Investing Lessons From The Apprentice Asia

The Motley FoolThere is nothing quite like a good dose of reality television to help provide some light relief at the end of a day’s work. One of my favourite reality shows at the moment is The Apprentice Asia.

It’s quite an eye-opener to watch the contestants firstly take pleasure in seeing their opponents stumble and then resort to slinging mud at their own team members to avoid being fired by Malaysian airline tycoon Tony Fernandes.

How to lose money, fast

But this week’s Take Stock Singapore is not about office politics. It is, instead, about one of the challenges that Tony Fernandes set for his prospective apprentices. The task was a simple matter of investing US$20,000 of virtual money in the markets through Contract for Difference (CFD). The team that made more money was the winner.

But even before the week’s competition had started, I had already predicted that both teams would lose money. So, perhaps, the easiest way to win the challenge would have been to sit on the cash and not place any CFD bets at all.

Employing such a strategy might have incurred the ire of Tony Fernandes. It would probably not have made for good television vision viewing, either. But since the objective of the challenge was to finish with more money, simply doing nothing would, in my view, have been the most sensible tactic.

Defying the odds

I’m surprised the team members that comprised a lawyer, a financial coach and an auditor couldn’t see that. But in the heat of competition, it is perhaps understandable that the contestants thought they could defy the odds.

For those who are not familiar with CFD, here it is in a nutshell: Traders aim to make money by placing small bets on the future price of assets. These assets might be shares, commodities or currencies to name three. What’s more, traders can either bet on prices going up or going down.

If you managed to make the right guess, your gains could be magnified many times over. That’s because your bets are leveraged. In other words, you are using borrowed money to make you wagers. But if you guessed wrong, then you could lose heavily. So, to avoid losing your shirt, traders can put in place “stops” that would automatically close positions if things should go against you.

Although the statistics about how many traders lose money are closely guarded, I suspect most people don’t make money from their short-term trading activities.

That said, the allure of betting small and winning big can be a powerful magnet. It can lead some people to believe that they can correctly predict the short-term direction of markets by scrutinising charts and studying graphs.

Truth is most people can’t. And the final cash positions of the two teams said it all. One team lost US$3,628 or 18% of its original capital, while the other team gave up US$7,759 or 39% of its phantom pot.

Voting, weighing and pinball machines

The performance of the two teams is a good example of what Benjamin Graham meant when he said: “In the short run, the market is a voting machine but in the long run it is a weighing machine”. I would add that in the time-frame of CFD traders, the market would probably look more like a pinball machine.

Truth is, stock markets can be volatile in the short term. Just look at what has happened to the markets after Ben Bernanke said he might taper the amount of money he would need to provide if the US economy continues to show signs of improvement. Who would have guessed that the market would throw a taper-tantrum?

Firstly, if you think about it logically, the market should be delighted that the US economy is finally on the mend. Secondly, would anyone even notice if the US Federal Reserve were to pump, say, $65 billion rather than $85 billion into the US economy? I suspect not.

If Bernanke is right, and the American economy continues to improve, then so too should bottom-line profits at US companies. That could feed through to companies around the world too, if it hasn’t already done so.

Make volatility your friend

As far as I am concerned, tapering should be seen as a good reason to invest in shares rather than cutting your holding as some badly-behaved market traders are doing. But think of it this way: while traders carry on throwing taper-tantrums, it gives us long-term investors more time to acquire the shares that we want own, at better prices.

Volatile markets can be disconcerting for investors. But as Warren Buffet once said: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

As for me, I don’t need to look at share prices to justify the investments I have made. I only need to look at the company accounts and my dividend income statement. They tell me all that I need to know about the companies I have bought shares in.

The only reason I look at share prices is to see if I can buy more of what I like, at more favourable prices. And in times of market volatility, I generally can, and I do.

This article first appeared in Take Stock – Singapore.

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