7 Lessons Learnt From Investments

In this report, we identified and evaluated the shortcomings of our investment decision process and what we could have done to improve our investment decision during the revision of our portfolio. This is so that we can better meet our investment objective of maximising returns and minimising risks.

Upon reflection, we came up with seven lessons that we have learnt from this assignment on investment. This includes the observation of the Efficient Securities Market Theory and momentum trading in Lesson 1 and 2 respectively. We are glad to be able to apply what we have learnt in real life, as it made our learning experience more relevant to the real market conditions.

Furthermore, there were lessons learnt through the process of arriving at the investment decisions. We have come to realize that fundamental analysis adds value to our investment decision-making process, as it provides a more forward-looking picture than technical analysis (Lesson 3). However, it is insufficient to rely on fundamental analysis alone. We need to conduct sensitivity analysis as well so that we can consider the intrinsic values of the company under different circumstances (Lesson 4). This is because the market is dynamic and uncertain.

In addition, we have learnt that corporate governance will affect the performance of a firm (Lesson 5). Furthermore, the composition of the company’s shareholdings will affect its trading volume, which will in turn affect our investment returns (Lesson 6). Moreover, we have discovered that stock prices are not exempted from the influences of macroeconomic factors (Lesson 7).

Introduction

The investment strategy of our group is to maximise returns from our investment portfolio, which consists of Advanced Holdings Limited (Advanced) and Asia Pacific Breweries Limited (APB) and Keppel Corporation Limited (Keppel). All three companies are listed on the Singapore Stock Exchange (SGX). Moreover, we wish to diversify to minimize our investment risks. Although we managed to make a substantial profit of $12,669.90, we realised that we did not fully capitalise on the prospects of the firm. Hence, in this report, we reflect upon our mistakes and observations and came up with seven lessons that we have learnt.

Lesson 1: Markets are efficient when publicly available information is directly translated to fluctuations in share price.

We saw how the release of good news can cause the share prices to increase when investors react promptly and positively to it. The recent news of Keppel acquiring a major contract with Maersk resulted in Keppel’s share price rising from $9.45 to $10.70 as at 17 March 2005. We felt that this increase in share price was due to the quick action of investors acting upon the receipt of new information. Investors’ behaviour, reflected by the high trading volume in the market when the share price rose, further validated the workings of the Efficient Securities Market Theory.

Lesson 2: Momentum trading is observable in the current stock market

We saw for ourselves the workings of momentum trading. The initial release of good news and the consequent press releases confirming further profitable contracts prompted investors to rush and buy the shares of Keppel. As a result, this propelled Keppel’s share price to an all-time high of $11.40 as at 21 March 2005. This is due to the sudden increase in the volume of shares traded.

After the initial excitement subsided a few days following the release of good news, the market reacted and Keppel’s share price started falling. This was probably the result of noise traders dumping their shares due to them believing that the share price could not go any higher as it had already reached its peak. As a result of the actions of such traders who are only in for short-term gains selling their shares, Keppel’s share price started falling. The fall was gentle at first but after some time, it hit $10.50. Momentum trading is likely to have taken place and that the initial action of some investors selling their shares triggered others to sell theirs, resulting in the fall of Keppel’s share price. Another probable reason could be due to macroeconomic factors, which will be covered in Lesson 7.

Another example to illustrate momentum trading could be seen in the case of APB. During our portfolio revision, APB was the stock that had the greatest increase in share price and we assumed that momentum trading would continue, thus causing continuous increase in the stock price. We then bought more APB shares. However, this cycle did not persist for long due to the noise traders as mentioned earlier. Furthermore, APB’s stock does not trade daily, thus this may have affected the on-going momentum trading. The reason why APB does not trade daily will be further elaborated in Lesson 6.

Lesson 3: Fundamental analysis adds value to investment decisions

During the revision of our investment portfolio, we depended largely on technical analysis, which is the analysis of stock trends. As it relies solely on historical data, we should not have sweepingly concluded that the three firms’ current performance would persist. This is due to the need to be forward-looking in this ever-changing business landscape. We also depended extensively on publicly available information, such as analysts’ reports and media releases, and failed to take into account the intrinsic value of the firms.

After conducting fundamental analysis, we had a better understanding of the true potential of the firms. Strategy analysis had helped us to better understand the internal and external environment and the sustainability of firms’ current strategy. Accounting analysis had helped us to reflect the true, underlying economic reality, while financial analysis had aided us to study the historical performance of the firms. These analyses provided a more concrete basis for prospective analysis, which helped us to be forward-looking. We have also learnt that without conducting these analyses, the publicly available information would prove to be useless since it is not incorporated into firms’ future value.

We regretted that we did not perform these analyses before the revision of our portfolio, as our investment decision would have been vastly different. We would have bought more shares in each company and not recommend a �hold’ for Advanced and Keppel Corp. This would allow us to better achieve our goal of maximizing returns. Hence, fundamental analysis would indeed have added value to our investment decision.

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