Mistakes, alot I have made - Act 1

I must confess, I have made alot of mistakes in my life as an investor. I would like to share some of them every now and then, hoping someone who read my blog might learn them the easier and cheaper way. I would also try to share my experience on how to deal with them and not to remake the mistakes.

The most important lesson that I have learnt from my past mistakes is "buying shares based on rumours without checking further into its fundamental". I have been repeating this mistake again and again without noticing it. There are instances that look so true that those who told me the news are willing to bet their head or sworn in the name of whoever they can think of. I didn't say that all news are fake, but it has to make sense, at least. Some common news are like "this company will be securing a contract or have signed an MOU with a super billionaire in China"; "someone has offered to take over the company, buy now before the price shot up.."; "this company is going to declare capital repayment of a few ringgits, the price will shoot up..", "some syndicates have signed agreement with the owner to push up the price.." and many more.

Any one of them sound familiar? Well, you are so lucky if you haven't heard any of them. yup, lucky. I've heard a couple dozens of them even though my main carear is not in the finance industry. I admit there are news that really came true, u know, once a while, but the chances of it NOT coming true are much more higher. Allow me to use another examples from gambling: How often have you heard people winning from the casinos? I do, occassionally. But the losers far outnumbered the winners. Even the winners will usually lose after a few successful runs, and usually, the losses are much more than those he had won in the past.

However, it is sometimes very hard to ignore rumours, isn't it? aren't you afraid that the rumours might turn out to be true and you are the only one left behind as the share price sky rocketed? Your uncles, aunties, brothers, sisters, neighbours, mother in law, daughter of your third grand auntie and etc are all singing praises for the syndicate while you hide at the corner kicking yourself? I kindda get use to this thinking myself.

However, if you really have to jump on the bandwagon regardless where it is heading, there are 2 questions you should ask yourself in advance.
1) What's the probability the rumours will come true?
This will require your rationale and sometimes a little logic thinking. One simple example: a company is going to have a capital repayment exercise. The easiest way is to find out whether the company have sufficient fund to do so. And, who is going to benefit from this? If the company is already in deep financial difficulties, how can they afford to do so?

Question 2, might require some homework to be done, ask yourself: What if the news doesn't come true?
It's back to fundamental analysis. There shall be a "margin of safety" or worst case scenario, if you were to hold on to the share. Let's say, a company is quoted at RM1/share and there is rumours that another company will take over them for RM1.50 per share. Your valuation told you that it shall at least worth RM1.20/share. So, in case the deal hasn't materialised, you will still be holding a share bought at a discount anyway.

Conclusion, avoid rumours and concentrate on Fundamental Analysis, if you can; else, don't forget the latter.