With the STI down 17% and Shanghai Composite Index down 23%, PRC fund manager Zou Tao cautions speculators against catching a falling knife in the bear market, and urges them to rely on fundamentals. Bloomberg Chart: index data from 3 Jan 2011 to 3 Jan 2012.

THE PRC stock market is full of gamblers who throw fundamentals to the wind, chasing stocks on the way up and then desperately hoping to recoup losses by averaging down. In his QQ blog post, China-based fund manager Zou Tao urges investors to 'respect the market' and cautions against three types of behavior that lead to stock market failure.  Singapore has its share of such gamblers, and NextInsight's Sim Kih has translated the straight-talking fund manager's comments, as follows:

"I am resting but my money is hard at work" is an investment method published by Zou Tao.

(1) Watching the trading screen all day

A true investor should know that stock prices are ultimately determined by two factors: intrinsic value and market behavior.

Yet, it is precisely these two factors that market hawks make use of to trap the unwary retail investor.

The typical retail investor psychology is to keep one’s eyes glued on stock price movements all day after buying a stock.

To entice the unwary investor into making the wrong buy or sell decision, market hawks put in queues or trades that give a false impression of market interest to entice retail investors to make the fatal mistake of chasing a rising stock and continuing to average down even when it falls.

Even if the retail investor gets it right 9 times out of 10, one mistake in this kind of game wipes him out.

(2) No concept of profitability or market valuation

Such investors do nothing but gamble on their luck. It will benefit such people to lose money if the pain makes them quit the stock market, or spend some money learning investment philosophies and profit strategies to help them play the stock market game.

Unfortunately, there are those lucky gamblers who actually make money because it was a bull market.

Such people chuckle that playing the stock market is easy money, and begin to increase their bets. But their woes begin once the market turns bearish, and they find themselves unable to liquidate their investment portfolio for several years.

QQ graphic

At this point, the wiser ones begin to learn to respect the market and begin to seek gurus' investment strategies.

But there will be some foolish ones who think it is merely bad luck that caused them to time the market wrongly. Such people continue to take on the market until they meet their fatal end.

There is a question in Zou Tao’s investment method, which requires an investor to reflect on his investment philosophy and profit strategy. Without fail, such people become lost when posed with this question.

(3)  Relying on free advice doled out by newspapers, TV,  blogs, chat rooms and rumours

 I often get queries for help from such investors. If they had half a brain, they would realize that the price of any investment advice is a sign of its value.

Free advice is not going to yield any returns. It may even lead to a costly lesson. Many a conman has succeeded not because he is smart, but because he has successfully preyed on those with a “freebie” mentality.

Having said that, there are things that money cannot buy, such as responsibility, integrity and reputation. That’s why I turn away some people seeking to purchase “Zou Tao’s Investment Method”.

If we trade our methodology in exchange for a tiny compensation to someone who can’t diligently follow it, his loss is a mere ten to twenty thousand yuan, but we lose the branding that we’ve built in our lifetime.

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