He/she says:
Hi, I hope that maybe in the future you will invest some time to write about the challenges and constraints of investment in foreign stock exchanges. Challenges and constraints not about the exchange rate volatility but rather about fraud, market manipulations, sharks and predators in these foreign markets compared to our own local "sharks".
My response:
I have written a lot on the concept of focus - Pareto Principle that I always used during my working days in time management and inventory management. I intend to have the discipline to stay very focused. I must say that I do not trade foreign market of any form, nor I know much about foreign equity market. I have followed KLCI when I traded in FKLI, but now stopped futures because of the time and distraction from equity trading.
Personally I feel that there is no reason for me to divert my time on something I am not familiar with, while I am confident to survive and be one in the 5% group, and not in the 95% herd. I know that many investors/traders like foreign market, but for me, it is the same as far as gains are concerned, but the costs of trading in foreign market will be much higher. The learning process will be longer as it will involve also exchange rates.
Now the cost as I understand (but I may be wrong):
1. If I buy a stock under the cross border trading account, my RM has to convert to the foreign market currency, and there is an exchange loss (assuming exchange rate will be constant all the time)
2. If I sell, the foreign current has to be converted to RM in my trust account, and there will again be an exchange loss
3, My trading commission is low in the KLSE market
4. I know KLSE and the companies well, as compared to the fact that I do not know much about foreign companies. Diversion of effort will result in losses in both.
5. I have limited time, and certainly focusing on one market, and only a few stocks in one market allows me to build my strengths to master the market, rather than being master of none.
6. Profit and loss calculation is the same whether it is Malaysia Market or foreign market
Therefore I will avoid foreign market at this moment and to stay focused on the Malaysia Stock Market. Even in KLSE, I intend to focus on holding less than 5 stocks (though monitoring more than 5) irrespective of how much capital I put in. Of course the more capital I have, the more flexibility in picking stocks, that I can pick a couple of stocks for long term investment. Until I have mastered the tools and techniques that I need in trading, I will not likely trade in any foreign equity market.
Should I trade in foreign market in future, I will not be trading via cross border trading system because of the exchange rate conversion, unless the stock broker allows a trust account in foreign currency that any transaction payments and income will not subject to conversion.
Focus simply means that I would not adopt a shotgun approach hoping that if I am wrong in 4 stocks, I can be right in right in 6 to make a gain. I would rather take the strategy to aim accurately to shoot at the target. In this respect, the rational analysis concept will surely help.
Personally I am not afraid of sharks and market manipulators, as their activities can be shown in the volume and price actions, and this skill I have been learning for two months, and now I think I know how to spot the sharks to follow their tails. As for fraud and accounting irregularities, I will have no way to know, but a thorough fundamental analysis including looking at the management team, the Board board, the shareholders and financial data abnormalities will lesson this risk, but this is the risk that I cannot control. But should fraud and accounting irregularities detected, the chart will quickly tell me to exit with lower loss. Therefore knowing technical analysis would likely reduce any loss due to the resulting share price decline due to accounting fraud. That is why I have turned to a technician from a fundamentalist.
1. If I buy a stock under the cross border trading account, my RM has to convert to the foreign market currency, and there is an exchange loss (assuming exchange rate will be constant all the time)
2. If I sell, the foreign current has to be converted to RM in my trust account, and there will again be an exchange loss
3, My trading commission is low in the KLSE market
4. I know KLSE and the companies well, as compared to the fact that I do not know much about foreign companies. Diversion of effort will result in losses in both.
5. I have limited time, and certainly focusing on one market, and only a few stocks in one market allows me to build my strengths to master the market, rather than being master of none.
6. Profit and loss calculation is the same whether it is Malaysia Market or foreign market
Therefore I will avoid foreign market at this moment and to stay focused on the Malaysia Stock Market. Even in KLSE, I intend to focus on holding less than 5 stocks (though monitoring more than 5) irrespective of how much capital I put in. Of course the more capital I have, the more flexibility in picking stocks, that I can pick a couple of stocks for long term investment. Until I have mastered the tools and techniques that I need in trading, I will not likely trade in any foreign equity market.
Should I trade in foreign market in future, I will not be trading via cross border trading system because of the exchange rate conversion, unless the stock broker allows a trust account in foreign currency that any transaction payments and income will not subject to conversion.
Focus simply means that I would not adopt a shotgun approach hoping that if I am wrong in 4 stocks, I can be right in right in 6 to make a gain. I would rather take the strategy to aim accurately to shoot at the target. In this respect, the rational analysis concept will surely help.
Personally I am not afraid of sharks and market manipulators, as their activities can be shown in the volume and price actions, and this skill I have been learning for two months, and now I think I know how to spot the sharks to follow their tails. As for fraud and accounting irregularities, I will have no way to know, but a thorough fundamental analysis including looking at the management team, the Board board, the shareholders and financial data abnormalities will lesson this risk, but this is the risk that I cannot control. But should fraud and accounting irregularities detected, the chart will quickly tell me to exit with lower loss. Therefore knowing technical analysis would likely reduce any loss due to the resulting share price decline due to accounting fraud. That is why I have turned to a technician from a fundamentalist.
2 comments:
Hi Lee
You are very right about it here. Good point, as always.
BTW, you may consider e-trade or many more platform to trade foreign stocks which cut-off fees and exchange rate losses. Just FYI.
Like the way you think. Very objective.
Happy New Year to you and family.
TEH
Hi Mr Lee,
Just came across your blog. I find your postings pretty informative. Thanks for sharing your knowledge. I am a fundamental investor and agree with you that we should focus on what we know best. The toughest part of investing from my expereince is formulating the exit strategy and adhering to it. Any tips on how to get the emotion out of the equation?
thanks and wishing you a Happy New Year 2011.
chris Chan
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