THINKING, FAST AND SLOW

 I had read an e-book, Thinking Fast and slow and I have read it in preparation for my Toastmaster speech before. Only then, several months past that particular speech, that I came across this video and cursed myself for falling into cognitive fallacies that I once told others to be wary of. Now, as a cool-down period of my purchase of silver-lake axis and remorsefully looking at the share performance of Hyflux and Raffles Medical, I decide to do some stoic meditation and reflect on the triumphs and mistakes I made so far.

1) I need to find a wife and getting her pregnant to continually have kids. So that when I lose a kid, I will be sad for a while. Then I get her pregnant again and have another kid.

This is by far the greatest opener in the video so far. Jokes aside, Life is not all about investing and I need to find some filler to tide through this long investing marathon ahead. Maybe I should get a girlfriend, coax her to be my wife, get her pregnant, so that when I lose a kid, I will be sad for a while. Then I get her pregnant again to lose another kid.

2) Systems 1 (intuitive, Inference, screening mentality, crowd mentality) VS System 2 thinking (rational logical reasoning, self - doubt)

System 1 is an automatic response of the body and mind to react to crisis. It is an evolutionary fight or flight response embedded in evolution behaviour to give us the greatest chance of survival.

System 2 thinking is based on sound logic and facts, discounting market noise and mayhem. It allows you to make calculated moves in periods of great fear and turmoil and make the best decisions and be less deterred by fear in the market.

In a Lush forest, following your instincts in periods of great stress may lead to great rewards and the highest chance of survival. In the investing jungle however, it will ultimately lead to herd mentality, irrational fear and ultimately leading to buying when the meat is gone and selling at periods when it is most certain to incur a loss. Always use rational thought and keep your head instead of losing yourself in the noises around you. Always buy and sell stock based on fundamentals and not price levels!

3)  Price Anchoring
I fell into this damn trap when pricing my purchase of Raffles medical at $1.305. When it reached its 52 week low, I greedily snapped up this stock as it is at a new low, with unchanged fundamentals, and it is trading at a  pe relatively cheaper at its competitors. I used a relative valuation method to justify my purchase although it is trading at approximately PE 30.  Only when the entire healthcare sector stocks started dropping (RMG, O&G, ) did I realise that it could be just a buoyant market and the tide have subsided. I did not account for market risk. Everything then was expensive. Everything now is cheap. Relative valuation is NOT a good estimate of value.

I should follow Warren Buffet's method of disconnecting from social media and focus  instead on the screens and annual reports. Do up the fundamental analysis and estimate intrinsic value of the stock first before looking at its price to prevent anchoring. Be anchored to the intrinsic value as no one really knows how much to really price a stock. Being anchored on historical highs is the greatest folly I have made so far. When can go low and even get lower. How much lower can the damn price actually go? Well, all the way down! Resistance lines are just short term mind-tricks and once it is breached, it certainly can fall from the first level of resistance, to second, and much further onwards.

I wanted the stock. Now I am paying dearly for it. It still has good fundamentals no doubt, and I am not sure if I should start averaging down as price continue to decline. I probably need to input its financial into the new valuation model I refined and calculate if the thesis still hold true.

4) The science of availability
 Just because a lot of information is accessible and available doesn't mean you should regard all of them as significant.

Don't worry and think of the uncontrollable. Don't tune in too much to irrelevant financial news and the media. Fear mongering, Emotions, Deaths and Sex sells. Transaction costs are the livelihood of the brokers and sensational content the livelihood of the media and financial journalists. Reading through the new paper market commentary, it is clearly coming from someone whom clearly know nothing about the economy and industries, but trying to apply every possible random news to justify the stock price.

A lot of people are suggesting certain information to you because it is in their best interests, NOT Yours. What is most available doesn't mean it is the best and right course of action to do.Only focus on the relevant information and tune out the irrelevant, sensational, attention capturing market noise.

5) Expected Utility vs Expected Return (Loss Aversion)
I admit I am a cautious investor requiring a good margin of safety. Given a 50% chance, I will rather have a 0% chance of losing money than have a 50 % chance of either gaining $1,100 or losing $1,000. I need a sufficiently high risk premium for me to take such bets. Expected Utility can diverge from Expected return. I remembered having a debate on this area with my cousin about this question. It is surprising that despite economics framework is centred around rational behaviour, the Expected Utility topic in contrast with Expected Return in microeconomics seem to subjugate this fact, that humans are indeed NOT RATIONAL!!! I considered myself pretty strong at this topic. However only though that discussion, did I realise the irony of centralising the study of economics around rational behaviour, but the application is nowhere near robust.

Betting on just a coin flip is most certainly speculation. What I prefer is more towards getting 1000 coin flips, and the option of fast-forwarding the process or given the option of not looking at each individual flips. In the long run, I can most certainly win. But spare me the torment of looking at each individual outcome.

6) Reframe Issues
There is a 20% chance that Hyflux goes under and struggle with prolonged financial difficulties, dragged down by debt burden, and forced to repay that 8% preference shares until perpetuity. For the year of 2017, management warned that Hyflux will continue to suffer losses and even some of the directors are opting for preference shares rather than dividend shares.

HYFSP 6.000% Perp/Callable 2018 Pref (SGD) - Retail

Class A Cumulative Preference Shares may be redeemed for cash as described below, in whole or in part (on a pro rata basis): at the option of the Issuer, on any date on or after the date falling 7 years after the Issue Date (the "First Call Date") (25 April 2018) at the Redemption Price (100%);
https://secure.fundsupermart.com/main/bond/bond-info/factsheet.svdo?issueCode=SG2D17969577




There is a 80% chance that it can successfully raise money, by divesting its assets, moving towards asset light operating model and slightly moving towards retail ELO. It has strong and stable municipal clients and guaranteed cash flow. It has a very strong and consistent, operating history and good management despite the sudden dip in playing into the cyclical downturn of the energy market (Tuaspring energy) . The energy companies are out of my circle of competence for now.

6) Sunk cost fallacy.
I need to monitor the End of year news for Hyflux at end 2017 and thereon, whether it is able to successfully secure refinancing and divesting its toxic Tuaspring assets and China holdings. China water market is too competitive and Hyflux is calling it quits and seeking to diversifying into MENA. Those China companies got listed in Singapore although its base of operations is in China, and I had a chance to look into their annual reports before deciding against those purchases. (China Ever-bright Water, SIIC Environment and United Envirotech.)

This is a critical 6 months for  Hyflux until April 2018. If it is clear that Hyflux is going nowhere despite reassuring shareholders that steps are taken to improve its financial position, I need to re evaluate the fundamentals inside my valuation model. If it has indeed deteriorated, I need to rebalance my exposure and decide to hold, average down, or sell partially.

You should never buy a box of candies that have just expired. Tied to the purchase price (sunk cost) you keep eating it until you got a stomachache, and eventually pay much more for it should have been worth.