Saturday, July 4, 2020

Homework (not hard work) is the hallmark of a good investor

My CFA ("Chartered Financial Analyst") membership fee came due last month.

It is pretty depressing to see US$300 whisked away in an instant. They could have liven up the transaction with a grand display of flying dollars.

Icon credit: Dryicons and IMGBIN

Heck, even a prerecorded "Thank you for your support" would have sounded uplifting.

Fortunately, my company reimburses the fee. So I do not burn a hole in my pocket carrying the three expensive alphabets on my namecard.

Unless you are a hardcore FA fanatic or for work reasons, I wouldn't recommend anyone to join the CFA Program. This is because of the rigour of the curriculum, and the sheer amount of time and effort required. (The CFA Institute recommends 300 hours of study.)

I am puzzled why people would sign up for the CFA examinations every year, but do not make a serious stab at beating them. 250,000 candidates enrolled for the three levels of exams in 2019, but only 41%, 44% and 56% managed to pass them respectively [data].

It costs anywhere between US$2,100 and US$4,350 to take all three exams.

And that's passing them on your first try.

Yet, six out of ten candidates failed to make the grade. That is a serious waste of money.

If you are simply looking to build a skill set in fundamental analysis, I'd be happy to point you to the numerous FREE resources, both online and in our public libraries. The materials are as vast as the sands on the beach, from reading a basic financial statement to building your own discounted cashflow calculator via MS Excel.

You'd have no excuse that you don't know where to start. All it takes is a little Goggling.

And if you are those who prefer a guiding hand, distilled lessons or a classroom setting, there are investing workshops available.

In fact, judging from the numerous advertisements on the Web, there is no lack of 'gurus' willing to coach new students through the analytical process of picking stocks.

For a fee, of course. Anywhere from several hundred dollars to a few grand.

But before you sign up, I would advise to ask these gurus for their 'two lists'.

The first list should contain all of their past successful stock investments, independently verified by a third party. The kind that they will gladly put up on a beauty parade.

The second list is the more interesting, and the more important - It should contain all of their past abysmal investment failures, and the extent of loss in each case.

I'm willing to bet my lunch that few investment coaches out there can produce the latter list. Either they are geniuses (even Warren Buffett has a few regrets), or they haven't had much time and exposure cutting their teeth in the market.

At the worst, they could be charlatans wilfully hiding skeletons in their investment closets. To these teachers, I recommend to keep a fair distance. Say, as far as possible.

Be it taking the CFA exam, learning through a book or emulating a trainer, my message to the aspiring stock picker is the same:

There is no free lunch in investing. You need time and effort to do your homework.

Time to read up on company reports.

Effort to compare financial statements historically and against peers.

Finally, a set of well-defined rules to judge a stock.

Investing is not tough. Not when you have the willingness to do the above.

Ultimately, it is the homework done, not hard work, that is the hallmark of a good investor.

"Never lose money. Stay rational and stick to your homework when researching businesses in which to invest."

- Warren Buffett

It is okay to browse through forums and blogs for stock ideas. But if you hadn't done the homework to convince yourself the company is a buy, you will NOT have the conviction to stay through the ups and downs of the market swings.

You may be spooked by the ever switching news headlines and sell out at the wrong time.

If your analysis is flawed and the stock turns out to be a lemon, at least you would have learnt of your shortcoming and became a better investor, not to repeat the same mistake.

And the loss will well be worth every cent of the education gained.

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