I started investing in stocks back in June 2009 once I turned 21. It has been around three years and I have learnt lots from this experience. Putting my knowledge into practice is a better teacher than merely reading books on investing.
My investing mentality was grained by the theories of Warren Buffett, Benjamin Graham, Peter Lynch and the likes. They have always espoused that investors should see stock prices not merely as numbers but should understand that there is a business behind these prices. Theories like this have been stuck with me but lately, I found that they were getting diluted due to a trader’s mentality.
I think it started back in August 2011 and was reignited last month. Markets were coming down but the businesses I was monitoring did not come down to the price point where I would be comfortable investing in for the long-term. Since I could not take opportunity of the price drops of my favourite companies, I thought of trading by buying other companies that came down in price a lot like Capitaland. So, at least by buying Capitaland, I could make some money when it recovers. This trading mentality caused dilution of the investing theories I had read over the years. Scarily, I began to see stocks as merely numbers moving up and down and not businesses. What made it worst was that this traders mentality made me have a short-term view of the stock market! I wanted to make quick bucks. Businesses take time to flourish and decisions made by the management will take time to come to fruition. This fundamental knowledge of investing was getting thrown out of the window.
I realised that I had to separate the investing arena and the trading arena and not mix up the theories. Investors have a longer term outlook and see a business behind the stock price. Traders have a shorter term outlook and just buy and sell based on the prices. Having a traders mentality on stocks meant for the long-term will only hurt returns as one would sell when the price goes down and buy when the price goes up. Instead of buying low, selling high, one can end up buying high, selling low.
This post serves as a reflection for me. Some of you investors might have been in the same situation as me. Share with me your thoughts in the “Comments” section. Cheers!
SudhanP.com 
what more can i add? you are only 20+ and know the different, most people of all ages still mix them up. i’m impressed.
I know is hard to stick to the rules of investing, The hype of making quick buck is tempting and addictive when you really do make a huge quick cash with leverage and you thought to yourself “hey, i can do it again.” That is where strong mentality come in. Always remind yourself before you press the button on the online brokerage if you are doing the right way.
However, i remember an article that even warren buffett sometime break his own rules or theory when he think the business he put money in is sound.
I believe as long as you did your homework and have think of the risk properly and safeguard your investment, it will be fine if you skip out of your rules. That is just my 2 cent thought.
ofcos the hardest part is to do the right thing in according to your believes. many people knew but can’t do it, the different between winning and losing. i think i said what you had already knew.
Investment Rule # 1: Never Lose Money.
Value Investing helps reduce the risk of losing money because we analyses the business in the real world, then yet for the stock market to price it wrong and take advantage of it.
Always treat ourselves as business collectors – collect them when it is a good price. Pro – collectors will not enter unless it makes sense.
Short term trading is really “guessing emotions”, lets stick to “buying performance”.
Why risk our money? :)
HI all,
Thanks for your comments.
In this business, discipline is key. Greed has to fly out of the window. I’m still learning the ropes… Won’t stop learning. The key is not to make the same mistakes again.
Long-term investing and short-term trading is not mutually exclusive.
Hi Createwealth8888,
That’s true but I tend to mix them up. Still learning how to switch hats.
Good read. Sometimes a little bit of trading gives us all the bit of adrenaline we need.
Hi equitywatch,
Thanks for your comments and for visiting my blog!
Hello!
This trading/investing dichotomy is interesting. There are a couple of good investors I have read about who have a very small portion of their portfolio meant for trading purposes (1-10%). It is meant to preserve a meaningful chunk in long-term compounding machines but yet indulge that urge to make quick profits without really harming long-term results. Of coruse, if anyone has a proven technique of making quick bucks, then power to the man! :)
Hi Ser Jing,
Saw your email too. Thanks for your support!
What you said is true as well. However, for me, I find it hard to separate the different psychologies involved in both. If I trade and then switch to value investing, I tend to look at stocks as just numbers going up and down daily, which should not be the case. Value investing involves buying businesses and not pieces of paper. Time for me to work on my psychology if I were to trade properly…
Hi!
Oh, I did not add my caveat here. Their ‘trading’ is more for generating cash flow positions in companies that are still considered pretty-decent investment opportunities. I think what you are doing in Capitaland should be fine. For example, if Capitaland’s P/E or P/FCF ratio dropped dramatically, even though its long-term prospects are more or less unchanged, we can initiate a small position. As its P/E ratio improves after awhile, you could sell it. The difference here is that you know Capitaland is not a real Long Term Buy and Hold investment, but rather an investment in which its price-to-value relationship is at an alarmingly attractive level. I have never studied Capitaland, so I have no idea how sound its business is. I’m only using it as an example because you mentioned it in your blog post. Ridiculous price declines can sometimes be accompanied by furious price upswings, which is where the ‘trading’ mentality takes place.
Maybe I misunderstood your usage of ‘trading’. For me, even if I were to trade, the fundamentals has to come first :) For what it’s worth, well known value investors like John Neff and GARP investors like Peter Lynch have been known to turn over their holdings in 2-3 month time frames. That to me, is considered short-term trading.
Haha. Psychology is hard to conquer. It is just how our brains are wired. One of the best advices I’ve received with regard to investing is ‘If you can sleep well at night, you are doing it right’. I pretty much abide by that. Have fun! :)
Ser Jing
Hi Ser Jing,
My method of trading follows exactly what you have mentioned. Strong companies that have disparity between price and value (talking about P/E or P/B here and not intrinsic value) for the short term, especially during a market correction/crash. I know they are strong and the price will recover soon but something you mentioned at the end is the stumbling block. Sometimes, I can’t sleep well at night even though all look good (P/E historically low, etc) when I trade. That’s something I have to work on. Thanks for your input!
Hi Sudhan,
If it helps, try paring down your ‘trading’ positions. Play with a smaller amount of money in each trade, until you can feel comfortable. I’m just relaying advice from the seasoned pros who frequent community discussion boards that I check often. After all, investing is done to make our lives better, not to make us feel worse. Haha. Everyone is different, hope you can find that balance point. But as long as we have this focus of ‘business’ and not ‘tickers’, yea I think over time things will work out well.
Cheers!
Ser Jing
Hi Ser Jing,
Luckily, I don’t have any trading positions currently :) Thanks for your advice anyway! Sounds logical.
what biasedness.. at the end of the day its still betting your beliefs on a company. Its ok we need people to be egoistic, narrow minded and hold strongly on a belief.