Sunday, November 8, 2015

Random thoughts: Jason Zweig's concept of mind control

I have Just finished reading the book, The Little Book Of Safe Money, by Jason Zweig.



What really intrigue me is the chapter on mind control, listing a series of unconscious biases that may hamper sound decision making. I was thinking through about it and realize I make several such mistakes/ tendencies. I wonder if there are others like me.

Anchors.
I always feel a stock is cheap after it break a new low from recent low. for example,  when sembcorp Industries keep breaking new low, and then rebounded. That low then became an anchor and I might disregard other quantative research I might have done.

The same as ST engineering. I bought at a low of 3.24 a year ago. It then did rather well and stay above 3.4 for a considerable period of time. And when recently it went to 3.15 with pending CD of 5 cents, I jumped on it. With black Monday it went to 2.77. I made a bid at 2.65 but it was fat hope. Why is 3.15 cheap? Because I thought 3.24 is already cheap. But most importantly I think achor  effect is at play here with the new low appearing after a long hiatus

The cure? Had a rough valuation and stick to it. I thought I will get CCT AT 1.2. I didn't move when it was 1.23. I was stupid. 

The reverse of Anchor can work against one too. It raises so quickly and break a new high. It then dropped from that high. The next time it went back to that high one will be tempered to sell for no good reason except the fear of it falling again. That's how I let go of Venture when it gave me 2.5 years of dividends when all along my concept of taking profits is 3-4 years of advances of dividends. 

Lesson: stick to target buy and sell price, and reason for changing it should not be due to achor effect

Framing 
I dun really have this problem because I always look at the risk and what it entails and how much I could lose than the profits. Even the calculation of dividend gains is part of risk calculation for probability of eventual capital loss. So I dun get into the trap of looking and think a glass is half full, I will think it's half empty 

Magnets in mind 
I understand this as bias of familiarity. I dun buy household brand name for the sake of it. But I do only buy Singapore shares. 

This seems countertuitive to circle of competence but actually it just mean we should keep expanding our radar.

Halo effect 
I dun usually track "star CEO" although u do have some respect for Ren YuanLin, but I generally do not think "anyone can do no wrong"

But the halo effect manifest itself in my over-confidence on GLC to deliver. While I do not want to pretend that I know the industry better than them or I can be a better CEO on hindsight, all CEOS SHOULD BE judge by results and track records. Sembmarine foray into a Brazilian yard on hindsight is a mistake at the worst possible time. Compare this with Ren YuanLin steering of YZJ. If results is the only yard stick, Temasek should employ Yuan LOL

Also, Keppel is in a similar mess, but they merge the property business unit to offset some of the weakness and they didn't build a new yard in Singapore. I not sure what Sembmarine is doing to address all the problems.

Indirectly vested in Sembmarine through sembcorp industries 

Prediction addiction
Thinking we are predict the short term movement of Market. I do not think I fall into this. Although I predict at least 2-3 years future earnings, and where are the sources of earnings.

The book asked us to write down our forecasts and track our success rate. The purpose is to show that it is futile. 

I think my prediction on earnings of companies has a 50% success rate, not too bad I think. But I could be right about the earnings of a company but still wrong about its price ... Lol 

Examples: Sembcorp industries, lee metals, venture etc etc... 

The blind spot 
We see ourselves too flattery or too kind to our mistakes. In the pure investment context, I see this everywhere. Value investors or self-proclaimed value investors poking at traders and traders poking at "long term" investors.

So to avoid this, avoid halo effect too. Show me the money. A trader who can consistently make money. Respect! A value investor who can consistently make money. Respect! A hybrid who can consistently make money. Respect!

Can I consistently make money? So Far in the last 2 years, think I am still happy with my performance but dun ask me my returns because I dun track it. 

But I am quite sure I never peddle "my way" since I know my limits. Lol

So... What's your bias?

5 comments:

  1. Hi SI,

    The last oil crisis is 30 yrs ago, Keppel and sembcorp marine will never have predicted this. Brazil is booming with new oilfields discovered. Given Sg relationships with Brazil, and the local content requirement Kep n Semb had to have yards there to win the Petrobras orders!

    Sometimes timing do plays a part when random event take place! Nevertheless if average over a long time, The effect of the random failure or success will be less profound.

    And yes, agree on the Anchor effect! How about looking at historical Valuations aside from us already considered the basis of business n mgmt is not going to change?

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    Replies
    1. Hi Rolf,

      Actually I dun quite agree. While the scandal engulfing the Brazil is unforeseen circumstances, why is Sembmarine building yard both in Brazil and Singapore ??

      Also, there is no advice from management or what is ther next course of action should
      Delays become cancellations or how long is the delays...

      I believe Keppel will do better

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    2. Yes Keppel definitely much better than Sembmarine, without any doubts! At least that is what I think!

      Delete
  2. yeah..nmind so much returns lar....dun lose money can liao.

    enjoy life to fullest...

    paul

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    Replies
    1. Lol Paul,

      Can see u are at a high. Enjoy !! I want to live life satisfactory .. There are room for improvement ...

      Delete