Wednesday, November 28, 2012

Why having an investment philosophy is important

If you are a reader of my blog, you probably have heard of Muddy Waters and OLAM. Let’s look at the 4 charts of OLAM, NOBLE, WILMAR, GOLDEN AGRI .

Poor performance relative to local STI. In fact if you look at commodities asset class as a whole, most of them are performing poorly, with the exception of physical gold and oil.
Recall my post here in 2008 where I blogged about my investment philosophy. I wrote at one point on NOT investing in high volatile stocks and assets classes.

“I do not have high risk tolerance and will avoid investing in equities that are highly volatile in nature. S chips, penny stocks and commodities are almost out of my consideration. Unless I have strong reasons and have done due homework, I will not invest in them, at least in the near future.” SBC (2008)
I do not invest in volatile stocks from simple observations. When a stock falls from $1 to $0.90, it only has to rise 11.11% to regain the 10% drop.
 However, if it falls from $1 to 0.50, it needs a good 100% rebound for it to go back to $1. And we know volatile stocks are rarely high dividend counters, there is little hope of even recouping one’s initial capital when you are hit with a 50% loss.

Making good investment decisions are not the most important. Avoiding any bad investment is the critical success factor. Do not forget it is human nature to hold on to losing stocks and selling winners too early. Hence one is likely to book a 20% - 30% gain rather than cutting loss at 20%-30%.
This is the importance of having investment philosophy. Have a sound one and have the discipline to adhere to it.