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6/12/2010

Step aside Warren Buffett

The game of stock investment is no longer the same game Buffett knew in the past. Then it was just picking stocks on fundamentals, buy and sit on them and in the long run, well managed companies with growth stories will run up the ladder, paying dividends and higher stock prices. The formula was simple and logical. Buy only good companies. Today stock investment is a new ball game. Calling it investment is a misnomer. It is no investment but pure speculation or gambling. The nature of the game has changed completely. Stocks are being substituted with derivatives, options, covered warrants, ETFs etc that interests in the actual stocks have diminished. Money is placed on all the other instruments rather than the stocks. Companies hardly offered the conventional warrants which have died a natural death. And if the trend goes, stocks too will die a natural death when trading is on derivative instruments. Then there are the big money that are used to ramp stocks up and down at the slightest news or excuses. Either way, the big money will make more money. The conventional investors sitting on their golden stocks will see them battered down one day or up the next, sometimes with little correlations to the worthiness of the stocks and their businesses. With high powered and high speed machines and marginal commission to pay, the big money would take full advantage of their unfair advantages to push the market and stocks anyway they want and cleaning the investors of their long term investments. Investing for the long term, being paid dividends, bonus shares, waiting for prices to grow steadily are bad premises that no longer hold water in stock investment. It is hit and run, going with the tide, or the market makers, provided the investors guess it right and hitch a ride. Investing stocks for the long haul is likely to be a big roller coaster ride with many shocking moments, and may not see the stocks appreciating in price over time. It is all about selling and buying papers ie derivatives with some having zero intrinsic values.

6 comments:

Anonymous said...

You think these derivatives will work in the long run? I don't think so. many pros are already screaming for their removal - e.g. Soros is strongly anti-derivatives. Another round of financial collapse will see more urgency to go back to basic. Just to draw a parallel - like Kong Hee and his CHC, that uses modern concert-like sermons to drum up followers and hence income, many a time it has nothing to do with God and Bible. You can see it's demise on the horizon.

Remember what Abraham Lincoln once said - YOu can fool some people all the time, and all the people some of the time. But you can't fool all the people all the time.

Anonymous said...

Investmenting in stock is no different from gambling.

In gamblings, the gambling operators, such as casinoes, bookies are always the winners.

But for institutionalized commercial houses to become gambling houses, it makes a huge mockery of commercial governance.

Any government that allows their governance of state affairs to be mocked, must certainly equals a failed state. Chaos ultimately will beset such countries.

Chua Chin Leng aka redbean said...

As long as the supertalents refused to think and just go along with the tide, like they said, everyone is doing it then it must be okay, then derivatives will continue to be sold.

Reminds me of the toxic bonds.

I forgot that ours is a free market and anything goes as long as there are willing buyers and sellers. People will buy all kinds of papers, estates in the moon, land banks, and whatever, sure, toilet papers too.

Wally Buffet said...

Pop religion with pastors dressed like porn stars and hedge funds screwing the world's financial equilibrium are just deviant passing fads that will just fade into the sunset when people awake from their stupor and know the snake oil that they are selling.

The Buffetts, Soroses of this world will still stand when the rest have turned to dust and disappear.

With stock investing, buying into good companies at low prices in a down market with a medium to long term investment view and doing it with one's own money is the way to go. Markets gyrate. It's only the speculators that gets worried or euphoric. They do the same in casinos when they roll the dice.

I absolutely disagree with what you say in your last paragraph. Ramping or dumping of shares causing major shifts in prices only affects those that trade short term. The analogy can be found in property investments. If you buy a property to live in, you'll be less likely to suffer from swings in prices because it is academic but if you are a property speculator, you most certainly may lose your pants in the process.

Anonymous said...

And if you loose your pants, don't blame anybody. Returns that are too good to be true are always risky. You dabble in it, you take the risk. That's the gamble you take.

Chua Chin Leng aka redbean said...

The problem with the current system is that investors are encouraged to punt short term, punt derivatives, instead of the traditional way of investing.

Stocks, currencies, commodities, properties etc are now highly speculative. Yes, paying $36m for a 99 yr lease is quite crazy really. Then there are people buying arts and willing to pay millions for it, hoping that another sucker will come along to pay more for it. And that is only a piece of canvas and some oil paint or water colour splashed on it.