Oct 27th, 2007 by Martin Lee
James Skinner is the first speaker after lunch. I have listened to him before and really liked his presentation. Just like the previous session, he did not disappoint this time round. He shared some radical ideas about investing. Here are the points he covered in this session.
You can become a successful investor if you can control your emotions. The attributes of greed, fear and more importantly boredom.
Making money is easy. Not losing money is more challenging.
Successful investing is not very exciting. For example, Warren Buffett bought Coke and didn’t do anything to it for decades.
No one wakes up in the morning knowing for certain one thing that is going to happen in the world. No one knows the direction of a stock with 100% certainty.
If you are not confident what something is going to do, do nothing. Do nothing. The one advantage that the retail investor has over the big fund houses is that we have the option of doing nothing.
Another advantage for us compared to a big investor is that the cost of buying the same stock would be lower. Big purchases would push up the price.
Once in a while, if you see something that you are pretty confident in, go for it.
James talked about the US trade deficit, and how all the other countries that US were buying stuff from were financing the US by buying the US treasury bills. The biggest worry any central banker had was about his holdings of US dollars and how to reduce his position gradually without triggering a big selldown.
Another region that James Skinner is Vietnam. Vietnam is a choice of country for companies wanting to diversify their manufacturing from China.
An option is leverage at a high interest rate. Leverage is a tool for multiplying volatility. Volatility compresses time.
An option is thus a tool for increasing the volatility of a product. Using an option requires a premium (or paying an interest). You want to leverage something that is non-volatile, and not something that is already volatile.
The price of an option is driven by the volatility of the mother share.
If you want to trade something, you need to understand what is the primary driver of the price. Without knowing so, you will have no basis of prediction. Investing is all about prediction.
James Skinner then talked about the US sub-prime crisis, going into a detailed explanation of the leverage being used and the magnitude of the problem.
James gave a very good demonstration to illustrate a point. He asked the audience whether we had money in our wallet. And then he asked if someone could pass a $10 note to him. After a person passed the note to him, James put it into his wallet and never returned it to him!
Do not in any situation give money to people you do not know, on terms and conditions that are unclear, and without understanding the underlying risks that are involved, because the money will not come back to you.
What a lesson for that person.
News drives the price of stocks.
Interest rates (and default rates) drive the price of bonds.
Demographics and population drives the price of real estate.
Demand and supply drives the price of commodities. Whenever you invest in commodities, you are exposed to event risk.
When you are investing, you are paid for the risk. The only thing you ever get paid for in investing is risk. Risk is the possibility of bad stuff happening. Before you invest in anything, you need to list down all the bad stuff that can happen.
When you put money in the savings account of a bank, you get paid for default risk.
When you buy fixed deposits, you get paid for default risk and liquidity risk.
If you are an investor, you need to know about all the different kinds of risk.
If you know what all the risks are, you can do something about it. If you do not know what the risks are, you are toast.
Think of yourself as an insurance company. Reinsure the risks you are uncertain about.
Your success as an investor will be directly related to the number of risks with which you are familiar, and the number of risks you don’t know and reinsure. You don’t want to get paid for taking risk that is painful for you.
- Market risk can be eliminated by taking a short position on the shares of another stock which is in the same industry of the original share you bought. Other ways include settting a stop-loss level or buying a out of the money put option.
- Liquidity risk in a real estate can be mitigated by setting up a revolving line of credit with a bank that allows you to draw on any time you want.
- A fund manager has a much lower tolerance of volatility risk than you. If the price falls too low at the end of the quarter, he might lose his job. You do not have to be concerned about the price on particular days.
Everyone should prepare and keep a list of all the kinds of risks you can be exposed to, and another list of reinsurance tools that can help you “outsource” some of those risks.