What does Hedge Fund Billionaire Ray Dalio say about being wrong

ray_dalio“Our greatest power is that we know that we don’t know and we are open to being wrong and learning.” -Ray Dalio

Whenever I share new investment ideas with my readers and clients, no matter how confident I am, I always feel worried that I might be wrong, especially if my idea is unconventional or against the consensus. The irony is that in every investment transaction, there is always a buyer and a seller, and both of them think that they have made a smart decision.

If I hear different options from other people, I will tell myself, “No problem, I’m open-minded. After all, there is always some probability I might be wrong and that it’s worth the effort to consider what others are saying.”

But I found it very hard, maybe for many other people as well, to calmly take in what other people are thinking rather than block it out, to listen carefully and objectively to the reasoning behind differing opinions, or to clearly lay out the reasons why they haven’t reached the same conclusion.

Until I studied hedge fund billionaire Ray Dalio recently, I realized the art of seeking out thoughtful disagreement.

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Four fun Behavioral Finance videos you should watch

Have you ever wondered:

  • What do most investors have in common with football?
  • Would you have swooned for “tulip mania” in the 17th century?
  • Is Loss Aversion Really just about Dodging Water Hazards?
  • Why investors rather put money in the bank earning low yields, while the real threat of inflation is taking bite of their purchasing power?

We like to think we invest rationally, but the field of behavioral finance has shown that there are social, emotional, and even cognitive factors that can affect our investing decisions. By becoming aware of these unconscious tendencies, we have a better chance of meeting our long-term investing goals.

Fund manager Franklin Templeton has produced a series of fun and short videos to educate investors about behavioral finance. Watch them by clicking the image now

3 financial lessons to learn from iPhone 6 flipping story

iphone-high-priceIn today’s Straits Times article “Early birds get juiciest profits flipping iPhone 6″, it was reported that “in just 30 minutes, finance manager Sky Hui made a cool profit of $4,000 from buying and re-selling three new iPhones.”

Interestingly, in this simple story, there are three essential lessons that you can learn to achiever greater financial success.

Lesson #1: Successful investing is anticipating the anticipations of others

How did Mr Hui do it?

It was reported that he had pre-booked three 128GB iPhone 6 Plus devices with SingTel and renewed three contracts for himself and his parents to pay $746 for each phone. At the same time, he contacted 40 buyers he found on HardwareZone and sold the iPhone 6 at $2,200 each to the buyer, making a total whopping profit of $4,362!

All these just took him about 30 minutes after collecting his phones from SingTel’s launch event at Marina Bay Sands last Friday.

If you want to be successful, you must have independent thinking, be ahead of other people and take action. The launch of iPhone 6 is such a buzz and I cannot avoid hearing people talking about it. So many people spent time on researching the specifications, comparing it with other phones, but only the real entrepreneurs and traders see the opportunity for profits.

Lesson #2, Most things will prove to be cyclical and some of the greatest opportunities for gain and loss come when other people forget about this

Of course, Mr Hui is not the only trader in the market. it was reported “yesterday, there were also more active sellers than buyers on HardwareZone’s mobile phone bazaar forum… WhyMobile’s retail sales manager Samuel Chan said: ‘Last year we had people from China coming to buy 50 sets at one go, but none this year.'” While Mr Hui sold his iPhone 6 at $1,200 last Friday, many sold it at $1,100 and probably lower now. 

The fact is that market is cyclical and it changes very fast. Even with 10 million iPhone 6 sales during the launch weekend. I can assure you that some people will lose money in this game.

Lesson #3, A handful of patience is worth a bushel of brains

A 35-year-old housewife, who declined to give her name, bought four phones at WhyMobile in Far East Plaza yesterday. She said her husband had queued overnight but went home empty handed. So she decided to “just pay more” to get the phones for herself and her family. She paid $1,550 for each 128GB iPhone 6, which costs $1,288.

Note what she said, “I cannot wait anymore, that’s why I came here.

now-laterLongitudinal studies of children (till they are adults) show that the greatest correlation with success is not with intelligence but, rather, the ability to defer gratification. Ask if a child would prefer a candy now or two candies tomorrow, I think we all know the answer.

As Thomas J. Stanley put in this famous book “The Millionaire Next Door”

“There is an inverse relationship between the time spent purchasing luxury items and the time spent planning one’s financial future.”

Do you agree? What other lessons do you think that we can learn from this story? Let me know by leaving your comment below.

Five reasons why you must define your investment goals

We are all familiar with Lewis Carroll’s story “Alice in wonderland”.
alice-cheshire-cat
One day Alice came to a fork in the road and saw a Cheshire cat in a tree.
“Which road do I take?” She asked

“Where do you want to go?” responded the Cheshire Cat.

“I don’t know,” Alice answered.

“Then,” said the cat, “it doesn’t matter.”

Have you ever drifted through life aimlessly, wondering why your life lacks purpose and significance? That is because you did not bother to write down your goals.

It is the same when it comes to investment. Being in the financial advisory industry for more than ten years, I have only come across ONE person who ever had a written investment goal for himself.

King Solomon once said, “Where there is no vision, the people perish”. While that sounds a big scary, the truth is that most people are not clear what they want, even though they think they do.

In one of my recent blog posts, I quoted billionaire Philip Ng saying “The ironic thing about possession is that you don’t possess the possessions, the possessions possess you”. That really set people thinking and that post attracted tens of thousands of views.

When you really start to set your goals and write them down, I promise your life will be different.

Setting goals will force you to clarify what you want

You see, most of the time, people invest, thinking that they want to make as much money as possible in the shortest time. In the earlier days of my career, I made the same mistake. When I presented my clients the profit which I have helped them generate, I have never felt the same excitement as I had expected.

Now think about it, if you are a business man or a busy professional, you have your house, a car and a healthy balance in your bank account, do you feel richer if you see 5% or 10% profit in your $200,000 investment account? Probably Not.

But you will definitely feel uncomfortable if you see that your account drops $10,000 last month.

When you are in the middle of a meeting, would you want your banker or broker to call you to make some urgent trades or top up the account due to margin call? That will definitely screw up your day.

When you are home after a tiring work day, would you want to check your investment statement, follow up the never ending news of the stock markets, or do you prefer to spend some time with your family, having a good meal, talk about anything other than money and work?

ding-xie-stock-market-crashIn real life, it is very hard for you to get excited by the cold numbers in the profit and loss statement, but it is easy for you to suffer emotionally for any bad investments.

So now you probably agree that the goal of investment is NOT just about making money.

Many people think that investment is risky, but ironically, people invest because they feel insecure. If you know that you have enough money to spend for the rest of your life, why make more money? You should enjoy your life, pursue your passion and help people. Like Brendon Burchard alway said, “Did I live? Did I love? Did I matter?”

The hard truth is that most people worry about the risk of running out of money. They do NOT feel safe by not investing. They just don’t know how.

Unfortunately, the typical financial institutions and regulators could not help much. The financial academia invented the risk profiling by scoring people’s risk preference into numbers. They then classified the investment products into aggressive, balanced or conservative and sell it to people who match the numbers. The assumption is that low volatility, low return products such as bonds are safer, high volatility, high return products such as stocks are risker.

That is why people lose money. Because your investment objectives and the products do not necessarily match!

For example, a typical businessman will be classified as an aggressive investor because naturally businessmen are risk takers. But in reality, if you have already exposed your life savings to great business risk, should you also risk your investments by setting a high targeted return? If you treat your own human capital as an investment product, isn’t it that the rate of investment return of yourself is much better than most of the investment instruments out there?

Think about it, write it down!

On the other hand, if you are near retirement, conventional wisdom tells you that you should scale down your investment and be more conservative. But think about it, if you are running a marathon, would you slow down when you are approaching the finishing line or make a final sprint? If you have not accumulated enough retirement savings, would you just give up and leave your future to the unknown or your want to take charge of your life.

Think about it and write it down!

By defining clearly investment objectives, you will leave the wonderland and on the right path.

In my next post, I will talk about “how setting investment goals can provide you with a filter for other distractions”. Stay tuned…

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You Could Be Richer Than You Think

you-could-be-richerEvery year, more than $16 billion in dividends are paid out to investors. It was reported this week that there were $68.3 million worth of unclaimed shares and dividends still held in SGX, these belong to 83,000 investors. Among them, some 74,000 investors failed to cash their dividend cheques, amounting to $53.7 million in total.

In particular, one surprisingly forgetful person stands to be $1.2 million richer if he collects all his outstanding dividends.

While the news may surprise many people, I find it hardly anything new. Two years ago, I wrote a blog entry “Common psychological biases among Asian investors“, I outlined common biases average investors have. One of them is called “Mental Accounting”.

Ask yourself or your friends, have you ever recorded ALL your investment transactions and really penned down your profit and loss? I have met so many investors but none of them can show me an excel sheet of their past investments.

Some may argue that the brokers provide such system, but the reality is that many people transact through multiple brokers. The situation is worse especially in Singapore, where stocks are held in CDP instead of the brokers. I’ve yet to see a broker’s system to be able to capture information of dividends, rights, etc.

If you also invest into unit trust and dividend or coupon paying life insurance policies, you will never know what you have until you really write them down.

In fact, stocks and dividends are not the only financial information which people lose track. Many do not budget and have no idea of their own monthly expenses and outstanding debts. That is why “money is not enough” until you count it.

There are even unclaimed insurance maturity proceeds and death proceeds. Most of the insurance companies publish these data in their website, and the list is astonishing long.

The news is a wake up call to many. Probably you should turn on your computer and start to record your personal finance from today.

To check if you have any unclaimed shares or dividends. You can simply visit www.sgx.com/mygateway or call 6589 8039. SGX will waive the administrative fee for the re-issuance of dividend cheques and dividend crediting until 26 January 2014.

Check for your spouse and parents too! ^_^