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Tuesday, December 2, 2008

Following Stock Calls

This evening, in an honest discussion with "dylan" who is a keen follower of "Samgoss" blog, Windsurfer chatted with us and shared his personal story and insights about following stock calls from Samgoss. The following are his exact words, and reproduced here with his permission. I have not edited any words (save for one minor spelling correction).

I am reproducing it here because I think it raises important and critical questions about following stock calls blindly, as well as very valuable lessons for any investors who has lost nearly everything, and does not learn how to fish for himself, and relies purely on others.

Windsurfer: i know Samgoss for long time ago ... actually it was through the OSK forum ... back then the website was stock188.com i think ... Samgoss appear in the forum preaching Fundametalist approach to picking stock ... i think i was in 2001 or 2002 ... back then the market was very slow ... i mean REALLY SLOW ....

Windsurfer: so back then i was just starting to invest (play) stock ... so alot of things dunno ... ask alot of stupid questions( i still do) ... so i started to follow Sam's pick ... because his reasoning was acceptable to me ... fundamental approach... looking PE ... things like that ... as he also made enemies in stock188 forum as well ... these are mostly TA people...

Windsurfer: I make some money from Sam's pick, some notible great calls was YTL-WB, IJM, PARKSON, JUSCO, LIONDIV( although this one i thin Tinglek made the call 1st) etc ... But i didn't really follow all his calls, and some of his calls didn't work out as well... Sam's appraoch is very simplistic, sometimes, even too simplistic ...

Windsurfer: I follow Sam's call blindly for sometime, some very good, some so so ... but i would say most is pretty good, but because i didn't follow all his pick, so i did not make the most money, but when i follow, the stock didn't perform quite as good. Maybe my luck not so good ... Anyway, the call to buy MIECO-WA was the most damaging .... i lost all of my gains for a few years and then some ...

Windsurfer: i was reduce to ZERO, after that, i realize i need to learn to invest by myself, i understand that learn to fish by myself. I believe that Samgoss is geniune, i believe that he has no intention or that he is manipulating anybody, most of his psycho fan follow him because his track record is very good ... but, when discover the investssmart blog, Dali's blog, and this chatbox, i find myself learning alot... especially from Dali ...

Comments

1. "when i follow, the stock didn't perform quite as good".

This is a very important issue that needs to be examined carefully.

Why didn't the stock perform as good as for the caller himself?

Is this because the follower didn't follow closely enough? Is it possible to ever follow closely enough? Is this because of inevitable time delay since prices can move up quicker than the blogger can blog or inform others? Or (heavens forbid) is this due to manipulative practices, i.e. you will never be able to get the same performance?

Very often, when stock calls are made, the price will usually have run up. This could be due to natural supply and demand, or price manipulation. The problem is for 99% of the followers, they will not be able to tell the difference. The risk is of course - are you buying off the caller's earlier buy? Then, you could end up taking the risk, with the caller having minimal risk. He doesn't need to sell all. Instead, he could buy a bigger amount first, and then distribute on the way up to his followers, thereby minimizing or zeroizing his own personal risk. And at the right time, he sells all.

Hence, I always believe that it is better to learn how to fish for oneself, than to follow stock calls. The benefit is that when you learn how to fish for yourself, then, you can be the first one to spot such bargains. Therefore, knowing the full reasoning is just as important, or more important than just knowing the stock call itself.

2. " i didn't follow all his pick".

This is a difficult issue. Normally, traders are encouraged to follow a constant and disciplined stock decision making process with a positive expectancy. And in this case, all stock experts will tell you to ALWAYS follow the signals generated with no exceptions. Why?

Because the positive expectancy is generated statistically, and have been proven from experience - e.g. it may even have been backtested against a large sample of stock trades before. Miss out some, and those trades which are missed out could turn out to be the really big moves that explains 80% of your potential returns or otherwise.

However, when it comes to blindly following stock calls, then, many additional problem arises.

For example, we cannot be certain that the stock caller always call when buy signal is generated. He might tell you 5 out of 10 times, and keep the other 5 to himself. This means that statistically, you may be at a disadvantage, because he may be keeping his best 5 trades to himself without necessarily having to disclose his best trades to you.

Another problem arises because we don't know the algorithm. What exactly is his decision making process? And for discretionary traders, the truth is sometimes, we can never know, because human decision making process which can be explained to others can never be 100%. We can explain some things, and others most things, but never everything, however much we try. In other words, for something as complex as trading stocks, we can never spoon-feed another. Like an infant learning to walk, eventually, the infant himself must force himself to learn how to walk. As parents, we can only assist and make the process perhaps a little bit easier.

Hence, again, I am a deep believer that it is better to learn how to fish for oneself.

3. MIECO-WA was the most damaging .... i lost all of my gains for a few years and then some

This is very important to understand. The nature of stock market is that all it takes is a single mistake, and it can actually wipe you out completely if you don't know what you are doing. Especially warrants.

Most people don't understand this. They think that if the past 5 calls works, and the next 10 calls work, and the 11th call doesn't work, they think they'll come out ahead.

But if the 11th call doesn't work, and if the guy is greedy and put 100% of his capital into that 11th stock, and if that turns out to be a warrant or a stock that goes to zero, then, all his past gains means nothing. Zero.

Buffett likes to say that when you take 25 x 24 x 23 x 22 x ... x 0, the end result is always ZERO. In other words, past gains means nothing if there is no prudent money management.

In the US, and overseas, this is a known manipulative tactic used by syndicates there. They know that statistically, greed in stock market is a relatively stronger force than prudence. So, they make sure the first few calls works in varying returns. And when most followers least expects it (usually, this coincides with the time when everyone is confident the next call will work, and there is huge volume), the next stock turns out to be the stock that the syndicates actually want to distribute.

Trying to prove beyond a doubt such syndicates in practice are almost impossible in real time. However, applying common sense is very easy. Hence, my position that I will never endorse nor promote another "stock call" service / blog unless I fully trust the service provider. The truth is - as you will have noticed from this blog - there is no such provider that I fully trust. Over the Net, it is important to never trust anyone, because you will never really know if the other person on the Net is genuine or not. Written words over the Net are cheap, if not free.

4. i was reduce to ZERO.

At this point, "dylan" asked Windsurfer this:

dylan: wind , yes miecowa is koyak.. but remember he asked us to swap to ijmwb @0.38 ? there we made kow kow to recover all yr losses ?

I don't know what transpired in the past. And it is probably worthwhile to explore this phenomena further specifically to better understand what actually transpired.

However, what I would say at this jucture is that it is actually quite common behaviour amongst investors/traders, that when one has built up substantial gains over a reasonable period of time (say months or years) by following others, only to see 100% of the gains lost, then, confidence in that person is completely destroyed.

Overseas syndicates knows this, and will make sure there is another trade that works ... "for you to swap to" .. in order to retain their clientele. The problem is that if you are a follower, then, psychologically, when ALL of your past gains is lost, you are devastated emotionally. You are usually in no position to be able to be objective about anything.

The next trade that works big (such as IJM-WB) is a known syndicate method of trying to retain their clientele for future followings, without having to start from scratch.

Again, I don't know if there are such syndicates here in Malaysia's stock market. And identifying them is usually very difficult for retailers. So, even if there is just 1 sign that I don't trust them, I don't follow them. Better be safe than sorry.

And it's always better to learn to fish for oneself. Initially, the results are less good, but after the first year, most learners should already aim to beat F.D. returns, and get at least market returns. And in a few years time, many of the dedicated ones will find that it's actually not too difficult to beat market indices. And by this stage, you should find your self with genuine financial independence, because you should then be able to fish for yourself, without having to rely on others. Isn't this a worthwhile goal?

Yes, it is not easy to learn how to fish for oneself. Initially, you will have to pay tuition fees to Mr Market. We all do. Even I and Samgoss did when we first started out, and even Windsurfer and Dali and everyone else did. Even Buffett did as well. No one can escape this "tuition fees".

Which is why, there are things in this world like investment groups, investment blogs, etc. for people to bounce ideas off each other for checks and balances. And hopefully, reduce some of the painful lessons.

Which is also why I decided to set up this chatbox 1.5 years ago so that honest discussions can be had without feeling fearful of discussing. The most important thing in discussing is one's own self-discovery process. Learning to trade/invest is much harder than it looks because one must be brutally honest with one's own strength and one's own weaknesses. Most of us are really unable to identify, confront, admit and accept our own weakness.

It is not to say that it is impossible to profit from syndicate activities, especially if there is a high win rate. For example, relatively straightforward strategies may be designed to come out ahead, but it requires constant discipline. And since you need constant discipline anyway, why not learn how to fish for yourself?

Some Concluding Remarks

Here, I want to raise the issue of trust. Trust and believe in the stock caller is important - in fact the single most crucial element - before one can follow another's stock call. To me, it should go well beyond "proven track record". Why? Because "proven track record" can always be manufactured, unless it is externally audited by a reputable external auditor (and even then, one still cannot escape the possibility of fraud such as Enron, Worldcom, etc.).

And how does one "trust" another? To me, trust comes from integrity, honesty, sense of fairness to oneself and to others, and develops over time. Trust must be earned, not given. And trusts comes from looking at the entire "package", not just focusing on one aspect (e.g. "so called proven track record") at the expense of ignoring others (e.g. arrogant behaviour, unfair comments, etc.).

When I was young a very long time ago, my mother always tell me to pay attention to the details, when judging a person. Don't just listen to what he says, but observe everything. If a person gossips about others to you, pay attention to that and ask yourself this simple question - what makes you think he didn't gossip about you behind your back?

Similarly, if a person does something that is unfair to another person, what makes you think that he is going to be fair to you? Can you really trust such a person?

And if I can't trust such a person, why should I allow such a person's stock calls and blog be endorsed and promoted in my own blog and chatbox?

Anyway, I am a deep believer that human beings are not all bad or all good all the time. Sometimes, when we are younger, we do things that we thought was right at the time, but years later, when we reflect, we realize how silly we were then, and wished we haven't done such things. I know, because I was young and was such a person once before. The smarter ones do change, but unfortunately, this usually takes an extremely long time. And things like trust must be earned over time.

Acknowledgement: I would like to take this opportunity to congratulate Wind for sharing his true story. If true, it is clear that Wind is indeed a courageous and responsible young man. Despite losing and being reduced to ZERO, he still does not blame Samgoss at all, and does not appear to have any malice or strong feelings against him. This is a mark of a responsible individual who takes full responsibility for his own actions. On that note, I salute him for his courage and keen observation.

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