Cheng-Chung Yu, MBA, CPA, CA, CFA, CFP
Published in 2018
My investment experience goes back to three decades ago in 1989 when I was a university graduate finishing my military services and had just started my first job as an auditor with the largest accounting firm in Taiwan. At that time the Taiwanese stock market went through its infancy of capital market formation and its first multi-year bull run to break the 10,000 index points as tracked by the Taiwan Capitalization Weighted Stock Index (TAIEX). Most of the stocks had only one way up, regardless of the fundamentals and financials. Quite a few large companies would go through their IPO’s (initial public offerings) to get listed on the Taiwan Stock Exchange. Many retail investors went crazy trying to subscribe to the IPO lotteries, in which only limited IPO shares were allotted to the way too many frenzy IPO share subscribers. It was not uncommon to see most IPO shares went through their IPO bull runs of jumping twenty or thirty percent before any were pulled back some. Even I, as an auditor or accountant, did not really bother to do much investment research or read the company fundamentals or financials before I placed the stock buy orders. Soon before any realized, the Taiwanese stock market crashed, diving down more than half from its peak and bringing many shares to literally become nominal or almost worthless value. I was lucky enough to liquidate all my investment holdings before the crash as I went to the U.S. to pursue my graduate study at Michigan in 1991 and I needed all the money at my disposal at that time to pay for the tuition and living expenses.
Almost three decades later I am still an active investor in the investment market with a lesson or two to share. One thing I know for sure is that after you buy a stock, its share price will change. It could go up. It could go down. It may range bound, but seldom does the stock price stay constant for a long while. From a statistical standpoint, it rarely happens that every different stock you buy will all become a winner of your investment. You just need to make sure you have more winners than losers to come out ahead of the game. A dictionary would tell you that investment is the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. Keep in mind that it is investment, not gamble, nor pure luck. It is not buying the shares and then praying for their prices to go up. It is not holding a hen and waiting for an egg to be laid every day. It deals with financials, knowledge, foresight, belief, science, art, psychology, common sense and everything else in between.
The classic investment approach starts with asset allocation, through which you allocate your investment dollars into various asset classes, whether equity, debt, or cash, etc., appropriate for your risk and return profile. If you can afford more risk, and you may be able to make more investment allocation towards the equity class. For example, if you have more disposable income, have extra wealth and investment dollars set aside, are younger or in the middle age with regular and steady cash flows, can afford a longer investment time horizon, and are less worrisome and tend to sleep better at night when you put your investment dollars at work, you may be able to tolerate more risk. Traditionally, equity has higher risk and return potential as it is the ownership in a company bearing the higher risks and accruing the extra, residual returns. Debt, or fixed income, deals with more fixed rate of return regardless of the business performance outcome, unless of course the business goes belly up, then you likely won’t even have all or most of your investment principal returned. Interest rate movement goes reversely against the price of your current fixed income investment. That is, when interest rate goes up, the price of your current fixed income investment goes down as people would prefer the new fixed income investment with a higher interest rate than yours with a lower interest rate. Cash, or cash equivalent like GIC (guaranteed investment certificate) or money market mutual fund, holds the safety of principal, but typically does not generate too much more beyond the original sum. An investor with a moderate risk profile, just as an example, might call for an asset allocation of say 60% in equity, 30% in debt and 10% in cash. The asset allocation, according to traditional investment school, might determine over 90% of your investment return outcome.
One key investment lesson I have learned is that you need to do your homework before investing. This equates to having a map and knowing the direction and roads before you step into your car and start to drive. Investment researches could involve knowing what you want to invest in, the company profile and its businesses, the financials and statistics, and its market, industry, outlook and the demand for its products or services. There are two approaches when analyzing an investment target: top down or bottom up. The top down approach looks at the macro-economics from a broader outset and narrows in from the bigger environment, starting, for example, from the global economic environment, national economic cycle, industry outlook, consumer demand, competition, substitutes for the product or service, before zeroing into the company itself. The bottom up approach, on the other hand, looks at the company’s financials, such as profitability, margin, and growth, etc., from a more micro perspective. When a company makes a profit and continues to grow, it becomes more possible for the company’s share price to continue to climb and for you as an investor to profit. Investment analyses could call for your fundamental and technical analyses. With fundamental analysis, you are examining the company’s business and its financials. Technical analysis, on the other hand, has more to do with analyzing the chart and trend of the trading price and volume of a particular share. The conventional wisdom that knowledge is power also applies here. Again, do your homework before you invest.
The truth to profit from investment is to buy low and sell high, or to sell high first and buy low back. Over the years, I have learned some investment lessons to share, as listed below.
- to rely more on fundamental than technical analysis. The appreciation of the stock price still originates more from a company’s healthy fundamental of its business and profitability.
- to have a longer investment horizon as opposed to buy and sell all the time. When you lengthen the investment horizon and perspective, you get to filter out the price variations or anomalies in the short run, and make time and trend the friend standing along your investment side.
- to look more at the macro-economics than follow the ups and downs of a particular company stock. If the landscape of an economy goes well, then it becomes more likely for any individual stock to perform.
- to invest more strategically from your asset allocation and investment diversification, vs. speculating on an individual stock. This way you balance and diversify out the individual and unique risks.
- to think ahead of the risks before the returns. You want to preserve your investment principal so that it can continue to generate additional returns.
- to rely more on systematic, periodic investments to dollar cost averaging than try to time the market. You average out your investment costs to beat the ups and downs of the market and the individual stocks over the long run.
- to invest more through ETF’s (exchange-traded fund) and mutual funds, as opposed to invest in individual stocks, which have more company specific risks and investment research requirements.
- to look beyond the national border in investments as different countries or regions may offer different investment opportunities and profiles over different time.
- to look more into the future, not from the past, for your next investment move. We might psychologically be burdened by the price we paid for the shares. But what really matters is the future price movements when we make the next hold or sell decision for the stock you have on hand.
- to, again, do your homework, conduct your own researches, examine the financials and statistics, and formulate your own investment decisions. Be rational, use common sense, don’t be too greedy, and look before you leap.
When it comes to real estate, people say location, location and location. When it comes to investment, I say knowledge, knowledge and knowledge.