Wednesday, 23 December 2015

Clash of The Titans (1) - Traders vs. Investors

Author: Icon8888   |   Publish date: Wed, 23 Dec 2015, 12:45 PM 

1. Introduction

Recently, I wrote two articles about the stock market :-
(i) "Three Ways To Punt The Market"; and
(ii) "Punting Stocks In The Information Age". 

I am sure some of the sharp eye readers would have noticed the use of the term "Punt" instead of "Investing".

If you think that the use of the funky term "Punt" is to make the articles more down to earth and entertaining, you would have got me wrong.  

Many of you must have thought :-
"I am sure what Icon8888 meant is Three Ways To Invest In Stock Market and Stocks Investing In The Information AgeWe are not Traders. Traders are those fellows that buy and sell based on Technical Analysis. We read financial statements, we buy and sell based on balance sheet strength, profitability and cash flow. WE ARE INVESTORS, VALUE INVESTORS"

I am sorry to burst your bubble. In my opinion, you are not necessarily an Investor. You are very likely a Trader, a Value Trader. 

In that regard, the neutral term "Punt" was deliberately used so as to avoid accoding you (as well as myself) the status of Investor.   

Let me explain.

2. Shocked Me To The Core

Many years ago, I spoke to a friend of mine, who has been in the market for a long time.

Icon8888 : "I am an investor too".
Friend : "On ya, that is nice. What stocks do you buy ?"
Icon8888 : "I look for stocks with low PE Multiples, hold them for two, three years and aim for certain percentage of return."

My friend was shocked !

Friend : "What ? Two, three years ? I have been holding my stocks for more than twenty years. I never sell them. My stocks such as Public Bank, BAT, Telekom, had grown by many hundreds of percents".


All this while, I have treated myself as an Investor. To be told that I was NOT, really shocked me to the core. 

I was confused. However, at that time, I lacked the knowledge, information and wisdom to really figure out the contradiction. Just like many other things in my life that I don't understand, I shelved it, kept it in my mind, and moved on with my life.    

I only began to understand the nature of that issue until I started participating in forums like klsei3investor. 

3. A More Holistic View

As mentioned in my previous article "Punting Stocks In The Information Age", I benefited a lot from Cyber platforms like klsei3investors. For the first time in my life, I am able to interact with market players from all walks of life. Some use charts, some spread rumours, some pray to Snake God, some buy and sell based on fundamentals. All kinds of people. 

There is an abundance of information for me to tap into : historical datas, analysis, opinions, articles, etc etc...   Over the course of several years, I soaked myself in the forum and slowly digest the information. 

I benefited a lot from bloggers like KC Chong, Uncle Koon and various articles regularly posted by Tan KW. I also benefited a lot from observing the market behavior of fellow forum members like Ooi Teik Bee, Rosmah, Er Kong Seng, Calvintaneng, Kakashit, YiStock, Noby, and many many others.

After taking in all these information, a clearer picture gradually emerges, and I began to have a better understanding of the contradiction that arose from that fateful conversation I have with my friends many many years ago.     

I arrived at a stark conclusion - even though many of us buy and sell based on fundamentals, we are not actually Investors. 

If that is the case, who are the Investors ? What constitutes Investing ?

4. Investing

There are many books out there about investing. Warren Buffett's books are my favorites. I also like Peter Lynch. But compared to KC Chong, I read substantially less. Instead, I spent most of my time researching individual stocks (need to make a living mah. Lonely old man cannot rely solely on pension, right ?).

As such, KC's articles discussing the various Gurus' styles of investing are truly a gift for me. Unlike books, the articles are short and easy to understand. Very convenient. I consume them like eating fast food.   

After eating many Mc KC Burgers, I gradually formed a view of what constitutes Investing.

Among all the Gurus, Joel Greenberg's way of looking at Investing has the biggest impact on me. The key points are as follows (here is your Mc Icon Burger) :-

(a) Great fortune can be made by compounding over an extended period of time. Compounding involves reinvesting profit back into business so as to continue to grow. A company that has opportunity to reinvest will be able to become a great company, thereby creating significant value for its shareholders.

(b) However, due to intense compeition, not all companies can register compounding growth. Only company that has moat can do that.

(A moat is a deep, broad ditch that surrounds a castle. It defenses against invaders. Companies that have "moat" are those that have competitive advantages that differentiate them from rivals. Companies with "moat" usually will do well)

In short, according to Joel Greenberg, Investing is about identifying companies that have moat so that you can hold on to their shares for many many years. The Investors will reap huge capital gain as the company's profit keeps growing.

THAT, is Investing.

5. Trading 

How about Traders ? Who are the Traders ?

First of all, there are the TA Traders. As we all know, they buy and sell based on charts and other technical readings. I am not really familiar with TA. As such, I don't want to comment too much about TA Traders.

Then there are the Value Traders. These people buy and sell based on fundamentals. They used tools like PE Multiples, Enterprise Value, Price to Book Ratio, etc.

Sounds familiar ? Dudes, that is because the so called Value Traders are You and Me, ha ha.

One of the major characteristics of Value Traders is that they hop from one stock to another. 

Investors are like Zen Masters. They stay calm irregardless of what happens. They hold on to their stocks for decades. They let moat and compounding do their magic. Traders are different, they are always on the look out for leads. 

Investors can afford to be calm because they are guarded by moat. Traders aren't protected by moat. As such, they must constantly adjust their positions so as to capitalise on the latest trend / avoid beng swallowed up by trend reversal.       

Based on my experience in Bursa, trends usually lasted for multiple years. For example, property boom over past 5 years, oil and gas boom over past 10 years, palm oil boom from 2009 until 2014, and the latest export stocks boom that have already lasted 12 months and potentially can last for few more years.   

As a result of the long cycles, Value Traders can have holding period of multiple years (which induces them to mistaken themselves as Investors).

6. Too Compliacted ?

After reading what I have written so far, some readers might begin to wonder, "Not too long ago, Icon8888 wrote about how Anglers, Drift Woods and Surf Riders play the market. Now he is introducing Investors and Traders into the picture. Isn't he creating too many identities ? I am beginning to get confused."

Don't be confused. All these characters can actually be accomodated under one Grand Unifying Theory.

Surf Rider is definitely a Trader (Value, not TA). There is no need to explain much. It is in their DNA.

Angler is also Value Trader. It takes position in a stock with the hope of ultimately flipping it when certain events occur.

Drift Wood is a bit tricky. It does nothing and hold long term. That indeed sounds like an Investor. However, it is more complicated than that. Drift Wood's inactivity is not because they play the moat game. It is mostly due to their inability to look into the future. When the opportunity arises, Drift Wood might not hesitate to offload and cash in. They don't give a hood whether the company has moat or not. That, makes them a Trader. (If they dumb dumb hold, they can call themselves an Investor, I have no objection to that, ha ha).   

(In romance, Surf Rider is gold digger. Angler at least pretends to invest in a relationship. Surf Rider is only interested in courting rich widows, women that are available and widely known to have plenty of wealth.   
As for Drift Wood, she is the plain looking girl sitting quietly in a corner watiing for Prince Charming to arrive.
Of course, the above is purely for humour. In world of finance, no one method is more moralistic than the other)

7. Why Split Hair ?

The question now is why I bother going into such details segregating one group of players from another ? There are few reasons.

(i) I have long noticed the existence of tension between two main group of players.
One group is very well defined, they are the Value Investors. As mentioned above, they are guided by Investment Philosophies of famous Gurus.
The other group is not well defined. But their presence can be felt everywhere. In this article, I give them a name, "Value Traders".
By giving clear identities to these two groups, I hope to eliminate the confusion that have so far plagued the investing intellectual space.
Now there is no more need to debate about whose method is right or wrong / more superior. These two groups live in paprallel universe. Both are real and legitimate.

(ii) Investment theories started developing in early 1900s (correct me if I am wrong). Benjamin Graham was the pioneer. After more than a hundred years of development, the theories had matured and are now well established.
However, there is a void when come to Value Trading. People like Ooi Teik Bee is definitely no Benjamin Graham disciple (Benjamin Graham would be turning in his grave if he sees the way OTB trade stocks like eating kuachis). However, OTB's success is indisputable. More research is needed to understand this phenomenon.   
My article is hence an attempt to fill the abovementioned void. I am hoping that it will create a framework that can further the development of Value Trading theory.
Can Value Trading one day stand as a separate pillar that can compete with Classical Investment Theories ? Many people will benefit if that happens.     

(iii) For Newbies, the stock market can be a daunting place. One of the biggest headache is that there are so many different views, you don't know who to listen to.
For example, a Newbie is making some money in the market by following OTB's advice. However, he has many questions unanswered : Is what I am doing correct ? Is my method sustainable ? Is there any other methods that is better ? What about TA Trading ? What about Warren Buffett ?
I hope this article will provide them with better clarity of where they are in the market value chain. Hopefully, that will help them to position themselves better when come to committing their capital.      

(iv) Retiring early from workplace and trades at home has been many people's dream. I once posted an article and it attracted many readers.  
However, so far, the only way people can think of doing it is by way of TA Trading.
Through this article, I want to sow the seed in their mind that they can also trade based on fundamentals.
If you want to retire early, no harm picking up an accounting textbook now to try to understand financial statements. You can trade based on TA. But FA is your friend too. It can also help you to achieve what you want.  

8. Concluding Remarks

First of all, I would like to clarify that I do not take a stance on whether Value Investing or Value Trading can produce better results.

I don't champion one method over another. I am merely documenting my observation of the various behavior currently existing in the market.

However, before I end this article, I would like to take the opportunity to highlight one major flaw for each of the method. 

For Value Trader, the biggest headache is reinvestment risk. You made tonnes of money trading a stock. However, there is a risk that you will lose it back when you use the money to buy another stock. The boom bust cycle can be very frustrating. 

For Value Investor, the major headache is identifying companies that REALLY have moat. You have been courting this girl for 5 years, only to discover at the eve of the wedding that she is an Ah Kua, hoo hoo hoo.

Merry Xmas !!!

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