Here’s a list of 10 major mistakes in managing your money. It is compiled by our Church Pastor. And even if our Pastor is not an expert in finance & investment, I must say it’s a pretty good guide:

1. Too Much Debt – no elaboration needed

2. Get Rich Quick – no elaboration needed

3. Don’t Save – no elaboration needed

4. Being Lazy – no elaboration needed

5. Co-sign or guarantee a Loan – no elaboration needed

6. Being Stingy (or Greedy)
There’s a saying some people live by:
Get all you can.. Can all you get.. Sit on the can!

If you are one who always let someone else foot the bill, if you are one who’s always counting the cost, then sooner or later you will feel very empty indeed.

7. No Budget – no elaboration needed

8. Buy-Buy-Buy! – Sale Sale Sale! The more you buy, the more you save…. sound familiar?

9. Choosing Wrong Career – no elaboration needed

10. Not getting God’s direction – no elaboration needed

Our pastor was speaking from the book of Ecclesiastes, which is widely believed to be written by the richest man who ever lived.

Nope, that man is not Bill Gates or Warren Buffet but a guy called King Solomon. When God appeared to Solomon in a dream, Solomon could have asked for anything he wanted including all the money in the world.. but he asked for wisdom. God was pleased with his request, and Solomon got a big bonus from God:

And I will also give you wealth, riches and honour, such as no king who was before you ever had and none after you will have.
2 Chronicles 1:12 (NIV version)

In Ecclesiastes 11, Solomon in all his wisom and riches said:
He who observes the wind will not sow,
And he who regards the clouds will not reap.
(NKJV version)

As investors, it is important that we stay invested and grow our wealth over time.  There will be ups and downs, I’m cultivating myself to invest regularly in this up-cycle but my choice of stocks is increasingly defensive. The large caps are trading well over 15x PE ratio, while earnings growth is generally sluggish. Just as we had extreme Fear this time last year, we will move towards extreme Greed.

Selectively picking smaller caps with good dividends and REITs is what I’m doing for now.

There you have it… a pretty good definition of greed. ALWAYS NEVER ENOUGH.

I am quite AMAZED BY this stockmarket run. My portfolio value has moved past its peak (which was mid-last year when Bursa Malaysia KLCI was 1,400+ points).

But how do we repeat our investment performance from here on? Experts are saying that the easy money has been made, valuations are not excitingly cheap and the bull run has come too fast, too furious.

As I reflected on this for the past two weeks, several things came to mind.

1) Firstly I am truly AMAZED WITH the truth of God’s word in the way I choose to invest. From my past experience:

When I bet big, I usually loose
When I bet small, I usually win

OK before you conclude that I’m a total loser, let me share some insights with you…

When I bet big I usually loose
It’s not the amount that counts, but it’s actually where your heart is. The Bible tells us that God knows our hearts and He is greater than our hearts (1 John 3:20). In the past on occassions when I added to my position in a bigger way, I may or may not know it, but most of the time I was probably going for fast money. This is greed.

What about Warren Buffett? Didn’t he say: Be fearful when others are greedy, be greedy when others are fearful? Well I hope he was speaking figuratively. Look at what Jesus says:

Be on your guard against all kinds of greed; a man’s life does not consist in the abundance of his possessions.
Luke 12:15

this is one of those few occassions where I’d say don’t listen to Buffett.

When I bet small, I usually win
Recently I’ve had the privilege to add to some of my holdings at dirt cheap prices. I had not finished adding to it when the market started running. But with the little that I did invest, it helped to produce nice percentage returns in just a few months.

I’m probably 30% under-invested now. I made some wrong calls. I thought the banks were going to go lower first before recovering. But I’m glad I had the courage to buy AMMB around at RM2.00 to 2.50 when some analysts were prophesying end of the world.

I thought that Sime Darby was way overvalued at RM5.00 and IOI Corp was not cheap at RM2.50. I still hold that view but obviously the market doesn’t agree. I had lost hope on my Bumiputra Commerce shares at RM5.00 after entering at around RM9.00. So captured was I by the drumbeat effect that I had failed to seize the opportunity as a value investor.

But Peter Lynch was right. You can make mistakes, but even if you get 6 out of 10 calls right, you’d be smiling.

Fund Managers do have one advantage over us private investors…. they don’t invest their own money. Think about it…. this means they are not as emotionally tied to the money. They are not trying to get rich fast with their investment fund. But they are managing it in accordance with the investment mandate given to them. And most of them will be glad to flip out their fancy charts showing you how they outperform their benchmarks.

In truth, we should cultivate this attitude. The Bible tells us that all the money that we have belongs to God. In Mathew 25, Jesus tells a parable of 3 servants to whom are given different amounts of talents to invest. The story is much like our own lives where God has given each of us different talents and resources. If we are faithful and invest with the right heart, then we can claim God’s promise:

He who gathers money little by little makes it grow.
Proverbs 13:11

2) Secondly I need to cultivate a habit to keep improving as an investor.

Some commentators say that “the easy money has already been made”.  But one truth I learned long ago is that there will always be opportunities in the market. What it means now is that I need to work harder to uncover such opportunities, compared to 6 months ago.

I have several bad investment habits. I like to buy at super cheap prices and tend to hold on forever. Most people don’t have this problem. I am resolving to develop good habits – I will continue to buy little chunks of good stocks at fair prices… even when I won’t get them dirt cheap.

I’ve got some smaller holdings in stocks like NCB Holdings, Starhill REIT, Tower REIT and so on. These are very nice yield plays and I will add to them at the right time (as I have more savings). I am keeping a slightly defensive stance for now.

I will also need to sell stocks and take profit sometimes. Buy and hold may not always work.

We first make our habits, then our habits make us.
John Dryden

The Right Focus
Don’t look at your portfolio value every day. It is a meaningless figure. If you had asked me about my portfolio in January 2009, I would have gone away and buried my head in the sand. Never would I have imagined that 7 months later, it would look better than ever. GOD IS FULL OF SURPRISES!

As a private investor, we have one key advantage over fund managers. We need not be so concerned with fluctuations in our portfolio value. Even if I were to lose 20% in my portfolio value when I still have some cash to invest, I wouldn’t be too upset. If you continue to build an increasing stream of dividends, then your portfolio will go north in the long term.

Notes:

John D Rockefeller (1839 – 1937) – although regarded by some to be a ruthless capitalist, he was reputedly the world’s first philanthrapist. According to Wikipedia, Rockefeller had been tithing to his church since his first paycheck. His giving grew in enormous proportions as his wealth grew. Some estimates have it that he gave away more than $500 million in his lifetime to various causes in education, medicine and scientific research.

In the Parable of the Shrewd Manager (found in Luke 16 of the Bible), Jesus says:
 
“No servant can serve two masters. Either he will hate the one and love the other, or be devoted to the one and despise the other. You cannot server both God and Money.”

For some of us, the single biggest test in our lives is MONEY. For the sake of money people will do almost everything… lie, cheat, hate, backstab and perhaps more.

I believe that for individual investors, learning to deal with our greed is a key factor to succeed in the stock market.

I have lost money on the stock market before and it was largely because of greed.
 
In hindsight I consider the losses to be ONE OF THE GREATEST BLESSINGS in my life. Stock market players usually tell you how much they make. They keep quiet when they lose. You never hear of the loss.

But if you reflect on the loss, it can be a source for great lessons in your life.

Dig into your wallet now and reach for your largest note. See that it has four corners, right? So remember money has four legs. We humans have two legs…so we cannot run as fast. If we chase after money, it will somehow outrun us.

That was something I picked up from a conference speaker. Simple as it may sound, it also contains a powerful truth.

God clearly teaches us not to be greedy and not to focus our lives around money. See what Jesus has to say:

Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal. But store up treasures for yourselves in heaven, where moth and rust do not destroy and where thieves do not break in and steal. For where your treasure is, there your heart will be also.
The Holy Bible, Mathew 6:19 (NIV)

This teaching goes against the very grain of our human nature. Society today teaches us how to excel in our studies and in our work… so that we can make more money, buy more things and be one up on the other person.

For many the stock market is a way to get rich fast. If you are such a person, you are really setting yourself up for disappointment.

People Make Mistakes

In his book One Up on Wall Street (Page 74), Peter Lynch likens stock market investment to the game of Stud Poker.

“Betting on seven-card stud can provide a very consistent long-term return to people who know how to manage their cards. Four of the cards are dealt face-up, and you can not only see all of your hand but most of your opponents’ hands. After the third or fourth card is dealt, it’s pretty obvious who is likely to win and who is likely to loose, or else it is obvious there is no likely winner. It’s the same on Wall Street. There’s a lot of information in the open hands, if you know where to look for it. By asking some basic questions about companies, you can learn which are likely to grow and prosper … you can never be certain what will happen, but each new occurrence – a jump in earnings, the sale of an unprofitable subsidiary, the expansion into new markets – is like turning up another card. As long as the cards suggest favourable odds of success, you stay in the hand.”

I’ve never really thought of the stock market as a poker game, but the truth is that there is a lot of uncertainty in the market. The more I think of it, the more I realize that you can be the best investment analyst in the world, yet there are just tons of factors that are beyond your control. We are in a game where we need to put smart bets and find grace through divine guidance.

Lynch says that consistent winners accept the fact that “they’ll occasionally be dealt with three aces and bet the limit, only to loose to a hidden royal flush. They accept their fate and go on to the next hand, confident that their basic method will reward them over time. People who succeed in the stock market also accept PERIODIC LOSSES, SETBACKS and UNEXPECTED OCCURRENCES. Calamitous drops do not scare them out of the game.”

Hmmm… so it’s OK to loose money every now and then. Feeling better already?

If like me you are dealt with investment losses from Black October 2008, take heart. You are in a casino where you can tilt the odds in your favour. There’s heaps of free information to help you invest. Make a resolution to learn from your mistakes. Even the best experts make mistakes. Here’s Peter Lynch again:

“If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. Six out of ten is all it takes to produce an enviable record on Wall Street.”

Change Your Focus

Take a break from routine to refocus. Is money the only reason you are in this game? Say you make a lot of money later on, what do you plan to do with it?

Do you know where your treasure is? … because your heart will be there too. The Apostle Peter said this in his writings in 2 Peter 1:

Make every effort to add to your faith goodness;
and to goodness, knowledge;
and to knowledge, self control;
and to self control, perseverance;
and to perseverance, godliness;
and to godliness, brotherly kindness;
and to brotherly kindness, love.

Peter shared close fellowship with Jesus, so you can bet that he knows a thing or two about storing treasures in heaven. And for the people who find great delight in God’s commands, look at what God says:

He will have no fear of bad news;
His heart is steadfast, trusting in the LORD.
Psalm 112:7

I hope you have been blessed by this article which will be my final one for the year. I will continue to share with you over the coming year. May God shower you with His wonderful love and grace. May He be a guiding light in your investments and finances for 2009.

Happy New Year 2009!

Recently in my Church Cell I was reminded of how we should always be humble. I’ve never really associated humility with stock market investment but after reflecting on it, I must say it is extremely relevant.

All this while, I’ve been wandering in the dark thinking that I know it all.

The truth is well put by Peter Lynch:

“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”

I hear stories of people who suffered the 1997-98 stockmarket crash and never recovered. This is sad indeed.

If you have been in that situation, my heart goes out to you. You probably hate the stock market so much that you vowed never to buy stocks again. If this is so then perhaps I can offer you a fresh perspective.

I’ve lost money on the market before and I know how it feels. It was a humbling experience. For a time I didn’t want to touch the market.

But I’m glad I am now over that phase.

See, the stock market itself isn’t necessarily bad. It’s just a tool in the economy for people to use. What is bad is in our heart and attitudes, in the way we invest. Our motive is to get rich quick so we can satisfy the cravings of our heart. We want that new BMW, Gucci handbag, or that prized property. The bible says:

Guard your heart more than anything else
Because the source of your life flows from it
Proverbs 4:23 (God’s Word – Student Edition)

You know, some of us are fitness fanatics. We jog and run miles and do everything we can to keep our heart in tip-top condition. We know that when the heart stops pumping we die.

In the same way, how many of us actually exercise our spiritual heart? When do we say enough is enough when it comes to money? When do we put our own ego aside and say maybe the other person is right?

Humility means that when we make a mistake, we admit it and rely on the grace of God to move on. The more humble we are, the more of God’s grace we receive in our lives.

Palm Oil
I’ve always liked palm oil. It’s a useful commodity, something that the world needs that we can supply. But when CPO started reaching RM3500 per ton, I started disliking it as an investment proposition. And looking back I was right about this.

Am I saying this to boast? Far from it! When we are right we tend to be overconfident in ourselves. And that is where we make many investment mistakes.

You see the palm oil analysis to me is quite simple… producers can produce at a cash cost of around RM1000 per ton. Basic economics would tell you that there are super normal profits in the industry and supply will increase because everyone wants to make more money, and therefore price will drop. It was only a matter of time. But everyone was bullish. Analysts were screaming Buy at 3000 and when it reached 4000 it was still a Buy. What garbage I thought… to a point where I was scornful of all this palm oil analysis!

I realized that each good call I made caused me to be more confident about myself. And guess what? The obvious happened… I made some bad calls.

Humility would say that everything happens according to God’s timing. We ought NOT to think ourselves more highly than others.

Keep an Open Mind

The smarter you are, the more you think you know. But we are told that knowledge puffs up, while love builds up.

“The man who thinks he knows something does not yet know as he ought to know. But the man who loves God is known by God.”
1 Corinthians 8:3 (NIV)

Humility would say that despite not agreeing with the analysts on palm oil, I should respect their call. In fact my closed mind has both caused me to lose money and kept me from making money on some stocks.

IOI Corporation started at around RM3.00 in the year 2000, before its spectacular run. If we adjusted for bonus issue and share split, I estimate that the recent peak of RM8.60 would equate to an adjusted share price of around RM60 (someone please correct me if I’m wrong). So it has gone up 20 times in the span of 8 years! But my closed mind said at RM5.00 that it could not go up much further. The analysts who were still calling Buy are just plain silly. Of course, I was wrong about that too.

I am not afraid to admit my mistakes to you. I hope it will give you more insight and wisdom and if you are blessed by it, then it would be a cheap price to pay.

(Picture Source: One Year Bible Images)