Lately, I come across two groups of people with completely different reactions to the recent crash in the stock market. The first are the more conservative ones who would stay away because the price drop looks scary. Ironically, they are also the ones who would buy whatever they can grab in the departmental store during the year end sales. The same company that has become 50% cheaper overnight is so frightening but a pair of jeans that suddenly cost 20% less is a newly found treasure.

The second group of people are more business minded and would recommend me to buy a share that has drop from, say RM6.00 to RM2.00 simply because it’s comparatively cheaper now. Some would even say it’s dirt cheap compared to its highest record of RM9.00 two years ago and I can easily make a 350% return on investment when it rises back to RM9.00. How I wish it’s that simple. By the way, these are also the people who would hesitate to buy a house that cost 10% cheaper than the neighbouring lot because they suspect something must be wrong with that house.

Honestly speaking, I exaggerated the above examples a little bit but the essence is true and that probably explains some of the irrational behaviour in the market. That’s also why we have people who have misunderstood speculation as investment and I have my fair share of making the same mistake, not once but many times. The first lesson I’ve learned is to ignore all this noise and fall back on some simple common sense. Stay away from speculation.

I generally love to look at companies with falling share prices and start investigating what’s happening. That’s what all great investors do anyway but it’s always easier said than done. That’s a lot of hard work because the amount of information to go through is painful and sometimes you can’t even get what you want and therefore need to make a judgement with limited data. There are some assumptions to be made before coming to a conclusion and then you realise that a slight tweak in the assumption makes a wild difference in the outcome. Sometimes the whole angle of analysing the business is wrong in the first place. I call this information overload.

Suffice to say that the second lesson I have learned is to focus on the downside of the investment. What are the things that could go wrong and look for red flags. It’s simply impossible to gather all the information to justify how good that investment is, I might as well focus on what could go wrong. Very often, I find that most companies’ annual reports look like they are written by the marketing department because they will tell you a hundred reasons why you should invest in the company. Hence it’s more important than ever to find out what can actually kill the business. Even Warren Buffet used to lose billions of dollars buying a large amount of ConocoPhillips stock without realising that oil price was near its peak at that time. In this case, the concern with oil price should take precedence over other business fundamentals.

Thirdly, I’ve also learned to stay away from businesses I don’t fully understand. There could be 200% upside in an engineering company making electronic components for the aerospace industry but I know practically nothing about the business. I don’t understand how does the current technology employed fare against competitors or whether there is a paradigm shift in the aerospace industry. Drawing from my own experience, I used to be a junior auditor doing a stock count audit on the inventory of an aerospace company based in Farnborough, United Kingdom. At that time, 99% of the items within my vision are so alien to me that I couldn’t even distinguish between a finished good and a piece of scrap metal on the floor! Now you know how much you can trust an auditor’s opinion. In short, I just think it’s not worthwhile to sweat and stress myself over this when there are many companies out there with far simpler business.

There are a few more lessons I have picked up but the list goes beyond my current attention span as it’s already past midnight now. Perhaps I can talk about it some other time.