and from this short period of time frame, I have make a small handsome amount of profit, but the most important thing that i earn is not in terms of monetary values, but from learning the real essence behind it.They are - (1) psychology, (2) greed If anyone in this forum who have played bacarrat before, would find a similar pattern from this genting stock.When a certain bacarrat table keep rewarding the players with winnings every round, it will create "noise" which would soon attract more people to crowd around the table and kaypo.. these people may/may not be betting on it... those in the table initially and those new comers who believe in it and bet together will win and win... and soon enough... a happy atmosphere will be created. Every round, they will bet on the same winnings side that rewards them. Gamblers call this phenomena "Chasing the dragon".Now, we have those parties standing around the table, who did not "chase the dragon" will find it ridiculous and stupid of the rest who keep winning it. They will feel jealous, slowly, anger creeps in and they will be blaming themselves deep inside why they didn't chase... But on the other hand, they will be putting a brave front and warn others that this is stupid, putting in "kind advice" to fellow gamblers not to chase it.. citing it that it will change lah, this lah, that lah... but these gamblers don't heed, and each and every round, they win...Then, on seeing this situation, these so-call rationale bystanders without a strong faith may finally take the plunge and follow others blindly... Then the moment their chips are on the table, BANG, the tide has changed.... and they lose their money.... Anger will now control their emotions and they may double-up their bets in order to regain their losses earlier...and deeper and deeper they sink and soon... everyone will realise the party is over and leave the table.So now, who is the real winner or loser? I would categorised them into 4 distinct groups:Group 1: Banker Always Win.... in this case, that is Mr Market himself and other BBs. Don't believe? Try it yourself.. be it in the casino or stock market.Group 2: Those players on the table initially and those who "chase the dragon early". People may laugh at them for being too greedy to keep chasing winnings. But do you know, these are the people have already profited handsomely earlier... whatever they lose later.. is just their winnings, no capital involved!Group 3: These are the weak-faith players who caved in eventually to Mr Greed at the end of the day and 80% chances, they lose their keep.Lastly if you think that Group 3 are the only ultimate losers? think again...Group 4: These are the bystanders who keep to their faith.. kudos to them... they will finally see what they want to see... people losing money finally... then they will conjure up with great theories of critising those who lost. But did they win? HELL NO!... Deep inside, these group of gamblers will be kicking themselves in the butt for not joining many others who won..and most of all... i would feel sad for them for wasting their time on the table while they can go try their luck elsewhere. I would feel even more disgusted for those who are laughing at those who lost... Does it really makes you happy that other people has lost their money? Come on man... get a life!From now on, will Genting really grow sour? The answer is relatively simple - NO! but of course... gamble or invest with brains. It may be looking bad now... but hey... no way will this stock be a penny 10 years down the road. For those who are clear of it now... hold yr horses... if can, wait until the days the rights are issued. Take out whatever amount you can afford and buy... thereafter... don't bother to take a second look on it....

We all sit around a poker table with chips ready to bet. Should I place to sell or should I bid to buy. Our aim is to win the chips from the other players.One strategy is to place a buy at lower queue and sell at higher queue and see what other players do. As the gap is close, I buy just a little and place it to sell above the upper queue. I take some profit by selling a little to the bidder and place to buy back at lower queue.And does it work? yes. But I win small. But I keep some to sell later at higher profit.I must make sure I keep a close eye on my capital should the price drop and I should be able to buy some at lower price.

Are you better than Buffett?
WHEN presented with or considering any investment scheme, it is always important to ask yourself, 'What are you investing into?' Also, are the risks and returns of this investment reasonable? This leads us to another question, which is 'What makes an investment's returns reasonable?'
In any reasonable kind of investment, one relationship has always held true: High risk = high returns, and Low risk = low returns. However, when markets are doing well, investors sometimes get carried away by greed, and their expectations of their returns can become too high.
This is especially dangerous when unscrupulous people start to use very attractive returns to lure people to place their money into what are probably scams. Let's take a look at how the stock market (S&P 500 Index, which consists of 500 blue chip stocks in the US market) of the largest and most powerful economy in the world has fared over the last 42 years to give us an idea on what makes a 'reasonable' return. From 1965 to 2006, a period of 42 years, the index would have returned an annualised 10.4 per cent (in US dollar terms and with dividends re-invested).
This figure might look rather disappointing, but at that rate of growth, a US$10,000 investment at the start of 1965 would now be worth US$637,800 at the end of 2006. That is how much just US$10,000 would have grown into. Equity markets may go through booms and busts, but returns on average over a long time horizon can turn out to be significant, like in this case.
This is fairly indicative of the type of long term returns that investors can expect to get from just passively investing in the market. Good fund managers will outperform this return. So will good individual investors. But if you believe strongly you can do a lot better, here's another example that might serve to put things in a better perspective.
How good is Buffett?
Let's take one of the most successful investors in the world as an example: Warren Buffett. He is now one of the world's top three richest men with a fortune worth tens of billions of dollars. And he is well known for his investment skills. His primary investment vehicle is his company Berkshire Hathaway. What kind of annualised return do you think Warren Buffet has achieved over the years? It is not 30 per cent, or 50 per cent. In fact, it is just 21 cent.
Based on the annual report of Berkshire Hathaway, from 1965 to 2006, the company's per share book value has increased by an annualised 21.4 per cent. This may not seem much higher than the annualised 10.4 per cent that the S&P 500 Index has achieved. But a difference of just 11 per cent in terms of the annualised return means that the same US$10,000 would now grow to over US$34 million over 42 years.
This brings us back to the issue of what makes an investment's return 'reasonable'. When you do your investing, or are considering any investment vehicle, ask yourself this: 'Are you the best investor in the world? If you admit that you are not, then over the long term, do you expect to achieve a return of 21 per cent per annum?'
When stock markets, or your investments go up, it can sometimes be easy to think that these types of returns are always going to happen every other year. But in truth, they do not. The annualised return of 10.4 per cent that the S&P 500 Index has delivered is made up by good years when the index can grow by more than 20 per cent, as well as bad years where the index may fall by 15 per cent or more. Many investors believe they can skip all the bad times and only participate in the good times.
Trying to time the market to give yourself better investment returns is understandable, but again, we need to be realistic. Even with trying to time the market, what kind of returns would you expect to make over a very long period of time of 20 years or longer?
Even one of the best investors in the world, when measured over decades, has an annualised return of just 21.4 per cent. So, when you try your hand at it, you definitely should be a lot more realistic in your projections of returns. After all, there is only one Warren Buffett in the world! This then leads to some 'investments' which try and promise 50 per cent per annum, on a consistent basis, or even 100 per cent, and higher! I have only one word for such 'investments'. They are scams.
While stock markets can go up 50 per cent or 100 per cent in a very strong bull run year, the key word here is consistency. Stock markets never ever go up 50 per cent or 100 per cent every year for 10 or 20 years. It is impossible. Similarly, if an 'investment' can promise you 50 per cent every year without fail, there is something wrong somewhere. A return of 50 per cent per annum to US$10,000 after 42 years would lead to US$248 billion! And no one today, not even Bill Gates has that kind of money.
If anyone knows of a way to make 50 per cent return every year with no risk, the last thing that person would be trying to do would be to sell that investment to other people. Even by borrowing money and factoring the loan interest, this person can still make a return that would be higher than the most successful investor in the world. So, if he can do that, why would he even need to ask other people to join him?
There are pyramid schemes thought up by scammers who make use of eye-popping returns like 50 per cent per annum to lure people in. Any such high returns, especially if they seem to come with little risk should be treated with extreme suspicion. In fact, it is better not to get involved in these at all. They may paint lots of rosy pictures of how much potential their scheme has, etc. But at the end of the day, ask yourself seriously. If this scheme is so successful and has so much potential, how come they need so many other people to join them?
The answer is because they need your money. And while it may still start off all right initially, eventually, people will find out about their scam, and huge numbers of people at the bottom of the pyramid will lose their money. And you may well be one of these people who will lose their money.
What exactly is a pyramid scheme? A pyramid scheme is a business model that involves mainly enrolling other people into the scheme. There is often little said about the product, or service it is supposed to sell. Far more effort is actually spent trying to get ever more and more people to participate in the scheme. The key thing about a pyramid scheme is that it is unsustainable.
Very often, the product or service itself is very uncompetitive, and under normal circumstances, you would never imagine yourself spending thousands of dollars buying such a product. However, the pyramid scheme promises you very high returns, and on a consistent basis too! You might be getting 50 per cent per year, or even 100 per cent! The thing is, people who join the scheme are actually surprised when they initially do get some money back. This is when their greed starts to really kick in.
Unsustainable scheme
And this is how the pyramid scheme works. It gets an ever increasing number of people to join the scheme. The earlier people who join, and who are experiencing amazing returns, are the biggest proponents of the scheme and insist it is the best thing in the world. These people will then be motivated to try and get their friends into the scheme.
In actual fact, what is happening is that the people joining the scheme later are financing, or paying for the returns that the earlier joiners are getting. And the biggest winners are the people at the very top of this pyramid, who started the scheme in the first place. The whole problem with all this is that a pyramid scheme is unsustainable. That is because the entire scheme isn't really making money. All it is doing is getting more and more people to join it, and pump their money in and then using those monies to pay off the dividends of the earlier people who join. And after a while, when you run out of people to join your scheme, the entire thing collapses.
Suddenly, nobody is getting paid anything anymore. The next thing that happens, people start getting worried and want to withdraw their money. Those who withdraw early might still get their money. But since no profits were ever really made, if a large number of people all start getting worried and want to withdraw, then there is no way the scheme can keep up its deception. At this point, everyone would realise they have been conned and the panic would set in, but by then, it would be too late. All the money would have gone to those few people at the very top of the pyramid, while the rest of the people in the later tiers would be left with nothing.
The table above shows this clearly. See how it looks like a pyramid?
It should be noted that there are valid investment vehicles with a long history, like stocks, unit trusts, bonds and such. Then there are investments which are not well known, and there are outright scams, which are thought up by conmen. By understanding how these investments make their money, and also by understanding the concept behind what is a reasonable type of return versus what is not, you can protect yourself.
Savvy in investor, media relations? Financial PR, IR firms want you By Benita Aw Yeong and Tettyana Jasli - Mar 20, 2007 The Business Times
(SINGAPORE) With more than 700 companies listed on the Singapore Exchange (SGX) and counting, demand for investor relations (IR) expertise and communications services is on the uptrend.
Many businesses today engage what is commonly known as financial public relations (PR) companies to handle initial public offerings (IPOs), as well as day-to-day investor and media relations.
Currently, there are a dozen or so main players of different sizes offering investor relations services. But given the buoyant demand, the market is far from saturated.
Industry sources say demand for investor relations providers has grown to a point where firms need not go looking for clients aggressively, thanks to a steady stream of referrals from market intermediaries.
'More companies have come to realise that effective financial communications can help them achieve their business objectives,' said Terence Foo, managing director of PR firm Gavin Anderson and Co.
'Although there are a lot of players in the market now, I think there will always be demand for quality financial public relations services. This is not only in Singapore but regionally,' he said.
Along with the growth in the number of listed firms, companies are also increasingly seeking professionals to assist them in communicating with investors and shareholders at a time when good corporate governance and greater transparency are high on the agenda, said Andrew Cheng, general manager of Citigate Dewe Rogerson.
Said Alan Lee, managing partner of August Consulting: 'Companies today face demands of getting information to the investing public in the most expedient way so that they can make informed decisions. This is compounded by the fact that shareholders nowadays are increasingly more aware of their rights.'
August, Citigate and Gavin Anderson are three of the bigger players in the market, and they have been actively involved in acquisitions, mergers and alliances of companies.
Citigate, for example, has supported the listing of more than 25 per cent of all companies listed on the SGX.
It currently provides day-to-day investor relations and related services to some 50 listed companies.
Gavin Anderson handled four out of the five largest IPOs, in terms of deal sizes, in Singapore in 2006.
August is another major player in the IPO market. Other firms - some one or two-man outfits - also jostle for a slice of the pie.
The services on offer do not come cheap. Companies which engage communication professionals to support their IPOs are charged between $20,000 and $60,000, depending on the size and complexity of the project, as well as the size of the PR or IR firm.
Very often, listing companies are referred to the PR or IR outfits by the issue managers, who have worked with these firms before.
The 'retainer fees' charged for handling day-to-day investor and media relations range from $4,000 to $20,000 a month. Industry sources say that fees are on the rise and profit margins are increasing.
It's a market that many are keen to move into. Financial PR and IR firms BT spoke to said that the industry has become more competitive than it was five years ago, notwithstanding the fact that there are still more than enough jobs to go around.
Buoyant demand has ensured that thus far, fees and margins have not come under pressure.
Competition isn't all bad.
Michael Tan, managing director of Spin Capital Asia, said that more players and increased competition have pushed firms to raise their standard of service.
Some IR and PR firms have also adopted creative solutions to help them stand out.
Some smaller outfits, for instance, peg fees to their success in raising a client company's share price, or meeting a 'media coverage quota', according to industry players.
The competition is also for talent. Attracting talented and experienced professionals - recruiting financial analysts and journalists is not uncommon - to the industry has become a key concern for firms. Consultancy firms say it is not an easy task finding experienced staff.
'The main challenge for IR is that little is known about it. However, we believe that as the industry matures, more professionals will be attracted to the industry,' said Citigate's Mr Cheng.
According to Mr Foo at Gavin Anderson, PR and IR firms these days are competing not only with other agencies for talent but also with banks, law firms and accountancy firms.
'I think striking a good work-life balance is crucial for staff retention, as is ensuring that staff are continually engaged and challenged by a wide variety of assignments, across different industries and countries,' he said.

Striking a balance between value and growth
WITH the stock market continuing its five-year bull run into 2007, investors could find that stock picking has become either increasingly difficult, or incredibly simple. It really depends on each investor's expectations and the stock selection criteria he sets. Given the bullish market conditions, the short-term trader whose sole strategy is based on hopping in and out of the market, will say it is simple. To him, it is just a matter of snapping up stocks that are on the move in the hope of selling them quickly to pocket a small profit. However, those investing with the view of holding their stocks for a time frame considerably longer than three days will not find the situation as simplistic.
Drawing reference from the two distinct styles of growth and value investing, the two well-established investing methods are often viewed as dividing the investment world, with their respective approaches sometimes at opposing ends of the spectrum. At one end is the stereotypical value investor who will search painstakingly for companies whose shares are inexpensively priced. At the other is the conventional growth investor, who will focus on companies that are showing rapid growth in revenue and profits.
However, there are some drawbacks if you intend to invest based strictly on each of these styles, especially in the current situation when the market has already been charging upwards for a few years. In a mature bull market, growth investing is likely to see you focusing mainly on shares that have already risen to steep valuations. On the other hand, pure value investing could confine most of your options to companies with relatively unexciting prospects, and limit your opportunity to benefit from the market's uptrend.
The good news is that there is a middle ground for those who like the ideas offered by both these styles. This hybrid investing strategy is known as 'growth at a reasonable price', or Garp. This method emphasises investing in stocks that are undervalued but still have strong earnings growth prospects. The underlying principle is to seek stocks that have a price-earnings (P/E) multiple equal to or less than the company's sustainable annual earnings growth, and a track record of low variability in its growth rate. In fact, Garp is similar to growth investing in that both styles focus on discovering companies that are expected to grow at a faster rate relative to the market, as well as their respective industries. Like growth investors, Garp investors see the P/E ratio as an important valuation metric that compares a company's earnings potential against its share price. There is, however, a key difference in the way each of these styles uses the P/E ratio.
Garp investors, or Garpers, tend to be skeptical of companies with extremely high growth projections. So while growth investors typically would not bat an eyelid when buying stocks that promise growth of 25-50 per cent, Garpers would be less enthusiastic as such stocks are seen as too risky. The rationale is that excessive growth forecasts mean having to purchase the stock at a higher price, which increases the risk of a loss on investment if the company's results fail to meet market expectations. Generally, Garpers are more comfortable buying stocks that have realistic and achievable growth projections in the range of 10-20 per cent.
Although more akin to growth investing, Garp can also be used by the value investor to fine-tune stock picking strategies. While it is perceived by some purists as a 'neither here nor there' method of investing, Garp has strict criteria that provide a methodology and framework which the value investor could use to capture undervalued companies with promising growth opportunities. For instance, Garpers tend to prefer companies that trade at a price-to-book value, or P/B, ratio that is below the average of the industry. This is because a low P/B ratio should provide potential for share price appreciation when the discrepancy is eventually spotted by the market, as well as minimise the downside risk.
In terms of growth criteria, a Garper will usually require that the consensus forecasts of a company's earnings per share (EPS) over the next few years meet a minimum expected growth rate. Besides filtering for companies that are growing faster than the industry average, Garpers also need to see a growth trend that is accelerating. In other words, EPS should have been expanding at a faster pace in more recent years. Special attention is also paid to finding companies that have high and increasing return on equity, or ROE, which Garpers believe is the mark of a superior business. But having the required growth rate is not the only measure. Garpers also investigate the quality of a company's growth to ascertain whether its management is inflating growth by taking on too much risk. For example, leveraging up using high levels of debt would boost a company's growth and ROE but could impair the health of its balance sheet.
However, the Garper's most important tool is the PEG ratio, which is calculated by dividing the prospective P/E ratio by the estimated future growth rate of a company's earnings. The PEG ratio gauges a stock's growth potential in relation to its value. In other words, it looks at how much it costs to buy a unit of growth. Garpers generally require a stock to have a PEG below one and preferably closer to 0.5.
In summary, the goal of Garp is to strike a balance between value and growth by seeking undervalued companies with realistic and attainable growth potential. When used successfully, this strategy is expected to reward investors with more predictable and consistent returns, regardless of whether the market is in a bull or bear phase.
Herman Phua is the managing consultant of Octant Consulting, a firm that specialises in providing investor relations advisory services to companies listed on the SGX. He has more than 18 years of experience in Singapore's equity market.
How not to be the first to sell and last to buy
HUMAN beings are funny creatures. If there's a new type of funky shoes in the market and nobody wears them, you probably won't either. But if enough people wear them so that they attain 'cool' status, then their popularity will explode. This phenomenon follows the theory set out by Malcolm Gladwell in his book The Tipping Point.
Similarly for a book, if it makes it to the bestsellers list, more people will be enticed into reading it and that in turn will boost sales. So apparently one trick employed by publishers is to buy the books they want to promote from the retail outlets themselves. They have a rough idea of how many books they need to buy in order for the book to make it to the list of the week's top 10. Once on the list, sales will have their own momentum.
The same mechanics work for stocks and shares, as well as the property market. Some people know that certain stocks are trading below their intrinsic value. But they are unwilling to put money there, until and unless they see that the share price is stirring.
The thinking, of course, is they want their money to get to work almost immediately. This is the trader mentality.
And once a stock starts moving, many more buyers will jump in. And if there is more demand than there is supply, the price will be pushed up even further.
It's the same story in the property market. Up till two years ago, many people had reservations about committing to a property investment. Now that prices have moved up sharply, and at an accelerating pace, more people are coming into the market to buy.
Now let's examine the effect of price changes on people's decisions.
Price changes will attract more supply or demand. On the supply side, it is easily understandable. When a producer sees that he can get more money by selling more products, the logical decision might be to produce more. But that decision cannot be carried to its logical conclusion, which is to keep increasing production capacity. At some point, demand will taper off, and if the producer is not careful, he will be stuck with a lot of excess capacity.
Different tactic
But some suppliers might employ a different tactic. When they see prices moving up fast, and if they cannot increase their supply, they may well hoard their products. In other words, they will hold back their supply to the market, in the hope of subsequently getting a much higher price.
On the demand side, the effect of price change is more intriguing. According to economics theory, for elastic demand, the higher the price, the lower the demand. This would apply to discretionary spending and goods with close substitutes.
So if prices get too high, and assuming income does not increase as fast, people will have to cut down on consumption or shift to cheaper goods with similar functions.
A change in price has less of an impact on the demand for necessities. For example, if someone is sick and needs a doctor and medicine, that person will have to pay whatever is asked.
Then there's another type of product, where the higher the price, the bigger the demand. Perhaps two types of products would exhibit this kind of characteristics. The first are luxury goods, or goods that signal to the world one's elevated wealth or taste status. Another would be products whose value is difficult to ascertain. This would include stocks and shares. In this group of products, the element of fear and greed will come into play.
One of the oldest tricks in the con-man's bag is this: Approach a stranger and offer to sell something totally worthless, like a bag of stones or obsolete semiconductor chips. Quote a price, say, $100, and the stranger will say: 'You are mad.'
Then the con-man's accomplice will act as a passer-by who has overheard the conversation. The accomplice will say: 'Wow, you mean there are still these products around? I thought there is a shortage now. I know this person who's willing to buy this at $150 per bag. OK, I will pay you $100 for this bag.'
After the first con-man has left, the accomplice will say to the victim: 'Oh, I just remembered that I have to bring my mum to see the doctor. I'm supposed to meet this buyer in half hour. Do you want to make some quick money? I'll sell these two bags to you for $120 and you sell to him at $150.'
Some people actually fall for the trick. In this instance, the promise of being able to sell at a higher price is the motivation for the purchase. Of course, there is no guarantee that the promise will be fulfilled.
Jack Treynor, author of the article 'What does it take to win the trading game?' identified three key trading motives: value, news/information, and cash flow.
Value buyers act when they see things they consider cheap, and are willing to wait for the market to recognise the value. They can take their time to accumulate a stock, and hence reduce the cost of trading.
Information traders, meanwhile, act on new information and changing expectations of the market. So if one has new information not widely known in the market, one can reap the benefits.
Therefore information traders are always under pressure to complete trades before the information spreads across the market. They are time-sensitive: their goal is to get the trades done quickly, even if this means paying up for liquidity.
As for traders with cash flow motivations, buying or selling is dependent on their desire to increase or decrease equity exposure, independent or even ignorant of the prospects for the stocks. Those getting into the market believing they can make a quick profit belong to this group.
Ultimately, a successful investor and trader is someone who can adapt quickly to a changing market.
A value investor may have identified a stock early and have held on for two to three years before the market starts to recognise it. And when the market starts to bid up the share price, the value investor may be tempted to sell once his target price is met. However, if he noticed continued strong buying interest - as every completed trade provides feedback to the trader - then he may want to hold out a bit longer.
Objective
In the final analysis, the objective of any investor or trader is: To avoid being the first to sell and the last to buy.
Everyone wants to be the last person to trade with a big contraparty - not the first.
This is evident in the numerous property en-bloc sales taking place now. When the wave was just taking off, many owners who missed their last opportunity to sell their properties in the last bull run grabbed the first offer that came along. And the offer was generally not great, on hindsight. But after the developer has accumulated a big enough plot of land, the last project to hold out - generally the smallest piece of land - will be paid the most.
But of course holding out for more entails the risk of missing the last buy order.
But what's true is: being savvy in reading the market, and timing and implementing one's sales and purchases, is as important as picking a good investment in maximising one's overall returns.
Has the bull run reached its peak? By Teh Hooi Ling, Senior Correspondent - Apr 21, 2007 The Business Times
I'M sure you don't need anybody to tell you this: The market is very hot now. How hot? Well, don't get too happy if your stocks have gone up by ONLY 20 per cent so far this year.
This would mean that your stocks have underperformed the market. The median price appreciation of all the stocks listed on the Singapore Exchange is 24.8 per cent between the beginning of 2007 and now.
The average - pulled up by the likes of Baker Technology, Lottvision, Showy International and Shanghai Allied Cement which have risen by more than 500 per cent each - is a whopping 40.9 per cent.
Eighty-one stocks, or 11 per cent of the market, have seen their prices doubled or more in less than four months. Some 25 per cent of the market, or 187 stocks, have surged 50 per cent or more. In all, 603 stocks have advanced and just 92 have declined.
Compared with the end of 2005, the median and average increases in all SGX-listed stocks are 52.8 per cent and 95.7 per cent respectively.
About a third of the market has more than doubled. Yongnam Holdings is the biggest gainer during that period - it's a 13 bagger in less than 16 months. It is followed by Nylect Technology, up by 1,290 per cent, and Baker Technology, up 1,136 per cent.
And as of yesterday, 130 stocks or nearly 18 per cent of the market are trading at their one-year highs. These include companies like Singapore Airlines, SMRT, Tan Chong, UOB Kay Hian, LC Development, Eng Wah Organisation, and so on.
Flashback
In this column in October 2005 - which was two-and-a-half years after the market started climbing from its trough in March 2003 - I noted that the rally was confined to only a select group of stocks. At that time, more than 70 per cent of all stocks were still trading at less than half their peak prices of the last 10 years.
'By contrast, in early 1996, some 70 per cent of stocks were trading in the top half of their 10-year price range. And on average, stocks were then trading at 60 per cent above their lowest levels.
'With that perspective, the market performance we have thus far is not quite the same as the bull runs we have seen before. In the super-rally of the first half of the 1990s, one could simply pick any stock and make a bundle. Rumours were the fuel for the stocks' ascent.'
I posited two theories at that time. 'One: the old type of bull is now an extinct breed. The factors which could have led to the death of the old bulls may include the fact that the world's economies have evolved in such a way that more than half of Singapore firms no longer have a fighting chance in today's knowledge-based, globalised and highly competitive market place.
'As investors are more discerning now, they realise today's economic realities and are only going for the fundamentally good stocks. Furthermore, the lessons learnt, and the lingering scepticism and loss of confidence from the crashes of 1997 and 2000 are not forgotten.
'The second theory is the direct opposite of the first one: that the bulls of old are still alive and kicking. If that's the case, a lot more stocks will have to play catch-up.'
Towards the end of the article, I noted that at that time - October 2005 - there were 48 stocks at their one-year highs, versus 40 stocks at their one-year lows.
It was a reversal from the beginning of September when one-year lows outnumbered one-year highs by 91 to 29.
Traditionally, one way to measure the strength of a trend is to compare the number of stocks posting new 52-week high closing prices with those posting new 52-week lows. In a strong uptrend, many stocks are likely to post new high prices, while relatively few are likely to be selling at new lows for the year.
Based on that, I concluded: 'So perhaps we can expect better things to come - not necessarily in terms of the STI hitting new highs, but perhaps more of the second tier market. That would prove to us that the old bulls that we knew are still well.'
Maturity of the bull
Indeed since then, as noted earlier, a wider segment of the market has participated in the bull run.
This is proof that the old breed of bulls is still very much alive and well. A few factors would account for the return of the bulls as we know them.
One, the very high liquidity in the system. Two, a robust economic backdrop with lots of businesses going around for all. Three, some companies have improved their competitiveness and those that don't make it become targets of reverse takeovers.
So if what we are seeing is the bull of old, then it will presumably go through the same life cycle as the previous ones. Now, let's try to ascertain how mature the current bull is.
From the table, you can see that as the bull in the early 1990s progressed, more stocks would scale new heights.
What we have seen in the market in the last two months is reminiscent of the two months between February and April 1993.
Then, the proportion of stocks trading within 10 per cent of their 52-week highs increased to 60 per cent by early April from 43 per cent in February.
Similarly today, the proportion of stocks trading within 10 per cent of their one-year highs is just over 60 per cent. This is up from 49 per cent two months ago.
In terms of the percentage of stocks which are benefiting from the bull market, we have already surpassed even the peak of 2000. During the biggest point of the dotcom bubble, only 24 per cent of the market was trading within 10 per cent of their one-year highs.
So what we are seeing today is the 1993 variety. Back in 1993, the two months following April saw even stronger buying momentum which led to a staggering 91 per cent of the market trading within 10 per cent of their one-year highs.
Going by the life-cycle of the 1993 bull, there is another eight months of vitality left. But of course, no one bull or bear market is exactly the same as another.
For example, this time round, despite an increasing number of stocks which have appreciated, there is still a big chunk - 22.4 per cent of the market, to be exact - trading more than 50 per cent off their five-year highs.
And nearly 37 per cent are still 50 per cent lower than their 10-year highs.
These are significantly bigger than the numbers seen in 1993. But it has to be noted that we now have a lot more companies listed on SGX. And Theory One above still applies, some companies are still finding it hard to compete and investors are recognising that.
Or another way to look at it is, the bull has not reach its zenith. But my suspicion is that we are unlikely to see the repeat of the scale of frenzy as that of 1993.
And that is a good thing.
What does it take to make it big?
I HAVE met a lot of interesting people lately. People full of curiosity who are open to sharing their experiences and investment ideas. And oh, I forgot to add: they are all very successful investors.
So I decided to tap their collective wisdom and posed a question to all of them: What are the key prerequisites to making it big in investment? Intelligence? Capital? Network?
The first guy picked intelligence, network, hunger and discipline as the most important factors.
'Capital, you can build it up slowly,' he said. He went on to recount the story of someone he knows who trades the market for a living. The guy was caught wrong-footed by the market and lost everything. Not willing to admit defeat, he borrowed $300,000 from his mother in 2001 as seed capital to start afresh. And today, his net worth is $40 million.
I did a simple calculation on how one can grow the money so fast. Here's what I found: You'd have to grow your pot 23 per cent every quarter to achieve what this person did in six years. In the bull market of the past three or four years, the prices of some stocks have appreciated 10 times or more in as short as three months.
In such a market, picking the right stock and riding with it can be very rewarding. But to make his money grow as fast as it did, the person must have had the guts to make big bets. Assuming a constant 23 per cent return a quarter, he would have had to stake all his capital and accumulated profits all the time. Of course, not necessarily all on just one stock. Still, this takes gumption. A wrong wager can be disastrous.
On the topic of limited capital, a financial market veteran who now manages his own fund, had this advice. 'When you have limited capital, you have to increase the velocity of your capital. In other words, you have to go in and out very fast. Always make your money work hard.'
How does one then identify the stocks or investments that have a high chance of yielding fast bucks?
This is where network and intelligence comes in. One can, of course, observe developments in the market and try to anticipate what will happen next. This requires intelligence.
For example, a couple of my friends constantly monitor the big picture for their next investment idea before the whole world wakes up to the opportunities.
A case in point. As soon as it was known that an integrated resort would come up at Marina Bay, they checked out the Urban Redevelopment Authority's plan for that area in the next five to 10 years, and how much the government is spending to build up this part of Singapore into an attractive pit stop on the world map for the well-heeled. Marina Bay, they reckoned, would be a desirable address in the years to come. But from URA's concept plans, they could see there wouldn't be that much residential space in the area. They checked out the most iconic project there - The Sail@Marina - and compared prices there with those in other global cities.
Their conclusion: Relative to other cities, The Sail@Marina was cheap. So the downside was limited, and if the prices in the other cities were any indication, the upside tremendous.
So these friends bought several units at The Sail@Marina in 2005 - a time when many people still needed convincing that Singapore's property market was about to recover. Today they are sitting on very handsome profits. In their case, a certain amount of capital was required.
Network
Another friend of mine ranks network above intelligence. 'Singapore is an insiders' market,' he said. 'If you know the right people you'll get to invest in the pre-IPO market, take up placement shares, etc.' In the past few years, pre IPOs have been almost a sure bet, with very lucrative returns.
It even applies to properties. Only the privileged are invited to pre-launches and given the opportunity to make an easy $200,000 or $300,000 in just two or three weeks by simply flipping the units. So knowing the right people is an important factor.
Besides, there are so many things going on all around all the time that we cannot be aware of everything. So having a good network that makes us aware of opportunities is a big plus.
But my take is that you still need intelligence to make the most of a network. Obviously, if you have the money you will receive a lot of investment propositions. Having the sense to pick the right ones - and walk away from the others - is key to preserving as well as growing your capital.
One friend's approach is to get information from various sources - read network. He then puts everything together to form his own go or no-go decision. For example, if a company's numbers look good and people in that industry tell him the management is capable and trustworthy, and the company is executing plans to take advantage of an industry upswing, and he notices that some very smart money has just gone into the company, chances are he will put his money into it.
Entrepreneur spotting
Another friend, a financial market veteran who has headed foreign investment houses, says that identifying up-and-coming entrepreneurs is tremendously rewarding - financially and in terms of satisfaction.
His boss took a bet on Li Ka-shing when the latter was still selling plastic flowers, he says. And he himself hitched a ride with Wong Ngit Liong, as Venture rose from a 30-plus cent stock to $5 or $6 in five years or less. Of course, famously, Venture went on to reach $30.80 just two years later.
Recent famous entrepreneurs include Yan Cheung, chairwoman of China's Nine Dragons Paper, who is said to be worth US$2.4 billion, and Zhong Sheng Jian of Yanlord (US$1.7 billion), who is now a Singaporean.
Singapore-based entrepreneurs who have done well include Chew Hua Seng of Raffles Education, Sunny Verghese of Olam, Olivia Lum of Hyflux, Patrick Chew of Midas, David Teo of Super Coffeemix, George Quek of Breadtalk and Leslie Loh of System Access - to name but a few.
There are many opportunities up for grabs. But if you are not hungry, and are content to just sit back and relax, your wealth is not going to grow fast.
Hunger need not be for money. It can be hunger for an intellectual challenge, for the satisfaction of getting it right and the recognition of being astute.
With hunger, you are more diligent when looking for opportunities, more willing to do a little more research and think through more thoroughly the probabilities of success and failure and the likely outcome. Often times, wealth will be a natural by-product.
Discipline, meanwhile, is about going through the same rigours for every investment, about admitting mistakes, cutting your losses and moving on.
It is also about properly managing risks, not over-gearing yourself and making capital preservation a major goal. For the uninitiated, the stock market is a dangerous place.
And finally, you should not down-play the role of luck. The first guy said he has always been lucky. In the previous bull market, his colleagues complained about how their clients' statements and transactions were processed very slowly because backroom staff were so overloaded with work.
He was nominated to speak to the department head. And the advice given was: 'Buy dinner or supper for the backroom clerks so they will process your clients' transactions first.'
He did, and lingered to chat with them. During the conversation, he found out that they had to handle so many new account openings. 'Grandmas and pops and even blind men are opening accounts,' he was told.
That sounded an alarm. The next morning, he went into the office, told his colleagues what he had heard and asked them to clear their positions.
Nobody listened.
But he took his own advice and sold everything he had. The market continued to run a bit more - then took a sudden south turn. His colleagues couldn't sell fast enough and suffered significant losses. He emerged unscathed.
Concluding thoughts
After speaking to and observing many successful investors, I believe you need all the above - intelligence, hunger, capital, network, discipline and luck - to succeed on a sustained basis.
With intelligence and hunger, and that little bit of luck, you can amass capital. Discipline and network can send that capital on the next phase of growth - this time, with a steeper trajectory.
I've come to realise that there is just not one route to investment riches.
Some people go for value, invest for the long term and allow the compounding effect to work. Some trade in and out, creating a lot of velocity with their capital. A few are constantly on the look-out for arbitrage opportunities - almost risk-less propositions with near-guaranteed profit - present in mergers and acquisition deals.
You have to find a style that suits your temperament and situation. For most of us with day jobs, the first option is the most viable. And it's not any less of an option. Pure and simple analysis of a company's financial statements, plus an understanding of its business can - without any access to privileged information - earn you just as good a return as any trader or fund manager.
There are a lot of opportunities, especially in the last few years and in the coming years as China and India develop and billions of consumers enter the marketplace. Enormous wealth will be created.
It's entirely up to you. Don't begrudge the rich. You too can become rich. It depends on how hungry you are. But remember, money is not the only thing in life. Having the time to smell the roses can itself be a luxury.
The 'same old thing' works
ASK Hugh Young what he is doing with the equities portfolios of Aberdeen Asset Management amid the current spike in volatility, and you'd get the almost laconic reply: 'Nothing much really, the same old thing.' Yet the 'same old thing' has resounded among institutions who continue to plough money into the firm's Asia and emerging market mandates. Assets stood at US$12 billion in mid-2005; they've grown to roughly US$35 billion. Retail money comprises just S$2 billion.
Of course, many other fund managers are in this happy position of rising assets, thanks to the last three years' robust market appreciation. Still, beside other managers who are increasingly offering complex strategies touting an absolute return, Aberdeen's 'same old' style belies an evergreen appeal.
That approach to markets is one that is anchored on value, and characterised by a very low portfolio turnover - almost an anomaly in an industry where a turnover of well over 100 per cent is common. Says Mr Young: 'We have the same companies we bought 10 years ago. They're not necessarily shooting the lights out or making deals every week. Companies like OCBC, they're perfectly well run, UOB, Robinsons and Bukit Sembawang.'
Interestingly, the value approach first embraced by the Singapore office is now being exported to other offices. Says a staff: 'We've exported our model in investment practice, things like our focus on quality before price subject to certain minor tweaks. All our offices have the same discipline now.' Asian mandates managed out of the Singapore office began with that approach from day one when the office was set up 15 years ago. Global emerging markets followed suit some five to six years ago; UK and European mandates about three years ago, and two years ago, the US.
'We have Asians dotted all over the group now, and I'm proud of that. And there's the odd Brit here,' he quips. Among the 'exports' is Cheong Yoong-Chou, now based in the UK and head of pan-European equities.
Value, says Mr Young, actually starts not with the various ratios, but with a screen for quality. 'The real screens are quality screens first. Our system works very simplistically. It's what the man in the street would understand. Is the company a decent business? Can you understand why the business would be bigger and more profitable in five to 10 years?
'When you pick up the annual report, do you understand the balance sheet? When you meet management do they know what they doing? Is there depth of management experience and focus? Will they look after you as a shareholder, or would they put (profits) into a different pocket? It might be controlled by the government and the government rips it off, or by a family who rips it off for family reasons. That screens out quite a few companies especially in the emerging markets.'
Aberdeen's portfolios comprise some 220 companies in the Asia ex-Japan space and another 80 to 90 companies in Japan. It tracks another 100 companies. 'There are very few we classify as a 'watch': Those are companies where if it falls by $1 or $2 we might buy. There are less than 10 companies there.'
The firm also has a 'revisit' list, comprising companies that pass the quality test but are too expensive or do not fit into the portfolios. The 'due diligence' list are large companies do not meet the quality criteria.
'Then it comes down to price and measures of value. We look at cash all the time. That can be reflected in the profit and loss accounts. We try to make sure it's real money and not an accountant's fiction like notional property revaluation ... We also make sure the accounts are clean so when you talk about net profit there is money there. And we look at ratios like price-earning, which is ultimately same as price-to-cash flow if the earnings are real.
'We look at the ability to pay more dividends. People can manufacture dividends, and you don't want to have your capital paid back to you in the form of dividends. That's where Asia has changed a lot. People are managing their balance sheets more effectively.'
Yet the value discipline has not always been popular. Even today it makes a mundane story beside other funds, marketed with high coupons and complex bells and whistles.
In the early days, Aberdeen raised just $2 million for its first Singapore Equity unit trust in 1995, when stocks traded in local and foreign boards. 'It was an astonishing period when the local stock was trading at half the price of the foreign board. We had 10 per cent in OCBC, UOB, OUB, DBS, SIA. We said to the locals, 'your own market is the cheapest in the world'. But the locals would still buy foreign stocks because they moved more.
'So we had a tremendous benefit from the disappearance of the foreign/local board. I'd love to say there are great anomalies today but there aren't. It sounds negative, but 10 years ago there were glaring anomalies. Today markets have done well, prices have risen and investors generally have become more professional and analytical. So the anomalies are smaller.' The Singapore Equity fund now has some $136 million in assets.
Typically a value approach would result in some underperformance in a strong market, but outperformance in a poor market. But Aberdeen has not been spared the fallout from the market's recent sharp drop. 'Normally we'd say we love falling markets. We get the opportunity to buy more of the companies we like at cheaper prices. But if the market falls sharply, everything falls.