Why and how we actually lose money from stock investing?

Can anyone claim he has never lost money investing in the stock market, or any investment for that matter? ย The book by Professor Philip Cheng, Taming the Money Sharks: 8 Super-Easy Stock Investment Maxims is dedicated to all retail investors who have both profited and lost money investing in stocks. I want to quote two distinct real stories narrated by the author in this book, and I want you as the reader to analyse how investors went from losing money to making money without feeling like much extra work at all.

Since this is one of the best written book I’ve read for long time, I intend to break it into 2 parts and share with you some of the other important points in Part 2.

Profile of the Professor Philip Cheng

Drawing on his years as an investor for leading banks in the U.S. and Asia, Philip Cheng delivers down-to-earth strategies guaranteed to make you “shark-proof” while you optimize investment returns. Statistics show that only 20% of small investors ever come close to achieving their investment goals. The other 80% get eaten alive by “investment sharks”โ€”investment advisors, fund managers and other hucksters out to line their pockets with your hard-earned cash. Motivated by a sense of fair play, Cheng resolved to write an investor’s survival guide in which he’d share everything he’s learned in his years as a successful professional investor.

**********

Scenario 1

Many of you are professionals in specialized industries, but may not be in finance or investments. For example, John was the head of an IT department in a multibillion-dollar asset insurance company. John is very smart and very knowledgeable in the IT field, given his 25 years in the industry. However, he confided to me that his stocks had always been losing money.

He told me he had been trying to take advantage of every profitable stock situation deemed to be attractive at that time. The results, however, had been Miserable. Can you relate?

I advised him to stick to buying investments only in the IT industry. Just stick with this for one year, I urged and he agreed. ย John trusted me and promised me. He began to study all the major IT-related companies in the global arena. His homework included basic fundamental and financial analysis of the target companies with respect to the IT industry trends and markets. He started to look into Google, Apple, Cisco, etc.

John was buying Apple stocks beginning in 2008 and through 2010 with cost averaging below $200 per share. As of early 2013, the price was about $450 per share, which is a fairly handsome profit.

I might add that John did not become afraid when AAPL prices dropped below $100 in early 2009. Instead of panicking like other investors, John just bought more via different tranches, as he was confident and knew the intrinsic value of such a good company. Even for great companies, their stock prices will fluctuate based on the perception of buyers and sellers at any one time.

Meanwhile temptations continued from other industries in the form of “strong buys” from John’ usual sources, stock gurus from TV Taming the money sharksprograms, analysts from brokerage houses, stock columnists from newspapers, and so on. But John stuck to his guns, unwaveringly.

Since John knew the IT trends of these businesses, including software, hardware and other related business models, he was suddenly making money, to his total surprise. He knew when to get into a stock, and when to get out. He was a happy IT guy.

Scenario 2

Mary is an accountant – and her investment results had been disastrous because she had been hopping from company to company depending on the prevailing fad. ย When I advised her to stay in accounting-related stocks, she declined. She said she wanted to get away from financial numbers for a change of mood during non-working hours. For that I don’t blame here.

When I began to ask for her hobbies or personal interests, she simply said none. I respected her honesty. I started to grill her for anything that she might like but came up blank. Finally, after I questioned her some more, she admitted that she only had one past time – shopping.

Then I recommended to her that even shopping could be an investment industry homework target if she put her mind to it. Mary was delighted.

Later I found out that Mary loves to shop at Tiffany, Coach, LV, Prada and other luxury consumer goods companies. She loved handbags, etc. I began to counsel her that she should study the financial backgrounds of these companies and learn their business models. I encouraged her to do basic fundamental analysis and some simple tracking of their stock prices and how they correlate with certain economic cycles and consumer sentiments.

Again, I made her to promise me, just for one year, not to invest in any stocks outside the luxury goods industry. She agreed.

Mary now had a focus as to the due diligence she needed to do in an industry she already knew quite well from product standpoint. She enjoyed doing her market research, visiting various luxury goods companies and trying to note the strengths and weaknesses of the companies regarding products, services, fashion trends, and reliability. Her sharp instincts also assisted her in her evaluation of high-class luxury items, from elegant design of jewelries to expert stitching of handbags. She learned by asking pointed questions, whether she was doing her field trips or performing fundamental analysis.

She would continue to examine industry and company reports. She would confirm or dispute their conclusions with her newly acquired expertise. Even though she had a full time job, she began to know why certain companies continued to do well while others just faded away.

Mary diligently tracked famous luxury goods companies. She was on top of industry trends and consumer spending capabilities. She was able to capitalize on market signals when they appeared, whereas average investors would have missed them totally.

For the ensuing years, Mary continued to profit from investing in luxury goods companies at the right prices at the right time. In short, the results were very favourable, in terms of both her own past time and her investments, which made for a happy accountant.

Mary enjoyed the financial results of her homework and became really excited. She informed me although she generally disliked reading company annual reports, reading attractive annual reports of luxury goods companies was fun.

The book, retailing for RM 71+ at Borders, is now available to you at no cost if you post a comment below on the following:

What is the investment mantra for Scenario 1 and Scenario 2?

The 2 best answers for this and for Part 2 (coming soon), well, like previous giveaways, the publisher Wiley will ship to your home ๐Ÿ™‚

Click here for Taming the Money Sharks Review Part 2

This Post Has 53 Comments

  1. Start your investment in what you know best, research thoroughly and be proficient. Start small to gain confidence and accuracy rather than focusing on many and not profiting. Knowing the rules of the game makes you a better player but not invincible… : )

  2. When you are passionate in certain field.,you will do study on something that you are happy with. You willing to spend your time and patience on that particular field. This is typical human behaviour! Meanwhile, you get return from the field you are passionate about and familiar with. It is make use of human psychology to kill two birds with one stone!

    1. Chia, great comments! Is it by any chance you major in psychology?

  3. Going through the 2 scenario, it is obvious the one key message is sticking to your “CIRCLE OF COMPETENCE – CoC”. John’s CoC comes from his professional training and work experience, while Mary’s CoC is coming through interest and love for luxury goods. It does not matter where your CoC comes from or how is it defined. The important point is that anyone desire to have a chance to be successful in stock investment needs to have the ability, or get a mentor’s help to discover his/her own CoC and apply them. Coupled with FOCUS – not distracted by stocks outside CoC regardless of their share price; and DISCIPLINE – use this strategy for at least one year, the chances of success is almost certain and predictable. Circle of Competence is one of the basic fundamental advocated by Warren Buffett in value investing. Obviously there are more aspects in stock investment success, which falls outside this discussion forum

    1. Hi Patrick, I agree these are the fundamentals of success that often get overlooked. It’s the mindset first, others comes later. But most will jump to the techniques (like FA or TA) without setting an internal goal. Like any projects, roadmap first, then execution ๐Ÿ™‚

  4. Both scenarios are a testimony of using coaching methodology to encourage self discovery learning. Instead of telling them what to do, the author asked a series of questions to let both discovered their interest areas and thus found self motivation to deep dive more into the field that they are interested and familiar. In so doing, they are had done their homework well in fundamental analysis and more confident in investing into companies that they are familiar with!

    1. YH, you are wise! You indeed see what most don’t – coaching methodology, your area of expertise.

  5. The simplest rule for someone who do not know how to invest in stock market: invest in the field that you familiar with or something that you are interested and have some knowledge about it and do some homewok.

    1. Hey Jasper, or one may want to consider paper trading first before involving real money ๐Ÿ™‚

  6. Very interesting! Build on your strength and passion.

  7. The investment mantra for both of the scenarios is focus on what you’re really good from the beginning. It doesn’t matter whether it is your specialize fields, hobbies or things that you do it as routines. Because every pieces of work you do, may directly or indirectly link you to the opportunity of success.

  8. Both scenarios have the same situation. Invest in the industry/sector/business that you have passion and interest in. Nothing beats passion. It will be disaster for an IT guy like IT stuff to do something which is not even his passion. Passion comes from heart which gives you the power and confidence. With passion, you know deep inside, you already achieve success.

    1. Hey Howie, but IT guy like you do have lots of passion and competence outside your scope ๐Ÿ™‚

  9. Due Diligence, due diligence, due diligence.
    Focus,focus,focus.

    1. Bernard, sometimes over-analysis also can lead to paralysis geh ๐Ÿ™‚
      Focus? Really works for you? The last time I checked, you are looking over at SGX already heh!

  10. The investment mantra for both Senarios 1 & 2 are:

    1. invest only in what you know and understand especially if aligns with your passion or interest of work
    2.acquire competent Financial Intelligence, do research based on facts and don’t rely on hearsay or rumours from celebrity experts
    3.have a realistic Investment / Trading Plan with clearly defined SMART goals and risk management ie clear exit and entry levels
    4. find a good Mentor and follow good advice that works ie track record of consistent risk-reward based on one’s risk profile
    5. stay focus and concentrate on one’s core competency

    1. Been some time I’ve seen this SMART goal indeed! Any chance you work in engineering or HR Cheong? ๐Ÿ™‚

  11. Focus on your interest and strength. Develop them further with what you already have into the share market sector. It takes lesser effort to make money once it is a focused area.

  12. Start investing with what you know…

  13. Scenario 1
    Like John, only investment in stock when you know the business. The benefit is you always can easily access the most updating information which adds the advantage when come to investment decision.

    Scenario 2
    Always invest in the common stock which relates to your hobby(ies). Maryโ€™s case, she likes to shop for luxury products. Anything to do with your hobbies will always draw your attraction. This will assist you to keep abreast of business growth and its market trend.

    Both scenarios are a great sharings but before any investment, always bear in mind is to educate yourself first. So buy the book โ€œTaming the money sharkโ€ as an investment on yourself ever without winning the contest.

    1. Hi David, yea, it’s really a great book and investment before dabbling too deep into stock market or any investment in that matter. Many just can’t wait to profit fast and big but let’s take a step back and evaluate one important thing first – ourselves.

  14. buy the stocks of the company that you are one of the consumer, ie. if you use maxis and think maxis is good in their service and deliveries, so further study on it, and if that convince you further, invest in it.

    1. That cuts due diligence into half, yes? Makes perfect sense, without much extra effort.

  15. The invesment mantra for scenario 1 and scenario 2 is always get a good mentor or financial adviser to guide you if you are not doing it right in your investment and the rest will fall into their places.

    1. If one is fortunate to have one wise mentor who has been there, done that in multiple bull & bear cycles, then he is indeed very blessed!

  16. In my humble opinion, investment mantra for

    Scenario 1: He focus on his daily job related investment which gave him more insight and technical knowledge which other people might not know since it is his field of expertise or so called butter and bread.

    Scenario 2: Most likely she doesnt like what she is doing or she want to try something different. So venturing into her hobby (shoppping) can be a good alternative also since it is the most relevant industry that she might find interest, at least she will discover more and her fore sight and prediction of company sale, design, product will enable her to make the right investment decision.

    1. And of course stay humble when the profit is trickling in ๐Ÿ™‚

  17. I personally feel that the investment mantra/moral for both scenario story is easily down to earth to thing you like/passion or your professional specializes area to get on to invest in the company related to your passion. It is very fun to do with something that you like rather than in force to get like on it. So when this feeling exist of fun, then all hardwork such as reading the company annual report, see and understand the chart become something called enjoyable. You can see your fall in love company how they perfomance current, and past. All i can say I love to know all aspect of the company too. haha thank

    1. Yea, in the end of the day, it really doesn’t feel like extra work at all. If this fails, at least it becomes part of our work, instead of additional work. People just don’t like extra work if they don’t see the return in short term.

  18. It’s about knowing thyself, knowing business and be patient!

  19. Simply, invest within what Buffet calls your “circle of competence”. As you are buying into a business, you need to understand the underlying economics of the business well enough to be able to determine what its future looks like.

    Buffett also been quoted as saying “If we can’t find things within our circle of competence, we don’t expand the circle. We’ll wait”. Again, all businesses that fall outside your circle, should belong to someone else.

    1. I like this analogy much Carina! Reminds me of the movie “Meet the Parents”, where the term Circle of Trust is also used a lot ๐Ÿ™‚

  20. Invest in yourself first ! And do the investment at your area of experty and interest !

    1. Yeap exactly. Good for a start before exploring the “bigger things!”

  21. Apply value investing concept for our investment. To move from IT and accountant industry to investment is hard and since there are tons of company out there to choose from, start or stick with the industry we familiar of as we will get more passion and interest to do it at the beginning. And it will be easier if the business nature of the companies we interested is simple and familiar of, just like Warren Buffet stayed away from the IT related companies as he did not know how to value them.

  22. Do what you love, Love what you do!

    1. Haha Alvin. good one but sometimes in work/life, we love the thing we do, but there’s one or a few minor aspects of it that we don’t really fancy. Because it is part of the thing we love doing, we got to learn to love these “minor unlikeable things” in the process ๐Ÿ™‚

  23. I think the answer lies in awakening your potentials through a mentor. We must learn not to repeat the mistakes of others. Through proper guidance we get into the right perspective in the investment world sticking to a plan that bear fruits to our labour. Two cases same results because they realised their mistakes and followed a path, which they know the way. So the mantra is believing in yourself, work towards your goals and listen to good advice.
    Have a good day!

    1. Jason I’d say if in our investing journey, we came across a mentor like Prof Philip Cheng early, that would save us lots of tuition fees, don’t you think? ๐Ÿ™‚

  24. The investment mantra : turn your expertise or hobby to earning engine, not an alien act even for share/stock investment. Invest into what you know, not what others recommend. Make investment as an interesting pass time.

    1. “Alien act” that’s a good phrase. But sometimes it IS hard to not look into what others recommend ๐Ÿ™‚ Ultimately, to follow what is recommended is another story.

  25. Define clearly the only field that you have the passion to study on it even you have to paid for it to gain the knowledge, if the existing plan doesn’t fit the newly defined criteria, dispose it immediately and start up a new plan that nothing to do with others but just simply because of your strong passion toward it. Then set up an achievable goal and keep remind yourself to ensure yourself stick to your plan no matter how is market going. ๐Ÿ™‚

  26. Simple – The ‘Investment Mantra’ for both scenarios is, “Invest only in businesses that you understand well.” ie. your ‘Core Competency’ area.

    1. And something that have a “Meaning” in one’s life ๐Ÿ™‚

  27. Both scenarios emphasize on sticking to what you are familiar with and spend some time to focus your strategies on one sector.

    1. Absolutely Wei Jung. If the industry or sector is within our line of work, even easier.

  28. The investment mantra for both scenarios is stay focused on the industry you know the most in order to capitalize on your strength. At the same time, passion drives them to explore more and when they feel happy, thus comes the success for them.

Leave a Reply

HowToFinanceMoney ยฉ 2011-Present. All rights reserved.