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Avoiding the memory effect.

Sunday, April 18, 2010

Human beings remember well things which are particularly unpleasant or particularly pleasant.  In short, human beings remember extremes very well.  However, as investors, we really have to stay level headed and be in tune with the present, the current reality, and not let the past shackle us.

For example, I have a friend who bought a few hundred lots of Healthway Medical's shares when it was 12.5c, if I remember correctly, last year and sold most of them at 13c or so just before the price ran up.  The investment in Healthway Medical was one premised on its relatively strong fundamentals and inexpensive valuation.  However, any shareholder of the company at the time would remember the months of malaise in its price action last year and my friend divested most of his shares.  With only 100 lots left, he became reluctant to sell even as the price rose to hit the eventual technical target I identified at 19.5c shortly after.

When we spoke, he told me, "but I only have 100 lots left". I told him that he must not base his decision on the larger position he once had.  He had to make his decision on what he had then which was 100 lots.  So, the question to ask was: "if he did not have those hundreds of lots which he sold off cheap (on hindsight) and 100 lots were all he had to begin with, would he sell some, if not all, to realise some gains?"  Freed from memories of the past, the answer was a loud and clear "yes".  Never be chained down by what could have been.  Focus on the present and what is.

Similarly, I have friends who told me that they should have bought Healthway Medical shares at 10c when I first started accumulating in mid 2009.  That's the beauty of hindsight, isn't it?  These same friends also said that they should have started accumulating Saizen REIT at 10c.  The memories of the past chained them down and they could not act in the present.

I would tell anyone that I only started accumulating Saizen REIT at 13c, not 10c, and I kept on buying as its price rose. I bought more at 16.5c too.  Why?  The uptrend is intact and this has not changed.  The fundamentals are still compelling.  There is no reason for me to sell if the very reasons which compelled me to buy have not changed and are still valid.  Mind you, these reasons could be fundamental, technical or both.  I am not a purist.  I am a pragmatist.

I might have shared some of these thoughts before in some other posts.  I cannot remember but if I am repeating myself, I beg your pardon.  Please humour me.  Have a great Sunday!


Anonymous said...

hi AK,
In a few month's time, when the px is beyond 20cts, I can imagine your friends lamenting, "If only i bought saizen at 17cts". People do not like to buy cheap. They like to buy when it is hot. And that could be when we dispose of these "hot potatos" that will eventually "burn" some careless investors. Like you, I have continued to add at 16.5 and 17cts, 7.5cts and 8cts for warrants. It is still alot of Credit lyonnais selling and I believe when that ends, it should coincide with positive refinancing and dividend news.


Anonymous said...

Hi there,

You always make a lot of sense esp when the market is so uncertain & we are looking for a direction. sometimes, there are no "right" or "wrong". sometimes it is just pure luck. sometimes having a focused mind & strategy like yours will make the wrong become right. cheers !

AK71 said...

Hi DP,

I continue to believe that it is not in the interest of the lenders to proceed with a foreclosure of YK Shintoku. With credit increasingly available, the re-financing of YK Shintoku is more probable than not and this is likely to be at an interest rate much lower than the current 7.07%. I will wait patiently for the good news. :)

Upon the successful refinancing of YK Shintoku, I see fair value for Saizen REIT at 24c. Patience will more likely than not be rewarded. :)

AK71 said...

Hi Anonymous,

Yes, even with the best FA and TA, we need a good dose of luck on our side. Luck is something we have no control over, of course.

I am not sure if I can make a wrong right. Haha.. If I am wrong, I'm wrong. Soldier on.

However, I believe that as long as my investment decisions are based on sound FA and as long as I have bought at fair entry prices as informed by TA, it should be ok to hold. There might be rough patches but if the big picture has not changed, there is no reason to sell. Only time will tell if I am right. :)

Could you leave your name or initials in future comments? Would like to avoid saying "Hi Anonymous". Thanks! :)

Raelynn said...

I agree... I think my grandfather says it best, "if you feel that it's a good stock, just buy some first. if the price falls, you can buy even more, if the price goes up, you can still buy and make some gain eventually through averaging".

On a side note, I'm having this mental debate about selling my shares because the number of lots i have are very small (imagine the largest that i have for 2 or 3 companies is only 10 lots), and my partner always nags at me for contemplating selling when my position is small even though there is a profit because the transaction costs will eat into the profit. but i'm thinking, a profit is still eventually a profit isnt it? because you cant always have the best of all the worlds, or gaining in the market and being charged the more value for profit amount for transaction costs.

AK71 said...

Hi Raelynn,

Your grandfather is a wise man. :)

As for liquidating some of your investment if the price hits target, I do that too. It's hedging. In case it goes higher, at least you still have more to sell. If it goes lower, at least you have locked in some gains. :)

If you trade online, I think the brokerage per transaction is less than $30. I guess your gains could cover this comfortably or else you would not be thinking about selling. ;-)

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