investment wisdom - Aberdeen Asset Management

At Aberdeen we keep things simple, so youwill always have the comfort of knowingwhat we do: buy great businesses withstrong management teams at sensibleprices, and then hold them for a long time.We do not try to reinvent the wheel, butseek to benefit from the enduring insightsof the investment legends. If you would liketo know more, ask Aberdeen.Eight pearls ofinvestment wisdomfor these volatile timesAberdeen International Securities Investment ConsultingCompany LimitedTel: +886 2 87224500Email: client.services.taipei@aberdeen-asset.comwww.aberdeen-asset.com.tw

The financial world is a confusing place at the best of times. But withthe current uncertainty in markets there may be a particular need forclear thinking. The difficulty with bear markets is that by the time onerealises one is underway, it can be too late to sell.Yet the natural reaction at times like these is to raise cash and putit under the mattress, for fear that the world is about to fall apart.But the world never really falls apart, and the bestcourse of action can be to stand firm andbe brave. To help you in this endeavour,here are some simple thoughts aboutinvesting.Important Information:[Independently operated by Aberdeen International Securities InvestmentConsulting Company Limited]The information of this report is granted byAberdeen International Securities Investment Consulting Company Ltd (97Jin-Guan-Tou-Gu-Zi-Di No.003) for investors’ reference only. The information areprovided “As Available” and subject to change without notice. Investors shouldmake their own assessment of the adequacy, relevance and accuracy of suchinformation, opinion or estimate contained in this article.About Aberdeen TaiwanSince 1997, the Aberdeen Group has been distributingoffshore mutual funds in Taiwan through third parties.From 2008, we are pleased to announce the opening ofAberdeen International Securities Investment ConsultingCompany Limited (‘AISICCL’) in Taipei, and acquireda Master Agent licence from the Taiwan FinancialSupervisory Commission (FSC). Aberdeen will now beable to directly promote and sell its own offshore fundsin Taiwan through third-party distributors after 20th Oct2008. The opening recognises the importance we attachto the expanding mutual fund market in Taiwan, and thebenefits we can bring clients through a local presence.Currently our products include 12 funds within AberdeenGlobal, a Luxembourg-based fund range.AISICCL is part of the Aberdeen Group, a UK-based, LondonStock Exchange-listed asset manager, with over *US$144.8billion under management globally. The Group manages arange of equity, fixed income and property funds for others,chiefly institutions but also individuals via pooled funds. Weare independently run and have no ties to larger financialgroups. Within Asia, we have a long record, having openedour regional headquarters in Singapore in 1992. We alsohave offices in Bangkok, Hong Kong, Kuala Lumpur, Tokyoand Sydney as well as representation in Seoul.*30 January 2009

Volatility isnot somethingto fear, butsomething toembraceThinklong termWhy do we fear stock market volatility somuch? As an airplane’s wings must bend duringturbulence to prevent them from snapping, so toomust shares fluctuate, sometimes gently, othertimes wildly. Of course, severe turbulence duringa flight can be an uncomfortable experience butwe have no choice but to sit tight, knowing deepdown that we’ll reach our destination. But in theworld of investing there is little to stop us bailingout at the slightest wobble as our emotions getthe better of us. Try then to welcome volatility.Shares do not go up without it.All stock price movements are a combinationof unpredictable noise on the one hand and themeaningful pattern of business performance onthe other. Over short periods price movements areas good as random, while over long ones businessperformance dominates. As an investor, youshould align your time horizons accordingly. If afactory, for example, is expected to provideat least ten years of returns, so shouldyour shares.Know thedifferencebetweengambling andinvestingBe contrarianWe all like to have fun once in awhile. A trip to thecasino is an excuse for a good time, but approachthe stock market in the same way and you’llquickly find yourself in trouble. Successful investingis hard and often dull, requiring discipline andlots of study. For that adrenaline rush, few thingsbeat watching the roulette wheel spinning. Whenit comes to making good investment returns,however, owning the casino itself tends to bemore profitable than entering it. Think about it.We have a tendency to do or believe somethingjust because others do. It makes us feel normal,part of the group. Occasionally, however,such behaviour is counterproductive and evendangerous. Rush for the exit in a crowded marketwith everyone else and you risk getting trampled.The same applies to behaviour in the stock market.Selling – or buying – behind everyone else is a sureformula for poor investment performance. WarrenBuffett teaches us to “be fearful when others aregreedy and greedy only when others are fearful.” 1Try to do more thanjust accept volatility, learn to love it.Shares do not go up without it.

Consider thedifferencebetween priceand valueBe humble,the stockmarketis smarterthan youIn the real world, the distinction between priceand value is frequently apparent. Given the choicebetween a $10,000 car and a $10,000 tee shirt,it’s pretty clear that the car is better value. Inthe investing world however, it is much harderto discern the difference. Unlike a car, whoseeconomic utility is something we can understandand even evaluate, the value of a company issomewhat intangible and thus a tricky concept tograsp. Guru stock picker Philip Fisher noted that thestock market is filled with individuals who know theprice of everything, but the value of nothing. 2Overconfidence might help to secure a jobpromotion or the attention of others at a nightclub,but in the investing world, an over-inflated opinionof yourself can be disastrous. You may think thatyou are in a position to predict the direction ofthe market or a particular stock over the next fewmonths but remember that there are millions ofothers doing the same thing. Apply a little humilityand ask yourself honestly whether you are reallysmarter than all of them. As the father of moderneconomics and successful investor John MaynardKeynes noted, “Successful investing is anticipatingthe anticipations of others.” 3Avoid thingsyou do notunderstandAnd finally…The world is an increasingly complex place andone often finds oneself blinded by science orconfused by complicated arguments. Withinvesting, it is important to understand preciselywhat you are buying, at least so that you cansleep soundly at night. Think about shares asyou would a book: if you don’t understand it,put it down. Peter Lynch recommended that ifyou cannot summarise in just a few sentenceswhy you’re investing in a company, then you’reprobably looking at too much information. 4If you place bets proportional to their market oddson every horse in a race, you’ll come out slightlydown, after the track’s take. This is a pointlessstrategy, particularly if you know more than othersabout horses. It is important to understand whereyou have an edge and, when you have one, to useit to your full advantage. We never forget Buffett’stip, “Wide diversification is only required wheninvestors do not understand what they are doing.” 51Warren Buffett, Chairman’s letter (2004) to shareholders2Philip A. Fisher, Common Stocks and Uncommon Profits (1958)3Isms (2006) by Gregory Bergman4Morgan Housel, Keep It Simple, Fool (2008)5James Altucher, Trade Like Warren Buffett (2005)