Saturday, September 18, 2010

Finding the courage to be brave and contrarian

A conversation I had today reminds me to remind myself that it takes courage to be brave and contrarian. Particularly in the field of investing. You can't follow the crowd and if you do, don't expect anything more than the average.

Warren Buffet, the wise dude from Omaha is often quoted:
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
The market has really tanked since 2007. Even for myself, a self confessed finance junkie, I find it hard to work up enthusiasm to contribute extra to my superannuation for my eventual retirement that's over 30 years away. And it's also hard to work up enthusiasm to buy stocks in a market that's volatile and swinging around with no clear trend.

No sane person likes to invest $10,000 only to see it drop to $9,000 the next week, for example. Because when that happens, your mind(and my mind) is plagued with slight regret that the $1000 could have been spent on fancy dinners, a new dress or some new toy. That if you hadn't bought that week, you could have bought the same number of stock for a cheaper price.

So in this imperfect world - I do realise that I have to boost either my retirement fund or my portfolio that's invested directly in stocks. Firstly, I'm overweight in property and cash, and underweight in stocks. At my age, I can afford to have a riskier asset allocation. Most of my parents friends are millionaires and they are invested roughly: 70-80% property, 20-30% shares, 0-10% cash.

Personally, I like the way they've invested and also prefer to have similar weightings on my asset allocation.
If you are more risk averse and prefer to increase your returns (risk and volatility), you would change the weightings to a higher percentage in property or stocks. I have met so many people in the past who are either 90% property or 90% stock. It takes effort to learn, understand and invest in both markets. Most investors fear what they don't really understand. Complacency and reluctance to learn means they usually prefer to invest mainly in one or the other. to the stockmarket I go again to buy some more stocks... despite my risk-averse side telling me to invest the majority in property or cash. Property just had a huge boom this past year so the rental yields have dropped significantly in most suburbs. The only thing that worries me about the global market these days, are the huge deficits in the US and most European Nations. In the long run, how can nations grow and afford to spend on infrastructures and social services when their cash flow is leaking out in terms of interest and debt payments? That is one of the biggest reason behind my hesitation to direct more funds towards increasing my stock portfolio.

Mind you, Warrent Buffet's advice is quite handy in times like these. And I couldn't agree more with this quote of his when it comes to buying fundamentally strong companies for the long term:
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

We had a wedding to attend today. I stitched two images together from the DSLR to form a panorama since I don't have a camera that can shoot panoramic images(and I'm too lazy to crop the image in Photoshop since it's past 1am now). It was dusk and anyone who had a camera could not resist the beckoning lure of our iconic Opera House, Sydney Harbour Bridge and Centrepoint Tower.

It was such a glorious Spring day with warm weather and I couldn't resist taking a shot of the lilac Wisteria's that were trailing off the trellis :

At the wedding, I met a guy named Dennis and he was chatting to another friend about trading stocks. Dennis mentioned that Peter Lynch's book had a momentous influence on his trading techniques. being me... when I got home, I just had to hop on the net to google Peter Lynch. His name was familiar but I had never heard much about him. Everyone who's into finance has heard of Warren Buffet and George Soros but Peter Lynch?

"Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion... achieving an annual average return of 29%."

It's hard not to be sceptical with any fund returning a very high average return exceeding 15% over several years or decades. Figures like that should always ignite little warning lights - particularly after the Bernard Madoff ponzi. Even for a fund that can return yields like that, it would be foolish to invest 100% of your funds in them. Everyone should be diversified across the asset classes (Property, Stocks, Fixed Interest & Cash), regardless of how tempting it is to invest in a singular asset class because of its attractive returns. Investing 100% in any singular asset class is one of the biggest risk you could ever subject yourself to.

Some people will say..."but I'm diversified...I have all my funds invested across 20 or 30 stocks. " however, you should be diversified across the asset classes and within the asset class. If that doesn't make sense to you, you better keep learning if you want to learn how to minimise your investment risks.

Warren Buffet is probably the most overquoted financial guru. He is however, a very successful investor and the second richest man in the world as a result of business aptitude.

One last photo before calling it a night. The wedding cake was cute. The bride and groom are both fanatical about aquariums, underwater diving and marine animals. This is their beautiful wedding cake, decorated with bride & groom turtles :)

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