Successful investors should not follow the herd

A driver fuels his car at a gas station in Jiangxi province. Oil prices have been rising recently.[Photo provided for China Daily]

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 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 an 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 opportunity 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@chinadaily.com.cn

 

(China Daily 12/27/2016 page14)