A few months ago, I divested my position in one of the counters I used to be vested in - Sembcorp Industries (Link Here). Back then, I remember receiving a few criticism coming in from a few readers.
One of the criticism which I remember vividly was from a reader that commented I was doing plenty of research, analysis and valuation runs on the company, but only to end up in a loss upon the divestment at the end of the day. On the other hand, the reader commented that he did not have to do much research on the company but yet was making a profit. He questioned the need to undergo such a detailed process when investing doesn't seem difficult to him.
I digested his words and compiled a few learning points from the incident.
The thing about doing homework on companies before you invest is this. I do not mind doing a lot of homework and analysis on companies and still made a loss at the end of the day. From my view, I will know that I have learnt something from my mistakes and probably there are many more instances like this in my investing journey. After all, we are all vulnerable to making mistakes in our lives.
I replied to the reader that I am happy because he has made a profit but I am more worried for him because he has not done his homework but yet made a profit out of it. I hope he understands what I was trying to say.
Temptation To Invest Without Research
Investing is a tricky and risky thing to begin with.
You would not necessarily ended up going into profits immediately, even if you are already putting so much effort in researching the companies. There are the other market forces you have to contend with, for instance recession cycle – things like this that are out of our control.
On the opposite end, you can make profits just by randomly picking the stocks that you think would outperform, but you will never know if it is attributable to luck or skills at the end of the day. The question to ask is if you are making sustainable profit calls in the long run. If the answer is a resounding yes, then by all means go ahead with your strategy.
Since it appears that the outcome comes across as multi-dimension matrix, many investors chose the easy way and go for the short cut by investing without preparing sufficiently in trying to understand the company better. There are also other investors who have “done” their homework by reading multiple brokerage analyst’ reports and/or blogger’s opinions. No strategy is wrong of course, until hindsight proves otherwise.
Temptation To Invest Before Research
This is a trickier one to be honest.
Some investors tried to invest before researching sufficiently on the companies. The key word to look out here is before. By the time they are vested, they would then spent their time looking for positive news surrounding the companies that made them believe they have made the right decision. This is called confirmation bias. Confirmation bias is harmful because your brain is wired only to take in positive information, and filter out everything that might come across as negative.
It’s actually pretty difficult to set this straight in our brains because I remember making the same fallacy of errors when I started my investing many years ago. I think this is a pretty common fallacy committed by many investors because as human beings, it is only natural that we see what we wanted to see and it is made even harder through the widespread coverage of the media which is deemed as noise and are often no much use to any investing decision made.
Final Thoughts
Investing is easy but successful investing takes a lot more effort than that.
Often, it requires many than simply the first level of screening, and even more so, it requires a lot of disciplinary strategies such as proper asset allocation and emotional investing. For many, it can take a heavy toll on the health and family relationship when things doesn't work out properly.
For investors who are not prepared to do spend too much time monitoring the market or picking individual stocks, but would like to participate, they can do so by investing in an ETF index fund which has proven to be much simpler and outperforming many other average investors. At the end of the day, what are we looking for when we are investing? What are our objective of investing? Isn't not losing money our main objective or are we looking for more beyond that?
What are your thoughts on this? Let me know.
