Suc­cess­ful in­vestors should not fol­low the herd

China Daily (Hong Kong) - - BUSINESS - By HUANG XIANGYANG

One of the lessons I have learned over the years is that to beat the mar­ket you have to do just the op­po­site of what oth­ers do. In the bat­tle for wealth the win­ners are al­ways the tiny mi­nor­ity of peo­ple, be­cause de­ci­sions made by the ma­jor­ity are al­ways wrong. This is a mar­ket driven by herd be­hav­ior, and it al­ways will be.

With this in mind, I could smell the scent of money from fall­ing global crude oil prices in the mid­dle of last year. Do­mes­tic stocks were over­priced then af­ter the mar­ket had been bullish for al­most a year. Yet oil prices had dropped by half from more than $100 a bar­rel a

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year ago, partly due to un­cer­tain global eco­nomic prospects af­ter a fi­nan­cial cri­sis. It was a good chance to “buy low”.

So I put some money in a crude oil-re­lated fund, set up as part of the coun­try’s qual­i­fied do­mes­tic in­sti­tu­tional in­vestor pro­grams to in­vest over­seas.

In the fol­low­ing months the oil price con­tin­ued its down­ward spi­ral, fall­ing to $50 and then $40. Ac­cord­ingly, the net value of my fund hold­ings shrank markedly.

A sup­ply glut was blamed for the dras­tic price de­cline as OPEC na­tions re­fused to cut out­put in a bid to pro­tect their global mar­ket share. Ad­vances in US frack­ing tech­nol­ogy used to ex­tract shale oil added to the oil price woes. Gold­man Sachs pre­dicted oil could drop to $20 be­fore things got any bet­ter.

That worst-case sce­nario was pos­si­ble. Pro­duc­tion costs in some OPEC coun­tries were said to be well below $20 a bar­rel, and oil had hit a his­toric low of $3 in the 1970s.

So should I con­tinue to in­crease my stake?

I hes­i­tated. Ac­tu­ally I was con­fused by the ma­jor changes which had taken place in the global crude oil mar­ket. I re­called how oil hit its his­toric high of nearly $150 in July 2008, only to plunge to less than $40 five months later. This could not just be ex­plained by changes in sup­ply and de­mand.

Then sup­pose the very rea­son given for the oil price fall — a sup­ply glut — were true, could it be sus­tained? Each time I wait in my car in a long line at a gas sta­tion to re­fuel, or I am stuck in the city’s in­creas­ingly worse traf­fic jams, I feel re­lieved some­how that the thirst for oil in this coun­try never seems to be sa­ti­ated.

As leg­endary fund man­ager Peter Lynch put it, “a de­cline (in prices) is a great op­portu- nity to pick up the bar­gains left be­hind by in­vestors who are flee­ing the storm in panic”.

Em­bold­ened by these words, I poured more money, tens of thou­sands of yuan, into my fund hold­ings, in the firm be­lief that oil prices will not re­main that low for­ever. I was greedy when oth­ers pan­icked.

Then came the time to reap the re­ward, when OPEC and other oil pro­duc­ing na­tions clinched a deal to freeze out­put late last month, which im­me­di­ately sent oil price up above $50, a 40 per­cent hike from its low at the start of the year.

In in­vest­ment, it al­ways pays off to be pa­tient.

For me, the year end is the sea­son of har­vest and con­tem­pla­tion, the time when I would look back at my in­vest­ment re­sults over the past year, and learn from the gains and losses which I may use as a guide for fu­ture per­for­mance.

I am not a se­ri­ous in­vestor who spends a lot of time study­ing news, poli­cies and tech­niques in pur­suit of max­i­mum profit. I don’t bet the farm on the mar­ket. For me, in­vest­ment is a fun game to test my judg­ment, and I use my small in­vest­ment pool of stocks, funds and gold as a means to feel the pulse of the mar­kets.

This makes it much eas­ier for me to laugh off losses and re­main cool-headed amid dras­tic price fluc­tu­a­tions.

Con­tact the writer at huangx­i­angyang@chi­


A driver fu­els his car at a gas sta­tion in Jiangxi prov­ince. Oil prices have been ris­ing re­cently.

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