7 weeks post MBA – personal thoughts from a junior investor who fail often

It’s been 7 weeks since I graduated from Yale SOM. I spent the first two weeks and a half battling the CFA exam, 2 weeks traveling to Cali and Charleston and the rest 2 hanging out between New Haven and New York. Life wise, nothing eventful yet. Just waiting to start my new job, waiting to get back to rhythm, waiting to see what’s happening.

1) In investing, patience is gold.

The first half of the year was shaky. The stock market went for an upswing and a sharp downturn. The equity market in the states was swinging between gains and losses. I stuck to my past picks and was doing OK. The Chinese stock market though, was riding the rocket. Every week, a new high was reached, and soon it was surpassed. Bubble or not? Definitely a bubble. But no one was there to be the loser who didn’t ride the upswing of the bubble. That was the time to test investor patience.

I made two good investments during the Chinese stock market bubble and two horrible ones. The good one was the investment I made in Trina solar at the beginning of the year. The second one was Jumei.com, one of the largest online cosmetics retailer in China. Both investments generates over 40% profits for my portfolio. I wasn’t greedy and sold both at a good time.

No investing story ends without failure, especially when greed comes. I was eying this online dating site in China for a while, and asked a classmate of mine if I should buy its shares. His answer was No. Just the week after I asked him, the price of the stock doubled. I was proven right in the short-term, but made the worst mistake a junior analyst would make – not wait until the contagion phrase of the market was completely passed. I went in after the price dropped half way, hoping to make a quick turnaround profit at this point. Needless to say the whole Chinese equity market collapsed in the past week, and that stock was not spared.

The other investment I made was a long term play. It’s the maker of Wechat, an online social networking site everyone is using in China. The stock held its value so far. But I could have bought it at an even cheaper price had I waited a few more weeks.

2) If you are greedy, everything you earned will be given back to the market.

Warren Buffett said it well, “An investor will succeed by coupling good business judgement with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the market place.” And “fools rush in when angels fear to trade.”

I was an angel then until late March, when I received my sign-on bonus. Once free cash comes in, I was anxious to put it to work and make some decent, quick profit to fund travel and entertainment activities. That small greed made me a fool. I read a few reports on the future of global energy and decided the era of the old oil was not yet over. Subsequently, I bought a couple of energy stocks, without realizing that the Greek crisis could have collapse energy prices and made those stocks even more affordable. On a macro prediction level, I failed. [I probably saw it coming, but just wanted to buy the stocks because I was too bored.To be a good stock investor, I should probably have a second job, just to keep myself busy and away from looking too closely into the market.]

3) You cannot outsmart everyone all the time. Find one good idea and have conviction on it.

We were taught about stock beta as the measure of risk. This academic term is super dangerous. It makes people (myself included) think diversification is good. I currently hold 10 stocks in my portfolio. That is way too much. I need to trim it down to 3-5 and just put everything on those. “Too much of a good thing can be wonderful.” Else, I should just sell everything and buy indices.

In “History of Financial Fraud” class, professor Chanos taught us to invest “inside-out” instead of “outside-in”. As junior investors, we tend to find companies by hearing from others, seeing them on the news, then statistically screen these companies by checking P/E ratio, cash flows, profit margins. We add them on our screen list, observe them for a period of time, and make a buying or shorting decision. (On the short front, my broker screwed up my account, could have made a small fortune. Yes, this is greed talking.) The right of investing, however, is to go inside out. Once you notice an opportunity, go read the company’s financial statement. We are so lazy these days that no one reads financial statement anymore. Financial statement will tell you what the company’s management is thinking, compare current and past financial results for you, lead you to the right competitors and give you an overview of the industry the company is in. Then you can get on with ratios, competitive analysis, industry analysis. You can go read news with a sharper mind, because you already know what to look for. However, this is quite difficult to do for most people, because we are all lazy and want quick money.

4) To be a great investor, one has to go through a long learning process. There is no short cut!

I thought I knew a thing or two about investing. I discuss stock ideas with my classmates, follow the market, read news, inquisitive about what happens around the globe, can build a valuation model, know what drives company profits and losses. I was an idiot.

I squeezed CFA level II study into 3 weeks. Although I did read a couple of the books prior to that, but there was still four books left 3 weeks before the exam. A couple of my classmates have reminded me that if I waited till the last few weeks, I would suffer and would likely to fail. Not sure what the result is yet, but I could have done so much better if I started early. The technical depth of the exam was much higher than I thought. And I needed serious discipline and training to pass.

I am glad I got these lessons early on, before I join wall street full-time. The next week will be a good time spent in Houston with families and friends. The next month will be a wild ride.

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