Translation by Sim Kih
WE ROUTINELY recommend stock investments when interacting with readers.
Strangely enough, retail investors seldom achieve outstanding returns even with our sound recommendations. On hindsight, I recall readers did not take immediate action when we recommended Luk Fook (HK 590). Instead, they asked about Chow Sang Sang (HK: 116), King Fook (HK: 280) and Hang Ten Group (HK: 448).
Is a jewelry retail stock better, or a fashion retailer? They were looking to bet a few thousand bucks in the best sector, or even the best stock. But, no one was interested in Luk Fook’s fundamentals.
Indecisive trading habits can only result in three outcomes: loss of opportunity, loss of trading gains, or worse --- jumping into a stock only after it has surged, which means the stock is likely to tank as soon as it is purchased. These problems can be succinctly attributed to ‘late action’. It is not necessarily a good thing to do due diligence on a wide universe of stocks. Sometimes, excessive caution deteriorates into investment paralysis.
Let me illustrate investment paralysis with an anecdotal test done by psychologists: An elderly patient suffering from arthritis needed major surgery. However, being advanced in years, surgery for arthritis may prove to be too much of an ordeal for the patient. When offered the option of administering a drug as an alternative, almost half of doctors surveyed opted for the drug. However, when given the option of choosing between two drugs available on the market or surgery, the percentage of doctors opting for drugs fell to a quarter. When doctors had to make a choice between two drugs, three-quarters actually took the surgery option!
Availability of alternatives leads to indecisiveness, which in turn leads to irrational action.
A second illustration: When investors believe that holding stocks is preferable to holding cash, if the entire stock market comprises of only one stock, everyone will simply invest in that stock. However, when given dozens of stock picks, investors hesitate and may finally end up still holding cash.
Information overload and being spoilt for choice lead to investment paralysis. As I have said, believing that more information leads to better decision-making, most people have been stuck in a research rut. The solution is really to focus on only the critical information. My previous news commentary was on investment logic. Today, we’re talking about identifying critical information for long-term investments.
Critical information for long-term investments needs to be fresh. There are two aspects to this:
The first is information on new phenomenon. For example, the program for purchase of consumer electronics and cars by rural households in 2009 and the introduction of affordable mass housing last year caused prices of automotive and consumer electronics stocks and China State Construction (HK: 3311) to soar.
The second is a realization of the extent of impact that a well-known fact has on stock price. Such things usually take 6 to 12 months for the market to react to.
Example: the surge in retail sales during the first half of last year was so apparent, even the blind roaming retail malls would sense it. However, Hong Kong retail investors only came to realize this during the fourth quarter of last year, which was when retail stocks started flying. By that time, the retail stocks have already peaked. In other words, information is valueless by the time it is acted on by retail investors.
Why not take a leaf from the investment books of gurus like Germany’s Lenny Dykstra or Japan’s Kawa Ginkura, who rely on critical information to reap huge gains. Without keeping a close tab on current affairs such as real estate news, the retail scene, and spikes in office rentals, when will the retail investor ever get his moment of epiphany?
This article appeared in Quamnet in Cantonese. It has been translated by NextInsight and is republished with the kind permission of the author.