Picking stocks is the wrong way to go

Published November 19, 2008

By GENEVIEVE CUA

ASIAN investors should wean themselves away from the illusion that they can pick stocks and time markets. Says Saxo Bank Group chief investment officer Steen Jakobsen: 'I think 80 per cent of readers should not invest in markets themselves. You need to treat investing as the most difficult thing in the world. Why are there more heart surgeons than successful traders?'

Markets are undergoing a 'paradigm shift' which should result in investment options that are low cost, more transparent and based on asset allocation principles. Against such a backdrop, structured products - notoriously non-transparent in risks and fees - have no place. 'Individuals need to realise that the allocation between equities, bonds, alternative assets and real estate is the biggest choice that they make. Whether you buy Singapore or China stocks, in the long term it makes no difference. The ability to pick stocks is (rather) useless. The discrepancy between the best 25 per cent of fund managers and the worst 25 per cent is less than 200 basis points . . . You should just be indexed. Spend time to get the allocation right. Finding the right stock is like a lottery ticket.'

Asia, he says, has fallen victim to structured products offering high yields. 'I'm a sophisticated investor. I would never buy a structured product. It has no transparency and a lot of fees. Every time you buy one, you're 5-6 per cent down at the start. As an investor, I only buy if there is transparency.' He himself writes a blog where he discusses the moves of the global macro fund he runs.

Mr Jakobsen, who has been trading since he was 17, says he follows three key principles. One is to recognise capital preservation is important - something investors often pay only lip service to. Second, have a true understanding of compounding in rising and falling markets. 'I know if I have $100 and I lost $10, I'm down 10 per cent. But if I want to go from $90 to $100, I have to make 11.1 per cent. That means I'm not willing to lose a lot of $10 bets.' The third is to understand you can't predict the future nor time markets. 'If I'm very convinced of something, I'm 60 per cent for and 40 per cent against. If I get to 100 per cent conviction, I'll be wrong. There are 100,000 people smarter than me trying to do the same thing.'

As an investor, he also scrutinises opportunity costs. 'I have 75 per cent in fixed income and cash. Every week I measure how much it costs me to be so defensive relative to the market. I'm gaining because I have positive yield carry. Investors can commit to a strategy but they need to measure the opportunity cost of doing something else.'

Also: 'Control your ego. When you make money, you think you're God; when you lose, it's everyone else's fault. It's not so. Whether you make or lose money, it's partly you but also partly random. There is a gravity in the market. Mathematically, if you speculate, you go bankrupt.'