Monday, 16 September 2019

CHOICE PARALYSIS : TOO MANY OPTIONS MAKES YOU A LOUSY INVESTOR


Let's talk about nasi lemak today.

Similar to Subway sandwiches or the Family Mart oden, nasi lemak is defined by customisation. The final output is the product of an assembly line offering limited but sensible options.

At the nasi lemak stall, your choices are broken down similarly: the carbs (rice), protein source (eggs, chicken, beef, squid, etc), the usual peanuts and anchovies, cucumber slices, and a dollop of shrimp sambal to top it off. 

These sensible options are not meant to disrupt the natural order of things.

Now imagine a totally radical take on the nasi lemak or Subway sub. A boundary-busting culinary enfant terrible decides to offer you unlimited options on what goes on your plate. Instead of normal nasi, this Roadside Ramsay offers you 15 different grain options to choose from as a base. Put in a bit of quinoa with that, or some Japanese black rice. 

Instead of fried peanuts, you can get 10 different types of nuts, cooked ten different ways. Boiled almonds, anyone?

Because we're too hipster for just sambal, perhaps you can replace it with kimchi that has been fermented for two years. Hot sauce, sriracha, you name it. Have the nasi lemak of your dreams. 

Your only limit is your imagination. But do consider that too much imagination can also be the absolute bollocks. 

To press our point, beware : the following photo is not safe for work. It will be the worst thing you'll see today. 


"Every day man dishonours his food..."


PARALYSED BY TOO MUCH STUFF

Have you ever sat in front of your TV browsing for something on Netflix/Astro channels to watch for a solid five minutes, only to end up re-watching an old episode of Friends that you've probably seen a hundred times?
Have you ever spent about an hour packing your clothes for a holiday trip, crippled by indecision about what to wear? 

We're not suggesting you should ditch the mankini for something that leaves a bit more to the imagination - that's your choice - but our point is that indecision can be time consuming. Having too many options can slow down your actions. 

Instead of doing, your thinking is hindering your progress. Choice paralysis.

It's the equivalent of the Jam Experiment which you can read more about, but the gist is this:



Too many choices can lead to bad output. When it comes to hipster nasi lemak, all you're risking are your digestive system and the boundaries of good taste. You've already gone past the part where your family has disowned you.

But in investing, you're risking severe financial losses, and just as bad, subpar returns.

Diversification and creativity are great, but only to an extent. Know the symptoms of bad decision making and perhaps you might be able to avoid them.

KNOW YOUR STRATEGY, KNOW YOUR LIMITATIONS

Another hypothetical; consider an ice cream man and a neurosurgeon. They are good friends; the neurosurgeon and her kids get free sundaes when visiting the friend's home. The ice cream man gets his endoscopic thoracic sympathectomy done by his good friend when he really needed it.

OK, but would you trust them to switch jobs? Absolutely not, right? The ice cream man would make a mess of people's brains. The neurosurgeon, in a far worse crime, would end up concocting bland chocolate chip ice cream.

 bad mix... (Source)

So why would you chase any stock and every stock in every sector? Do you know what you're actually good at? Are you a student of value investing or a dividend hunter? Are you a balls-to-the-wall short term trader or a safety-at-all-costs buy-and-holder?

Most retail investors are human beings (we think), and we tend to overestimate our capability as investors. We feel that we are jacks-of-all-trades, but we are not.

As active investors, we have the same fallibility. We know our strategies, yet sometimes we fail to abide by our own rules. We miss the trees for the forest, and our constant need for action and gratification - short term trades, that is - eats up on our potential profits. 

Case in point : the following is actually totally true. We refer to our GREATEC trade and a series of subsequent trades that netted us almost RM20,000 in profits. Sounds good right? 

Well:


Since the listing, we have encountered many good trading ideas and twice as many bad ideas. We did fine, although some of our choices have been sloppy. We remain vulnerable to emotion-driven trading sometimes.

Regardless, it is nowhere near as good as we would have been had we just sat on GREATEC and did absolutely nothing else since the stock listed. As of 13 September 2019, the stock has returned 149%. In three months.

While this is not meant as a criticism on our trading endeavours (though you can treat it as such, if you like), the point is this: having 50 good choices (potential trades) might not be better than having one truly great choice (GREATEC).

Early stage listings is one of our core strategies; it is why we had succeeded with many similar IPO situations. Our responsibility should have been to stick to our strengths, and fine tune that skill.

Most people, including us, tend to have more money than sense. Why do you think people do overseas transfers of RM500,000 to help their struggling long distance lover in Nigeria?

Here's our own version of choice paralysis. By (falsely) believing that there so many great opportunities out there, we end up making subpar decisions, which subsequently delivers less-than-desirable returns. 

Making too many choices is a constant activation of the senses; you feel the buzz of the markets and the thrill of executing a potential winning trade. We are hard wired into preferring this route, but we tend to forget that what feels good is not necessarily the right thing to do. 

Being fully aware of this weakness, we decided to take action. Rather than being serial traders, we have now limited our activity severely. From 15 really big attempts a month, we limit it down to less than 5. We no longer trade like this every month; we look at the market constantly, but we act rarely.

These big attempts are the trades which we expect to deliver close to five figure profits or beyond; they are not easy to come by. The GREATEC listing and our PENTA trade are two such examples, but these golden opportunities only come by several times in a year. 

Stock is up 33% since we wrote this IN JULY! Read more here.

We try to commit our capital to the very best ideas only; merely good ones are not good enough. We still do small trades to hone our price-volume analytical skills, but the profits generated are usually negligible, at least in the grand scale of things.

Eliminating choices is not a natural thing to do. Not trading for the right reason is immensely harder  than trading for any or no reason.

Refusing those endorphin shots that come with active speculative trading is not easy; think of it like somebody kicking a years-long smoking habit. You know the bad side effects but you can't help it.

You're correct if you figured that the key lesson here is 'don't overtrade'. But as the manager of your own capital, you also have to stick to your strengths. Know your weaknesses, and then find a way to minimise losses, maximise profit potential, and optimise your trading strategy.

So if you have a good record with trading oil and gas counters, having fully understood the fundamentals and sector dynamics, stick with that and hone that skill. If one day you decide to buy into a speculative tech counter of which you know little about, you're the same as an ice cream man dabbling in brain surgery. It will get bloody sooner or later. 

The other key lesson here is 'do your homework', but you probably already know that.

When interacting with our readers*, our answers tend to be questions : what's your profit target? What are your strengths? If you plan to go into a trade, what's the fundamental/technical/whatever justification? We do this to understand your thinking and motivations. We hope you have the answers to those.

We have many weaknesses; the first step is to be self aware. Rectifying them takes a long time, but the process itself helps.

If you see our shortcomings as similar to your own failings, be assured : when it comes to investing, we have failed much worse than you have, probably.


*Twitter or Telegram - join the conversation and reach out anytime!











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