By Andrew Chia
This is the first time I am reading a book by a Malaysian author Mr Andrew Chia. In this book, the author highlights a compilation of learning messages to his readers. His book is casual to read and it is easy to understand. He also writes it in a very straightfoward language, with no colourful technical words to confuse the readers.
I will just highlight some of the areas that I thnk are very important.
Investors should be careful to limit their exposure to property investment.
As in recent years, property prices have skyrocked in Shanghai, Hong Kong and Singapore. Housing prices have doubled over the past three years prior to 2006, fuelled by massive speculation. With China boooming and Shanghai at the centre of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up.
I agree with the author on this message. Personally, due to my job nature, I do see a lot of more and more people buying second or third properties the last few years and servicing misc housing loans. There are even people who have channelled all their money from their stocks,bonds, insurance or lifelong savings to buy properties . Then they tell their friends, dont buy stocks, dont buy bonds, dont buy insurance, buy property. Hey, something is not very right here already rite?
Learning message #5 : Movements in the stock market rarely bear any relation to the fundamental strength of the companies that you invest in.
Stock prices are usually expected to drop after the Federal Reserve announces a rate hike. However in July 2006, stocks rose further as investors cheered the fact that Fed is taking heed of the cooling economy. Markets are not rational, they reflect the emotions of buyers and sellers.
In the Intelligent Investor, Benjamin Graham mentioned that day trading is one of the best weapons invented for committing financial suicide. Warren Buffet once says “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Learning message #7 : The next time you hear bad news; don’t expect the market to react immediately. The same goes for good news. It could take anytime from months to years
Before we “bet” on market movements, we need to remember the First Rule of Investing – Don’t lose money. (Warren Buffet). “You get common sense through hard work and seeking knowledge. You come to know a subject so well that you have a sixth sense or common sense. What seems muddled to others is clear to you. – Datuk Tan Chin Nam, Tan & Tan Development.
Learning message #8 : Your investment decisions are correct only if your facts are correct.
When we look for the facts, we need to look at the numbers. Numbers tell the facts. Look for things like national and personal debts, savings and spending rates and unemployment.
Learning message #28 : When we observe a country allowing excessive credit in its economy, we know that it will result in a collapse.
In an environment of easy money, banks, borrowers and investors lost their cool and self-discipline. Free markets ran amok, trust in the banking system was shattered as regulators let their guard down and bankers let the pursuit of profits undermine the integrity of the system which they were supposed to protect.
Learning message #30 : Financial intelligent people never use audit reports as their sole decision-making tool
Some international audit companies have been collaborating with investment banks involved in financial fraud. Auditors are supposed to be watchdogs for shareholders and the company. But there is the inherent conflict that auditors are chosen and paid by the people they are policing. There are many scandals that involved auditors – example Arthur Anderson and Price Waterhouse. The auditors will issue biased ratings on stocks to lure unsuspecting and financially ignorant investors to part with their hard earned money.
Enron’s nontransparent financial statements did not clearly depict its operations and finances with shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to portray a favorable depiction of its performance. Arthur Anderson is Enron’s auditor.
Despite scandals involving billions of dollars, auditors invariably get off with only a slap on the wrist. One wonders why. Investors should understand that even the biggest audit firms may not always give a true and fair view of a company’s financial affairs, which is the primary task they are charged to do so.
Learning message #32 : Because of the existence of insider-trading, long-term stock investing based on track record is a better option compared to stock trading.
A big question mark hangs over Wall Street : How is it that the top firms consistently beat the odds, earning spectacular returns on their own investments? In 2006, the five biggest US investment banks -Morgan Stanley, Goldman sachs, Merrill Lynch, Lehman Brothers and Bear Stearns – generated US$61 billion from prioprietary trading, about half of their total revenue and a 54% increase over 2005.
Those returns have raised eyebrowns for years. Even the greatest investors lose money at some point, but the Wall Street firms never seem to lose. Investment banks may have collaborated with hedge funds in fleecing other traders and investors.
Learning message #39 : Social Security and Medicare may soon wreak untold damage on the world economy, including the stock and property markets, currency and exchange rates.
In 2005, President George Bush Jr gave a stern warning that the Social Security is headed towards bankruptcy. The Federal Reserve Chairman Alan Greenspan back then also urged Congress to move quickly to fix the financinag problems in Social Security and Medicare, arguing that delay will only make the country’s budgetary problems more severe.
Despite what had been said by Greenspan and Bush, it appears that the Bush administration have done nothing. Hence it is up to Obama’s administration to fix the problems of Social Security and Medicare.
Personally, I agree with the author that President Obama will have lots of problems to deal with. Furthermore, he proposed having medical insurance for everyone at one point of time. That I think is a great idea, very idealistic. However, if the insurance for everyone is really implemented, I think it will speed up the bankruptcy of the system.
Learning message #40 : If we wish to take a peek into the future, we should pay attention to people like Soros, Warren Buffet, the President of America or the Federal Reserve Chairman, and hear what they have to say.
In January 2006, Geoge Soros predicted that there will be a recession in 2007. He was spot on. At that point of time, all media including CNN, the dailies and even magazines such as Fortune ran stories from economists and experts that there would be no recession, and that market would recover in no time. No so for Soros, he was very clear about the recession and he outlined his arguements very clearly. You can visit his website :http://www.georgesoros.com for more of his latest thoughts.
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