“We [the Moderns] are like dwarves perched on the shoulders of giants [the Ancients], and thus we are able to see more and farther than the latter. And this is not at all because of the acuteness of our sight or the stature of our body, but because we are carried aloft and elevated by the magnitude of the giants.“
Bernard of Chartres
Just as we can build on the success of those who have gone before us, the failures of those who went first are also valuable lessons.
Today is one such day. I write this in the hopes that after reading of my mistakes, you are able to make better investment decisions.
No investor can make money in every trade he makes. Losses are bound to happen sooner or later.
What is important is that investors must learn to limit their losses with rigorous discipline, and use their mistakes to improve their investment decisions in the future.
In this way, even losses can provide returns in the form of an improved investment decision-making framework in the future.
However, not all losses come with lessons.
You will experience times where you make all the right decisions and come out with losses still.
No one is immune from this. Not even Warren Buffett.
In such a case, it is wise to remember that life is a game of probability and that the stock market is similar in that regard – we can only try to invest in such a way that the cards are stacked in our favour as much as possible.
I would further tell you this: to not imagine a mistake if there was none. It is understandable that most people will want to find the source of their failures.
We want to know why the chicken came out wrong, why we got 90 instead of a 100, why our proposal was rejected and why we failed.
And yet sometimes, there is no lesson to be learned. Sometimes, you just go back to the investing checklist you have, see that you ticked off everything you were supposed to, and realise that there’s really nothing that can be done.
As investors, more than anything, you must develop the mental mindset to thrive in times of uncertainty, fear, and trouble.
That is how you will be able to shake off the losses from life and move on to making better investment decisions that can ultimately change your life.
Let’s dig into our losses and the 2 lessons you can glean from them.
Lesson #1: Multiple Strategies Let Us Sleep Better
Recently we closed two positions listed in Kuala Lumpur.
- MCE Holdings provides electronic components for the automotive industry.
- Bright Packaging produces packagings for consumer products such as cigarettes.
Both are undervalued stocks which we sold at a loss of 28% and 17% respectively after 3 years. In addition, we also lost 17% in Berjaya Assets and 29% in Seni Jaya.
It would be quick to say that we picked the wrong stocks.
Yet at the same time, we used the same method to pick undervalued Hong Kong stocks has rewarded us with profits – Oriental Watch +153%, Swire Pacific A +25%, Sing Tao +11% and Wing On +13%.
So what’s really going on?
The issues did not lie with the methodology.
It worked – just in different countries. And no, it’s not because Value Investing doesn’t work in Malaysia. The studies are clear in that value investing works in all countries, just not all the time.
It is known that value strategies can underperform in certain periods.
And each period can last for years.
For example, value strategies have also underperformed in the US in recent years as well.
Below is a chart to show you that there were periods where Value outperformed Growth and vice versa.
The growth investors are currently doing very well with the US stocks until the tide turns again.
Growth and value stocks have shown to alternate their reign on superior returns. If you are wondering if Value is dead in the US, you can take a look at multi-perspectives in this link.
The cyclicality of strategy performance is something that we cannot predict in advance.
It is as tough as predicting when the market will crash.
Hence the underperformance is something we have to accept if you are doing one strategy. That is why we pair two strategies in our portfolio to get exposure to both value and growth stocks, to allow us to benefit from the outperformance of either strategy at any one time.
Lesson #2: Developed Markets for the Long Term, Emerging Markets Better to be Timed
However, a multi-strategy portfolio was unlikely to do much help for Malaysia stocks in the past few years.
In general, the Malaysian stock market was underperforming the Asian peers and the weakest in 2019. Low tide sinks most boats and it is hard either for value or growth stocks to perform well.
The lesson I learned is that emerging markets like Malaysia pose greater risks than developed markets. Using Malaysia as a case, corruption was problematic in the previous administration until a historic and surprising win by the opposition party.
All these while the Ringgit was not doing well and was sliding against the Singapore Dollar, setting a record of RM3 for S$1.
Malaysian stocks were not doing well too, and most investors wouldn’t have the confidence to put more money in a country which was mismanaged. The political landscape has a big impact on domestic businesses and currency strength.
Hence, we suffered a double whammy of stock and forex losses.
Emerging markets as a whole are risky because politically they are less stable which can lead to poor business results and currency exchange losses.
On the flip side, there can be opportunities when emerging markets can rally strongly.
For example, the investment dollars that went into Malaysia following the new party’s victory and drove up Ringgit in the first half of 2017, making it the best performing currency in Asia.
Now considering the US-China trade war, news of companies moving their manufacturing to Southeast Asia to avoid tariffs may be good news for Malaysia.
But economic improvement does not necessarily translate to immediate stock market returns and it still depends on the influx of investment dollars to push up the share prices.
As you can see, investment dollars are very fickle to emerging countries.
They come and go according to the dynamics of their politics and economy. One would need more macro analysis to invest in emerging markets.
Thus the lesson I learned is that I would need to time my investments better if I want to go into emerging markets while I could just stick for the long term in developed markets. If I have to choose only one, it has to be developed markets for sure.
I would have less headache and heartache.