A confession before taking the road to $100m

"Investing is difficult," i heard myself repeating such complacency during a brief conversation with a young accountant who was interested in making money in the stock market. Having been working as a research analyst and gotten the professional qualification. i don't show the minimum confidence that i should have on investing. And i often keep going back to the basic question: "How can i make more money in the market?" Inevitably, i share the same frustration of that lady.

Her accounting knowledge did not give her any confidence toward investing either, as she said: "It seems share price movements does not follow the financial performance of the companies, sometimes quite the opposite." "Even the accounts of a company itself go up and down. This year, a company scores strong numbers. The next, all things could turn 180 degrees."

i tried to lighten her a bit, saying accounting knowledge helps us, to certain extent, find a starting point. We have to take into consideration the company's underlying strengths, as well as such broader aspects as general market environment, the economy, psychology and even history. "It is difficult." i ended the conversation by recommending some periodicals, the likes of the daily Hong Kong Economic Journal, weekly The Economist magazine and amusingly the monthly National Geographic magazine. Although the last one appears to be unrelated, it offers the widest possible scope of human affairs.

i remember the first time i bought stock. In 2000, i bought China Mobile #941 at about $60 a share. A few days later, i sold the share at about $63. The reason i chose China Mobile is that i regarded China Mobile, the second largest blue chip, as the gauge of the overall market. Somehow, i had a "feeling" the market would go up. Then i made the bet on China Mobile. Together with the market, China Mobile did go up by more than a few dollars, before it came a few dollars down again. i "felt" that institutional investors, dubbed "big accounts", were doing something nasty. Then, i jumped out at $63.

It was a very lucky exit. Just after i sold the shares, the share price started its now infamous long deterioration from $60 to below $20. What was the lesson i learnt from this exciting ride?

Nothing.

Yes, i banked a thousand dollars but this profit was out of 100% pure luck. Should i buy China Mobile again or other stocks, i knew i could either win or lose. It was a 50/50, before brokerage fees.

Nothing, but the awareness of inadequacy.

Here, i share this apparently trivial incident because i believe most readers have had similar experience and taken similar "approach" to stock trading -- the sixth sense, or strictly speaking a combination of greed and fear.

i got on board driven by greed and got off out of fear.

A few years later, i bought China Mobile again, at around $17. Nowadays, everyone knows $17 a China Mobile share is cheap. But back in those hasty days, few people thought so. Today, most people regret buying China Mobile at its $20 something. If we rode the time machine and went back to 2003, i bet few people would dare to hold the stock, not to mention buying it.

Almost all analyses about China Mobile were unfavorable, as far as i knew. Anyone can dictate the gloomy factors about China Mobile, including the widely blamed intense competition, the decline of average revenue per user (ARPU) and the impact of Xiaolingtong, and the potential foreign competition once China opens the market.
i thought they were all irrelevant factors. First, China Mobile has a duopoly status in the market of 1.3 billion customers and potential customers. The only real rival in the mobile telecom service was China Unicom #762. In contrast, Hong Kong with its mere seven million people had six mobile telecommunications operators, what over-competition should mean to be.

Second, the pessimism about the declining ARPU won a lot of followers. ARPU was a popular tool used by analysts on measuring the performance of telecommunication providers in Europe, a fairly mature market. However, the same ARPU analysis fell apart in China.

Being a brief observer of Chinese businesses, i understood that the decline in selling price is not a nightmare, but simply part of the game in China. Chinese business was a volume business. And China Mobile was on the right track. Its subscriber base grew by the count of millions month after month.

Xiaolingtong is a technology like an extended household wireless telephone system. Similar technology had been available in Japan, but faded out quickly. Xiaolingtong was a fringe technology like Hutchison's Tian Di Xian in the mid-90's. As regarding foreign competition, China Mobile must have already established the valuable wireless network before foreigners knock the door.

It is always easy to be wise after the event. The point is that all the pessimistic arguments, which were so prevailing in the market, would become clearly invalid, in retrospect, when you have a cool head.

Unlike the first time when i bought the shares at $60 each and dumped them at $63 like a hot potato, i was confident enough to hold the shares until it hit $48.

i rethought about my vague comments on investing for that young accountant. i should have told her that the first thing an investor could do is being cool, defying greed and fear. Don't follow shepherd.

i should have recommended her read Sifu Vincent Lam's new book, "Setting Out The Journey Towards $100 Million Of Wealth" (Chinese Translation:《步上一億元財富之道》). Vincent offers many insights about investing in his trademark lively writing style. i was particularly absorbed into the chapters regarding market timing, how to avoid being trapped and how to control emotions.

Vincent gave me a copy of his book although i had already gotten one from the bookstore the other day. Gratefully, i accepted his gift and promise to pass my spare copy to a friend of mine. Here, i wish to give out that spare book, the one without Vincent's autography, sorry, to one of you. The first person who sends me an email requesting the book will get it. i am looking forward to your quick response.


Disclosure of interest: Currently, i am not holding any interest in China Mobile.

Aug 16, 2006
Copyright Quamnet

The Vincent Lam That I Know

In a visit to Vincent's home in a Lunar New Year, the research team was playing bowling in the clubhouse. Unlike Jay Templeton, Vincent is not a bowling genius, far from it. My dear boss fired the balls straight to the gutters beside the pathway. i didn't play well either, but still became so curious on how hard it was for him to keep the ball running down the lane. For God's sake, he kept trying and failing and tried again. By then, Vincent and his wife, Eva, had just moved into that beautiful estate for a couple of months. i thought he was so fond of playing bowling, and practice, i hoped, would make perfect.

A year later, in the same kind of festive visit, the research team again had some recreational activities in the clubhouse. i believed it must be Vincent's show time. Well, this time, he skipped the bowling court and led us to the snooker room, instead. We again had a good load of laughter on the snooker.

Vincent is an operation-minded man. Many of you know his investment performance, but few got to know his performance in other areas.

One night, Quam had its annual gathering at an exquisite dining club. More than a hundred members of staff attended. Red wine was served before the dinner. Vincent and his serious-looking research team arrived just before the event began. When we all settled down at one of the tables, the mediator invited Vincent to host a lucky draw. There he came, a red-faced Vincent with a little excitement and a little roguishness.

He hadn't drunk much, maybe one glass of wine. While smiling innocently, he rocked and rocked the lottery box fiercely, creating waves of laughter from the crowd. Oh, my dear lovely boss!

Vincent's alcoholic tolerance was next to zero. And it all showed up on his face when most of us hadn't yet felt the spirit. If we had a prize for the first one to get drunk that night, he had to be the winner.

As my boss, just like Tony Measor, is a gentleman, few people make fun of him. i dare bring up his embarrassing moments that he will never recall, or be able to remember, anyway. It is because i know he won't get mad on that. Besides, i am leaving Quam this week, which makes my gossiping risk-free.

i got my basic training in school and professional programs. i learnt the investment principles from reading investment grandfathers Ben Graham and Phil Fisher. Still, Vincent taught me much more. He taught me how to think (when being outside the bowling court and clear in mind).

i learnt from him to analyze matters from different angles and in historical timeframes. As a result, i wrote an analogy between Hong Kong property market and Kinder Chocolate Egg, an assessment on the economy from a Martian's viewpoint and an analysis on John Woo's films. i raised radical questions about conventional beliefs on income as a major source of happiness, as well as the irrational behaviors of consumers and investors.

Here ends my last article in this column. Goodbye, my dear readers. i really enjoyed writing here. And thank you for spending your time reading. If you really like my writings and do not mind acknowledging it, please hit the F5 button on the top of your keyboard (the refresh button) three times. That would boost my hit-rate statistics to surpass Marc Faber's, and i would very much appreciate it. Have a good day.

Jun 8, 2005
Copyright Quamnet

Buy Mama A Stock

What are you getting for your mom this Sunday? Probably, you have bought her a handbag, a necklace, a blender and again another handbag as in the past so-many Mother's Days. For this coming special day, buy her something special, if you don't mind it being secondhand -- a stock. A good stock is more appreciable in value than jewelry, and certainly, more durable than a handbag. Still more, it could be more exciting than a blender.

There are many different stocks to shop around for, depending on what you think she needs.

If it is for her savings, the stock that has long-term prospects suits her investment profile. She would unlikely dump a gift you send her. Therefore, the stock should also provide a nice dividend yield for her recurring income.

A banking stock will do. HSBC #5 is a luxurious gift for $50,000 per a board lot of 400 shares, at $125. i am pretty sure she would like it. If you get her a Cartier watch, she would probably say you have wasted the money. But i bet she won't say so should the money be spent on HSBC shares.

Hang Seng Bank #11 is more affordable, for $10,650 per board lot. It offers a 4.9% dividend yield, at $106.5, but only modest growth prospects. It has a price-earnings multiple of 18. HSBC, at $126, trading at about 14 times prospective earnings and yielding 4.4%, is preferred.

If the gift is to bring her excitement, your pick should provide a sense of ownership for a business that she appreciates. After all, owning a stock is not different from owning a share of a business. The gift could be shares of TVB #511, Tong Ren Tang #8069, Wing On #289, Lam Soon #411 and etc. Again mind the minimum price for an investment in TVB.

Whenever she turns on the TV, she will realize that she owns a bit of the broadcast business. Nevertheless, she will not have the voting rights for the ending of the dramas, or the choice of news anchors. What a pity!

Does the recent share price rally have anything to do with the successful Korean big-hit "Jewel in the Palace"?

TVB traditionally trades at premium valuations, probably due to its prominent market presence. At $39.9 per share, it trades at about 21 times prospective earnings, not particularly attractive. Maybe, leave it for the next Mother's Day.

Tong Ren Tang would be an interesting pick. Listed in 2000, this Chinese-medicine company has a strong balance sheet, a proven track record, rising dividend payouts and strong branding. At $14.75 per share, Tong Ren Tang trades at an undemanding 13.2 times prospective earnings. For the first quarter of the year, net profit rose a mild 4% from the same period last year. The recent weakness of the share provides buying opportunities.

Moms, receiving this gift, might suddenly become more health-conscious than ever. For those who have already been loyal customers, they would comfortably hold the shares.

Quam has recommended Wing On for quite a while. i won't bother to repeat why. One should be aware that its major profits come from rental income, rather than its legendary department store business, which recorded losses in 2003. Office rents in Hong Kong and Australia are important factors to look at.

On the other hand, while Lam Soon is famous for its "Knife" and "Red Lantern" brand edible oils as well as "AXE" and "Labour" brand detergent, its detergent business has been making losses. Mothers should have known what has gone wrong with its detergents.

Last but not least, you may buy her your favorite pick and show her what a brilliant investor you are. And let her share the profits from the hard work in your research. She must be proud of you, unless your investment turns sour.

Wish you a wonderful Sunday with your family. From then on, perhaps, investment will become a hot talking point.

(Disclosure of interest: I hold shares in HSBC)
May 5, 2005
Copyright Quamnet

The First Thing I Do After Buying A Stock

The first thing that i do after buying a stock is to forget the buying price. It is almost impossible to forget anything, intentionally. At least, i would try not to care, as the buying price is not only irrelevant to my trading decisions going forward, but also deceptive.

No one is perfect
Naturally, right or wrong, i tend to regard the buying price as a benchmark to measure the success of that particular purchase. When the market price of the stock goes higher than my entry price, i feel happy, or at least comfortable. Otherwise, i regret not having purchased that stock at lower prices, now available. i know i am not alone in having such feelings.

When the stock is trading at a loss, i tend to hold it and wish it a recovery, one day. By doing that, i am taking the risk that the stock will go further down and i will suffer from an even bigger loss. But my heart turns into a stone. Selling the losing stock, which is to admit the "mistake", seems to be the most embarrassing way to go. Investment psychologists call this behavior "fear of regret". Elton John sings: "Sorry seems to be the hardest word."

Emotionally, i tend to hold a loss-maker longer than i ought to, while i am often tempted to sell a winner much sooner than i should. The psychologists said the urge to take "pride" makes an investor sell a winner earlier than necessary. i think of other reasons for reckless profit-taking. Many people would rather spend the windfall, the "house money", on some nice vacations, plasma TVs, or new computers. By selling a stock, i bear the risks that the stock will rise further, and i miss the opportunity to make an even bigger profit.

Don't be a prisoner of the past
The truth is whether you should hold, sell, or even buy more has nothing to do with the entry price. Economists regard the entry price as a sunk cost -- one cannot turn back the clock. Investors should be forward-looking. Who on earth should be a prisoner of the past?

The best strategy

Expected price movement from now on     Current status      Best move
Up                                         Profit          Buy/Hold
Up                                          Loss           Buy/Hold
Down                                       Profit            Sell
Down                                        Loss             Sell

The table above is simple and clear. Whether i am making a paper profit or loss, i should hold the stock, or even buy more, if i expect the share price to go up from now. i should sell the stock, may it be presently a winner or loser, if i expect it to go down.

Back to square one, the question is always where the stock will go. Value investors look into future earnings and/or cash flows. Technical investors watch charts. Even though chartists may be looking backward (on past trading records), they do not necessarily base their decisions on their personal buying prices. Rather, they use the past trading pattern of the market to predict the future price movement.

Profiting from others' weakness?
Could we exploit the opportunities that arise from other people's weakness?

The market behavior, as collective behavior of individual investors, is too complicated to analyze by the means of "fears of regret" and "seeking pride". Trade happens when there are equal numbers of shares being sold and bought at a certain price. Both buyers and sellers exist at the same time and insert forces in different directions. However, to a certain extent, psychology contributes to the analyses of support and resistance levels of share prices.

Cut loss?
Some argue that investors should not only deny "fears of regret" and "seeking pride" emotions, but also go to the other extremes. That's to sell quickly when the stock falls below the entry price, and hold onto the stock that rises well above it. They point out that risk tolerance varies with wealth. When a stock falls, the loss would erode the core saving, on which the investor depends for his living or retirement. He should cut his losses. In contrast, when a stock rises well beyond the entry price, the investor's basic needs become less of a concern, and therefore he may go ahead and take higher risks, by holding onto the star performer.

That sounds reasonable, only when putting it into the perspective of the whole portfolio, but not a single purchase.

Value -- the benchmark
i believe a stock has a value. The lower the market price, the bigger is the discount to that value. That makes the stock a safer investment. The higher the market price, the bigger is the premium to the value. That makes the stock a shakier investment. That doesn't necessarily mean that i would blindly hold onto losers. Should the business environment change, or fundamentals deteriorate so severely that the value of the stock falls below the market price, i would sell the stock, even at a loss.

Feb 23, 2005
Copyright Quamnet