Merry Christmas!!
Following my last post, this one is about another two lessons I learnt about investments in 2019 - Patience and the importance of understanding Human Nature.
As I write this, I am sitting in a cafe at Spring City 66, developed by Hang Lung Properties in Kunming, Yunnan. The photo on the left is a shot of the beautiful Dian Chi and on the right is Spring City 66, located in the new CBD of Kunming.
Lesson 2: Patience
Patience is a virtue and it is also true for investments. Once we have a well-diversified portfolio, patience is the next key ingredient for sustainable outperformance.
On the one hand, for names that we are highly convicted of, even if it underperforms the market in the near term, we should remain patient and hold on to it after re-examining and re-affirming of the underlying assumptions. Diversification offers the room to tactically increase the bets on underperforming names, if needed. It makes sense - when a cheap stock becomes cheaper, we should be happy to own more.
On the other hand, for names not in the portfolio, we should not chase them when they go up. I made a costly mistake this year and chased a stock when it was trading at all-time high (both absolute share price and price to NAVps). I gave in to my simpler part of the brain which only projects linearly. Instead, I should have been patient and waited till the name got cheaper. In reality, the name did got cheaper, a lot cheaper!
In the fast moving society of ours, people increasingly want short-cuts - for grades, for health and for success. People also easily got distracted into a biased viewpoint by success stories, only paying attention to the success part, not the hard work part. The true short-cut, however, is to be patient and put in efforts in a consistent manner. Diversification offers the hardware for long-term winning and patience is an indispensable and critical software. Temporary fame and elevated valuation alike will eventually collapse, like the We Company did.
Lesson 3: Human Nature
There is an old saying in Chinese - it is easier to move rivers and mountains than to alter one’s personalities （江山易改 本性難移）. Human nature, as hard as it is to fathom, is easier than most people’s expectation to predict. This leads me to the 3rd lesson I learnt this year - understanding human nature and psychology is a powerful tool for investments, sometimes even more important and useful than quantitative and fundamental analysis. The following two examples help to illustrate my point.
Example One
Looking back to the beginning of the year, I was expecting the start of another easing cycle whereas the consensus was expecting otherwise. I expected Powell to ease, not because that I was anticipating the US economy to weaken (base on the running statistics, American economy was very strong); rather I was expecting Powell, and his colleagues to behave as normal human beings, just like you and me.
Imagine, when my boss repeatedly pressures me to do something in public, and constantly tells everyone he has access to about the consequences if I do not follow his orders, what do you think I would do?
Now the subject of the story is the Fed Chairman and his boss happens to hold the most powerful position in the world. The audience includes everyone with access to the internet. So the question is - would the Fed Chairman cave in? That is an easy question - who wouldn’t? Just because that he is the chairman of the most important Central Bank does not mean he is not human. The rate cut decisions are made by humans, not by a robot or AI. No one wants to take blames, especially a blame as big as being the culprit for the next economic recession for your own country - sadly whether it is true or not does not matter here. As for the boss, it was also easy to predict that he would repeatedly implement high-pressure tactics to get what he wants as he would greatly benefit from another easing cycle and soaring stock market.
Example Two
The Japanese real estate listed space has seen a major improvement with regards to shareholder return. As a result, share price performance of the sector in 2019 outperformed other sectors by a big margin. However, many investors were sceptical before this happened and they would ask - are the management really starting to care shareholder values?
Meanwhile, I have a different perspective and my question is - what would the management get when share price goes up or stated differently, would they lose anything if share price goes down. Now the game becomes a lot easier. When a management team is meaningfully compensated by share options, they gain when share price goes up and they lose when the opposite happens. Similarly, the management would lose their jobs if share price goes too low and the company gets taken over. This is, again, human nature - a great majority of human population put their own interests ahead of noble causes. Nothing to be ashamed of, for that is what motivated us to advance as a species.
2020 is just around the corner and 2019 has been a year full of changes for me, good and bad, but mostly good! I am grateful for everything that has happened, for that is what made me a better person day after day and one step after another.
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