Sometimes, Investing Is Sheer, Dumb Luck

Foreword from ShareInvestor

This article “Sometimes, Investing Is Sheer, Dumb Luck” by Cai HaoXiang was first published in The Business Times on 29 Feb 2016 and is reproduced in this blog in its entirety.

But what we do in a bear market will prepare us to be better investors

In my conversations with investors this year, one theme has emerged: Sometimes people make the right decisions using the wrong reasons, but it all worked out well.

A senior equity analyst told me, for example, that he sold all his stocks before going for a holiday last July. “It was completely random. I told myself I’ll look at the market when I come back,” he said.

Since he returned to work, China markets crashed, global markets followed. He then moved to a new role and compliance was stricter. And everything went down even further this year.

He is still in cash.

Similarly, a colleague told me she sold all her unit trusts around the middle of last year, not because of any economic foresight but because her pastor had forecast things were going to be bad.

Timing Does Matter

It has long been accepted market wisdom that nobody should try to time the market.

That is, investors should invest slowly and steadily through market cycles no matter what happens.

In reality, investing steadily is easier said than done.

In a market downturn like now, how many people are still investing steadily? Or are they waiting for a further downturn before buying? Similarly, when markets are rising, people tend to commit more money in the hope that they will make even more money.

Momentum does matter. Investing when everybody else is investing can work as a strategy. And it syncs perfectly with investor psychology.

What makes the strategy fail is that beyond a certain point, prices become too high. This was seen on the Shenzhen Stock Exchange last year when many stocks were trading at 50, 70, 100 times earnings. This was seen in the dotcom boom when lossmaking stocks were still priced as if they were established conglomerates.

Yet in between a market bottom and a market peak lies plenty of grey areas for momentum investing to work. Betting on the ever-present human gambling instinct, after all, isn’t unreasonable.

Market timing matters in another way. In talking to young investors who had done well, I noticed some of them worked for a few years and saved up enough money to start investing, just in time at the beginning of the global financial crisis of 2008-9.

That was plain luck. The global financial crisis, and the extreme valuations that stocks traded at, was a very rare event by historical standards. Many who started then saw their initial portfolios double within a few years, no matter what they invested in.

Since the beginning of the year, a couple of my contemporaries have asked me about investing.

What a fantastic time to start, I thought ruefully. My own portfolio had taken a hard hit because I decided to commit a bit more money last year. They, meanwhile, had saved a sum of money and were beginning to invest at a time when valuations were not overheated.

What Is In Our Control

Ultimately, some things are beyond our control as investors. Some people do benefit from sheer, dumb luck, or being in the right place at the right time.

Yet what is within our control is not what we do in a bull market, but what we do in a bear market like this one. Do we get put off from investing altogether, leaving a disparate collection of failed stocks and penny S-Chips in our portfolio that will only keep fading away even when the bull market returns? Or do we dilligently add financially healthy companies to our portfolio which are most likely to ride out the downturn, without going bankrupt or having to sell their assets at a low to meet cashflow concerns?

At times like these, some people will advise investors to sell everything and just hold cash. And while I am envious of those who managed to get out at the right time and be in full cash at the moment, being able to do what they did is out of my control.

Like it or not, I am stuck in a market downturn, with some stocks caught up in a vicious circle of low trading interest and low valuations. But I am confident in most of them because I have done my homework, mostly, to stay clear of highly indebted companies with complicated business models. And I am slowly accumulating blue chips still.

The final thing investors can also do is to ensure their record-keeping is solid. This means they need to keep track of all their investments and dividends paid out through the years, so they can judge whether their strategy has worked.

I keep a running tally in my Excel spreadsheet on whether investing was worth it: Taking all the dividends and realised profits through the years, and deducting all the realised and current paper losses.

So far, I’m breaking even, which on the bright side, means I will be in the clear if markets recover even a little bit from where they are now. But ask me in 50 years.