Way before Dr Wealth, there was BigFatPurse. I first started writing about investing and personal finance on BigFatPurse.com in 2007. It has been an extremely fulfilling journey.
And way before Bigfatpurse.com came about, there was Financial Education. Many investment and trading classes were already well established. Many trainers were familiar names amongst retail investors.
For someone looking to receive an education in investing, trading and personal finance, the choices are aplenty. The savvy amongst us who know exactly what they are seeking out will have no problems making a decision. For beginners and the rest, the decision is confusing and daunting.
Even from BigFatPurse’s early days, I have had people asking for my comments on this or that investment course. They want to know if a particular course is sound. Many also ask about the trainers – whether they really do have the substance or are they just form and slick salesmanship.
We started our own investor education business more than three years ago. It was a difficult decision to make. The skeptics would associate financial education as overpriced motivational seminars that enriched no one except the hyped-up trainer on stage. The naive, if they have not chosen wisely, would have already parted with their hard earned money and come out none the wiser. The indifferent are well, simply not interested. None of them would have been ready clients.
We pressed on despite knowing all that. We pressed on because we know of many who will benefit tremendously from a simple and applicable investing framework from a no-nonsense training provider. We pressed on because we believe that financial literacy is a very important part of modern day living. We want to win over skeptics, give hope to the naive and spark off the indifferent.
We believe in being informed and being responsible for our own financial decisions.
Which Course Should I Attend?
Compared to a decade ago, investors are faced with even more choices when it comes to deciding on an investing course. When faced with so many choices, many investors become overwhelmed and end up not taking any action.
I would like to bring up some considerations you should take note of when deciding on an investment course. With that, I hope to give you a better idea of Dr Wealth’s investment philosophy and how we compare to other providers.
It is important to note that my understanding of our competitors is limited since I have not attended their courses.
Can you really invest like Warren Buffett?
Some courses claim to teach you to invest like Warren Buffett. The prospect is very enticing. After all, Buffett is widely recognised as the best investor in the world. If there was an Olympic event for investing he would have swept Gold for the past 50 years. It is only natural when investors aspire to be like him.
The reality is, retail investors cannot and should not try to invest like him. Way back in 2010 I have written an article about why this is so. We believe individuals would have more advantages in trying not to be like the current Warren Buffett. His investment choices are very limited with his enormous capital. A retail individual investor does not have this constraint.
Berkshire returns has declined in the recent years and there was even a rolling 5-year period when Berkshire underperformed the S&P 500. This was partially due to the drag of having too large a capital. Buffett has openly acknowledged the penalty a huge capital imposes on returns. For example, he said this in a 1999 Businessweek interview:
If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
We on the other hand do not have a ‘too much money‘ problem. Because our capital is relatively small (compared to Buffett’s), any investment we make will not move the markets. We are able to purchase stakes in smaller and more deeply undervalued companies that Buffett would not be able to now. What we are doing is mirroring the young Warren Buffett.
The young Warren Buffett’s situation is more similar to individual investors. I had conducted a webinar some time ago about Why You Cannot Invest Like Warren Buffett:
Does it require me to take leverage?
Let’s admit it.
We all like the idea of using a small capital to reap big profits. For many of us with our limited resources, that is the only way we foresee ourselves getting rich. The only way to use little money to make more profits is to take leverage.
Most of the trading courses would involve buying and selling assets that are geared. Be it Forex, CFDs, Futures, Options etc. All traders take leverage. Most investors do not. We would have heard the cliche that leverage is a double-edged sword but how many of us really internalise it. Or have we just been paying lip-service?
The problem is we tend to focus on the upside and never on the downside. We think about the gains and profits and riches we will accumulate and fail to entertain thoughts of painful losses and catastrophic blowups. If one can really make 5% a month, (easily, from home, with half an hour a day, or so they promised), one would be making almost 80% per annum! You would be one of the top investors in the world. If you had started off with $20,000, compounded at 80% per year, your account would be worth $2.5 BILLION in 20 years’ time.
The reality – no one has ever done it before. Why?
Long time readers of this blog would have read that despite me making 3% per month constantly, I blew up my account of S$100,000 in one trade. It is not only because trading options is risky. It is also because I did not observe my own risk management rules – position sizing and cutting losses.
Traders have this mantra, you are only as good as your next trade. It does not matter how many millions you have made in the past many years of trading. Your past result is not indicative of your future performance. The very next trade, for whatever reasons you were emotionally affected, because your cat died after meeting with an accident, you would not be able to think and trade properly.
You might be like me who put up a bigger trade than usual. You might also think you can cut loss just a bit later than the rules call for. In one way or another, that could snowball into one big loss that becomes even harder to take. Eventually the market would force you to take it. Your kind broker would give you a margin call to take you out of your position. I have read about margin calls so many times but never in my life have I imagined that it would happen to me. That is called overconfidence. My story is not unique and I have heard similar stories about others blowing up. Here’s one about Victor Niederhoffer and two were covered in my book.
The increased risk is not in the product or asset but in the leverage involved. Leverage multiplies your potential gains and losses as market moves. Most people are already disturbed by the ups and downs in the stock market and find it hard to get a hold of themselves to make the right decisions. Multiply the ups and downs by 5 times and imagine how an investor would feel looking at his P&L? Would he still be calm and rational to follow the rules?
We are all human. We all live by our emotions. We are not as calm as we think we are, even with all the trading rules in place. I wrote a separate piece about why I stopped trading. I will repost an image here and it should be self-explanatory by now:
On top of that, having to make buy-sell decisions correctly and frequently is not an easy task. Decision fatigue happens to everyone, including very intelligent and ethical people. A study was done on Israeli judges and they found that parole was given 70 percent of the cases in the morning sessions and 10 percent of the cases in the afternoon. This was because the judges suffered from fatigue after having to make so many decisions in the day. The quality of their decisions dropped.
Most of us make many decisions in the course of our day at work. Once home, we fire up our computer to put in orders for our trades. More Decisions. When we are mentally exhausted, we end up becoming more reckless which may lead to outsize positions and big bets. Or we end up doing nothing, letting undesirable positions go bigger and bigger against you.
Many things can screw up the execution. Like the Swiss Cheese Model in risk management, a few bad things aligned together would result in an accident or a blow up in this case.
Lastly, it is psychologically challenging to trade vast sums of money. Trading a capital of $1,000 versus $1,000,000 is a very different feeling. It is a lot easier to trade rationally on smaller sums of money than on bigger sums, even though your trading strategy is exactly the same.
In other words, there is a scaleability issue and the trader’s mindset is usually the limiting factor. So if you want to trade, you have to limit it to a sum that you can remain sane with your trading decisions. If this capital may also be too small to generate meaningful gains for you, you will end up trading bigger and bigger. You physical capital has now exceeded your psychological capital. And that is when problems will start to appear.
Does the strategy require me to take unnecessary risks?
There was a study to show that women are better investors. One of the reasons was that women are more conservative. Being conservative simply means they are more respectful towards risk.
Nassim Taleb is an original thinker about risk. He has been saying that the world we live in is Mediocristan, where everything works according to what we expect them to. We expect the sun to rise tomorrow and there will be no surprises. However, there are areas where the conditions are Extremistan, such as the financial markets.
Our understanding about risks is incomplete in Extremistan. Shit happens much more often than our model predicts. We share the same belief as Taleb and we tend to err on the safe side.
To channel Taleb’s ideas, we have built a diversified portfolio with zero leverage. Our invested capital will never go to zero unless a catastrophic event such as a nuclear bomb wipe us all out. We are ready to take a hit when the market turns against us, because we have invested in fundamentally strong businesses with solid assets. We are confident that many of them will pull through tough times and emerge stronger. We imagine the worst scenarios and position ourselves to survive them.
Does the strategy reduce biasness?
Human beings are a biased bunch without us being aware most of the time. These biases are also carried into investments.
For example, the familiarity heuristic drives our preference towards familiar things rather than foreign ones. This tendency is obvious in the stock market as most investors will only research and end up buying stocks that they are familiar with. Investors also shun away from those they have not heard before. Many a times, these unfamiliar stocks end up being better investments.
In order to avoid such biases and many others, we follow a quantitative approach to uncover undervalued or profitable stocks. We are stock-blind. We do not need to know the stock names to tell whether an investment is good or not.
An interesting live experiment was conducted by Joel Greenblatt. He is a famous and successful value investor and hedge fund manager who devised the mechanical investing strategy, Magic Formula Investing.
He gave his clients two options. First, he would buy the stocks generated by the Magic Formula entirely without further analysis. The second option is that his analysts will help cherry pick from the Magic Formula results to determine the ‘better’ ones. He monitored the performance of his clients’ portfolios and witnessed that the first group performed better than the second. Professionals are human. They have their biases. They may not be right all the time.
Are the trainers investing using their methods? Do they share their portfolio returns?
We choose to rely heavily on research as well as practitioners’ results to develop our investment strategies. For example, generations of value investors following the Benjamin Graham’s philosophy have produced exceptional results over a long period of time, dwarfing most fund managers today.
At the same time, the value factor is also proven by academics with rigorous tests and statistical significance. One important study by Fama and French in 1993 showed that undervalued stocks by book value and smaller companies tend to give higher returns than growth stocks.
We leverage on such studies and real world observations to formulate our investment strategies. And we walk the talk, investing our own money using the exact same strategies that we teach. We ensure we have skin in the game.
We are also publish details of all the stocks we own within our student community once every two months. Students can see the stocks we own and the buy and eventually sell prices. There is a difference between selecting specific stocks to highlight as success stories and laying bare the entire portfolio. The former is easily and commonly done. The latter, only by far and few.
Does the course promise an realistic expected rate of return?
DrWealth had a booth setup at Invest Fair in Kuala Lumpur last year. One of our competitors from an adjacent booth dropped by and we chatted. He commented on our poster which stated potential returns of 10-15% per year – “can sell meh?”
He was a trader. His courses are marketed with promises of higher returns. He was fully justified to wonder why people would even sign up for our courses which have seemingly lesser returns. I could only shrug.
10 to 15 percent is not a number we plucked out from thin air. It is something we have achieved in real time using real money. It is not the selective returns of our best performing counters, but the consolidated returns of all the stocks we own.
The performance of our portfolio speaks for itself. We believe this result is fully replicable for all our students who are able to keep their investing emotions in check and to follow the investing rules.
If a training school shows you a stock in which they have made a killing from, ask about their total portfolio returns. If a trainer promises you anything more than 20%, ask to audit their results. After all, Buffett himself has only managed 20.8% compounded.
We do not over-promise just to attract customers. We speak the truth and we believe that it is very important students come to us with the right expectations. Your success is dependent on you as much as the help we are rendering.
I hope I have provided you with some food for thought when it comes to selecting a course to attend.
Unlike many of our competitors, we strongly believe that Buffett’s current strategy is not suitable for the retail investor. We also believe in employing a strategy that is simple enough for our students to replicate and one that does not require the use of leverage. We do everything we can to reduce risk and eradicate biases. We believe in eating our own cooking and we are extremely concerned about our portfolio returns much more than individual stock performance.
Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.