Warren Buffett losing $70 billion
Even billionaire Warren Buffett’s “value investing” approach is outdated. Look at this coronavirus crash, Buffett has suffered $70 billion in coronavirus losses on its 10 biggest investments (as reported by Business Insider of Mar. 18, 2020).
The value of Berkshire’s stakes in Apple, Bank of America, and other blue-chip stocks dropped by an average of 37% between February 20 and March 18.
Not only that, but Berkshire’s stakes in American Express, Wells Fargo, and US Bancorp also shrank in value by at least 40%.
And last but not least, Delta Air Lines, one of Buffett’s latest investment, was down 60%
That causes us to ask a question: Does value investing still apply in this day and age?
Cho Yan-Chiu’s trend investing
Cho Yan-chiu, a well-known financial columnist and investment veteran, is famous for his “trend investing” approach, which is all about making trends our best friend.
In the 1970s, Cho had two experiences of making millions from the market and two experiences of near bankruptcy. He learned something from these:
Do not borrow money for day trading
Do not cut profits, but one needs to cut loss.
Property investment is easier to make money than the stock market, because the volatility is less and the leverage is more easily available.
(Perhaps the most important less Cho learnt) Never, ever, go against the trend. You cannot beat the trend.
Cho was of the view that no matter how strong the fundamentals of a company is, no matter how profitable a company can be, if the economy is bad overall (just like what we have during the coronavirus outbreak), the price must go down.
Therefore, the major factor for stocks and portfolio’s performance is not picking the right stocks, but to invest according to the trends.
“You should adjust your investment strategy in accordance with different economic cycles,” Cho recommended.
“Your hard work can only count for 30%. The real reason — the 70% that determines whether you make any profit in the stock market or lose money is the trend.” Cho shared in an interview. “I started investing in stocks from 1969. In two years, I made more than $200,000. That is not because I am clever. Not at all, but because that was the time when the economy of Hong Kong is going up. The trend is upwards…. In 1970, why I made half a million in such a short period? Again, not because I was clever, but because that is the trend — the trend is going up. I am merely going with the flow, and I made the money.”
“In 1974, why do I lost money? Not because I was stupid, rather because I was going against the trend…. I spend 1975 to 1980 reading many books and only then did I realised the real reason behind why I made money in 1969–1970 and lost money in 1974.”
“When I started investing, I believed in value investing. Yet, later I found that a more powerful force than value, and that is the trend.” Cho recalled.
“Follow the momentum. Stock prices show upward or downward momentum 15 percent to 20 percent of the time and just move sideways the rest of the time. Make short-term buy/sell decisions that take advantage of price momentum.” Cho explained his investment strategy.
“Watch out for shifts in the trend. Trend shifts do not happen overnight, so stay alert if you notice that there is contention among market participants. Locate your point of exit before joining the crowd, and decide your loss limit before buying a stock.” Another one of Cho’s wisdom.
In 2007, Cho predicted that the US economy is entering into a downturn, and investing based on that trend — you are sure to make money even if you do not pick the right stocks.
Commonalities
Despite the different investment principle, there are a few thing that Buffett and Cho’s opinion meets:
Cho said “those who make money have the character of a wolf, those who lose money have the character of a sheep.” and “stay away from crowds. In the United States, the top 3 percent of the population controls 31 percent of the nation’s wealth, and the next 7 percent of the people have 17 percent of the wealth. If you do not belong to the 10 percent, you only have a 10 percent chance of succeeding.” Buffet said “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Cho said “risk management comes first. One heavy loss may wipe out all the gains from 10 investments.” Buffett said “the no. 1 rule of investment is never losing money. Rule no.2: refer to rules no. 1.”
Note: this is not investment advice. I’m not financial planning professional. Just sharing what is working for me as part of my investing strategy or what I have learned on my investment journey. Please be reminded to do your own research and consider your own circumstances before making any financial decisions. You could also check with your financial professional to understand what would be best for your situation.
