25 October 2016
Investors should do the right thing at the right time. Photo: Bloomberg
Investors should do the right thing at the right time. Photo: Bloomberg

Understanding risks matters

As I have mentioned several times recently, do not underestimate the Federal Reserve’s dovish character.

However, if you overestimated the European central bank’s dovish character, you may also lose money. Constant adjustment of investment strategy is necessary.

Currently, there’s nothing that can be called a real trend whether in stocks, foreign exchanges or gold markets. Everyone is making an investment based on their guess of the intention of the regulators.

Value investors may consider such a method as more of speculation than investment. But, in most cases, the performance of the stocks is highly linked to the overall market performance.

If investors say they only care about the stock’s fundamentals, it is very likely they are holding no stocks at all.

I respect the investors who seek the ten-baggers. However, ambition is not enough to outperform the market.

Investors should also dare to incur big losses. A certain stock may turn out to be a ten-bagger, even a hundred-bagger, but before that it is likely to suffer a large correction.

It’s hard and painful to buy and hold. In the past 30 years, the best performing stock listed on Wall Street is Home Depot. But how many of its initial public offer subscribers are still holding it today?

We cannot blame investors for their lack of patience or persistence if a stock does not bring positive results. For example, the fund Sequoia, which holds a similar value investing strategy as Buffett, lost everything overnight due to its persistent bet on Valeant.

It is true that retail investors can be more elastic because they don’t have to face the pressure of withdrawing and have lower leverage ratio than hedge funds.

But it is the same for both retail investors and institutional investors – they should do the right thing at the right time.

My opinion is, to realize better returns than the market, the portfolio must track a different benchmark than the overall market performance and avoid “too diversified” allocations.

Another thing is fund managers should also disclose the risks behind the portfolio selection to their investors rather than just showcase the returns.

It’s more important to understand how one loses than how one wins.

This article appeared in the Hong Kong Economic Journal on April 5.

Translation by Myssie You

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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