Thoughts on investing and current market (Part 3)

Another thing to note, when you see an influx of funds by people who do not usually talk about stocks, it is the time when the euphoria really begins. When there is an excess of money to buy stocks, there is no other way but up for stock prices. The reason is very simple. If you understand how the mutual fund industry works, all they want is new funds. For instance, like the local banks where they promote lots of different funds. If next year, out of the blue, everyone in Singapore wants to invest in a fund, they bring into the market with a lot of money. Where is the money going to go to? Sit idle? Goes to buying bond and earning its interest? Hell, no way, fund managers must find a way to invest the newly acquired funds for the customers. So when the supply of the stock is the same, all the fund managers will be fighting for a slice of the limited cakes. Thus, price of equity goes upwards. Now you may ask the reason they still buy when price is overdriven. Simple, they can’t afford not to. They are on losing ground whichever side they stand on. So for them, they’ll have to join what all others are doing. So when they fall they go down together, and they won’t look as bad. In some way, it’s in the fund manager interest to follow the herd, even if he thinks the herd is wrong. In the worst case scenario, he will go up in flames along with everyone else. And no one will fault him. Alternatively, if he dares to think outside the box, and do what he believes is the best long-term interest for his clients, he takes the chance of being “wrong and alone.” In the mutual fund industry, time is not the friend of the fund manager. In a market that focuses on the moment, the last 6 months is all that matters. So to speak, clients will not give money managers a chance to prove their case with time even if in future, the performance will be better than the others. Secondly, when investors invest, they expect their money to be in stock, not in liquid, if it is in liquid, the investor will withdraw the money and find someone else. This amounts to losing a business. Here, shall mention another Warren’s message – “The stock market is a no-call strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you are a fund manager is that your fans (investors who put money with you) keep yelling, “Swing, you bum.”

Thus far, the mutual fund only allows 4 paths for its managers to walk. 1) You can be right and with the crowd – which is fine. 2) You can be right and alone – and then you are a hero. 3) You are wrong and with the crowd, which isn’t actually so bad. When everyone is down, it doesn’t hurt (the fund manager career either because you’ll be ranked together with everyone) to be down. 4) Or you can be wrong and alone and then you’ll look like an idiot. The last option is the ignominious fate that a career-conscious fund manager strives to avoid at all cost even by knowingly buying stocks at a high price that is stack against the odds. So for most money managers, they do what the whole of Wall Street does best – by playing to the gallery; playing to how the fans and crowd dictates them to play. Wall Street does what they does best – being the best salesman. When you assume the role of a salesman, all they care about are sales – investor’s interest counts for nothing. On Wall Street – a community where quality control is not prized – will sell investors anything that they will buy.

Not that all mutual funds operates in this typical manner, but those who do not are too few and far between. It takes a hero to divert from where everyone else is moving. The strange thing with people is they do not mind falling together no matter how hard the pain is. But if anybody who has the intention to put his money in the care of a fund manager, the model example of this caretaker must at minimal be of the same standard as Jean-Marie Eveillard and Charles de Vaulx of First Eagle Fund. They were the heroes in the late 90s when most mutual funds are supporting the equity market while they are out in a huge way. What they say is impressive with action “At least we lost half of our shareholders - rather than losing half of our shareholder’s money.” “We only appeal to defensive investors, people who are worried about losing money than they are eager to make as much money as possible because we are not aggressive investors.”

Then as a value investor, it is also important to know the every basic of what can test your faith in the idea of intelligent investing. When everyone else is doing better than you in a bull market, naturally most people will feel down. Not because they are earning more, but because almost everyone is abandoning the creditability of a great idea. Like what Eveillard mentioned “I don’t mind seeing professional investors I respect doing better than me. To see people I did not respect doing better than me – this is totally discouraging.” When you encounter this, this is when it tests your discipline in your method of investing. To make money out of something you do not believe in is not really fun first of all, then it puts you in a very precarious position. Another Warren’s quote “I would rather be certain of a good result than to be hopeful of a great one.” Do something that is certain, not hopeful. The journey does not ends tomorrow, the day after, a year later or 20 years later, it ends the day you are immobilize. So, for something to last that long, you must have a solid foundation and idea to do it right. You can have a revolver with a bullet in 6 chambers pointing to your head, and then you shoot it yearly. The more you shoot with each time, your chances of survivor lessens. Assuming you survive the first 4 years, when it comes to the 5th year, you only stand a 50% chance of survivor. That is because it is something you have no means to predict in the safest way. But if you chose to do that, you must know when to give up. Being greedy will definitely harm you. It is important to know the level of greed moves in opposite direction of odds and sanity. So when you get greedy, odds and sanity decreases. In life, it is like a poker game where you must know when to give up even if you have a much-loved hand. Life is also a series of opportunity cost. Whatever you give up, you gain in something else.


If the present valuation is the same as in the late 90s, it is surely overpriced now. For most people, they think stocks are ever-ascending, on paper, at least, it shows. But in reality, the real people who gain are those who took their winnings home before the party ends. The vast majority historically holds on – as they are told by the press, the brokers, the gurus. For those who cash out, they may have missed the peak but they missed the wreak that follows suit.

The only so-called setback when you go against the crowd is you are almost alone. The crowd may provide you warm because you are inside the herd. But one of the few greatest advantage is time is your friend while it is the foe of those who does not practice value investing.

To summarize all the above, you can glean from it that investing is really one of the most diverse subject on earth, if not the most. It encompasses human psychology, basic arithmetic skills, discipline, patience, general knowledge, economics, and much more. For those who think investing is just about figures, then it is same as the principle of the man with the hammer who deals with everything like a nail – just hammer it in. Well, the problem with hammering all nails in is you have a problem of pulling the nail out when it is hammered at the wrong place.