Saturday, 26 May 2012
Investment Philosophy: Part 1
"Put all your eggs in one basket, but watch that basket carefully" - Warren Buffett
I first encountered this phrase when I was attending a Value Investing course conducted by a prominent stockbroker Mr Robert Tay in 2003.
I treated this phrase with some scepticism at first because till then, mainstream investing media always promotes diversification in order to protect your capital and prevent you from making a significant loss.
Now this philosophy is saying we should risk it all in one or two stock picks!?
Isn't it dangerous!?
In 2003, I spent hours researching this company analyzing its fundamentals.
It was a monopoly with great cashflow, management and prospects.
The current price was a steal!
Thus, I decided to buy SGX @ $1.10 and managed to sell at $2.20. A 100% gain!
But i only bought 1 lot, even though I could have bought more.
Looking back, my amount of research truly increased my probability of making a profit in the stock.
Shouldn't i have bought more to do justice to the hours spent on my research?
Thats when this philosophy came back to me.
Since then, I have decided to put a significant proportion of my net worth in an investment once I have thoroughly analyzed it.
One of the times I applied this philosophy was in 2006.
I put a significant % in SPC (privatised 2009).
Oil prices then were thrashed badly.
However, SPC's stock was sold down unjustly.
I bought in batches from $4 to $4.50.
Soon after, oil price recovered.
I sold all at $6.55 in 2008, making approximately a 50% gain.
Though % gain was lesser than my SGX trade, the amount I made was more!
This example, coupled with many others I seen over the years have convinced me that this philosophy has its merits if applied correctly.
Caveat here is you MUST HAVE THOROUGHLY ANALYZED the company.
Investing is ultimately hard work, not gambling. :-)
This same philosophy is repeated in an Investment Classic titled THE ZURICH AXIOMs written by Max Gunther.
It is located under the section "Always Invest for meaningful gains" - Minor Axiom I.
I would highly recommend this book for anyone who wants to start out investing.
Book Review --->