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SCMP Reporter

'After many attempts by well-meaning friends to teach me, I have finally learnt how to play mahjong! That is, I have learnt the rules of the game and can participate, albeit slowly... But, why am I talking about mahjong in an article about investing? By watching my friends play mahjong, I have learnt that there are many skills that are remarkably similar.'

Dr Wise,

Securities and Futures Commission

WHY INDEED SHOULD the sagacious doctor be talking about mahjong in an article about investing? Answer: Because, little as he knows about mahjong, he knows even less about investing.

You will rarely find firmer views about principles of investment than among people who don't do much of it but only the Securities and Futures Commission could suffer from such additional hubris as to offer a monthly column of investment advice under the fictitious name of 'Dr Wise'.

What the doctor has forgotten again, as his thoughts on the matter soon reveal, is the little matter of share price. It is a concept that has never been particularly well understood in the SFC.

The shares with which you play the market have share prices. The tiles with which play mahjong do not have tile prices. This is a profound understanding that has apparently escaped Dr Wise.

Take his principles of playing mahjong, which he says are so similar to principles of investing: 1) Decide which suit/combinations of tiles to go for to make a winning hand.

Good idea for mahjong, Doctor, but what makes a winning hand on the stock market is stocks with share prices that

go up.

I can pick all the best combinations of quality companies on the stock market, the ones that everyone says are soundly managed blue chips, but if all these qualities are already reflected in the share price, I may not have a winning hand.

It is better sometimes to pick rubbish instead.

The share prices will again reflect that most people have a low opinion of these stocks but any improvement in their circumstances can send their share prices soaring even if they are still of much lower quality than the blue chips.

In other words, the share price moves to balance the risk/reward prospect of any stock at 50/50 for the investment information available on that stock at the price at which it is bid or offered.

This price mechanism may not be perfect but a better one has never been found.

Thus, you can study the economy, the market trends and the fundamentals of any stock as much as you want, as much as Dr Wise says you should, but if the price has already moved to reflect these things, you will not be any better off.

Then we have Dr Wise's second bit of advice on playing mahjong: Calculate the risks of losing and the rewards of winning.

This, he says, means in investment terms that you should know how to manage your investment portfolio and determine the risks.

I wish I could find the calculator on which I could calculate such things. I could then know exactly when the potential rewards outweigh the potential risks or vice-versa and know exactly when to buy and sell, which would make me a multitrillionaire.

Price gets in the way again, however. The share price goes up when it is the general opinion of the market that the rewards outweigh the risks and once again that 50/50 balance is restored.

I can then make a guess at whether I should buy or sell, but one thing I cannot do is calculate that decision.

Next we have Dr Wise's third bit of advice - Recognise when it's time to 'surrender' and limit the potential losses, or to 'go for it' to maximise the winnings.

Tell me how to recognise it, Dr Wise. Whenever I think I recognise a time to sell, it turns out that the share price of the stock I want to sell has already gone down, usually to a level where my guess  of the risk/reward potential says the stock is probably fairly valued.

The same thing happens in reverse when I think it is time to 'go for it'. But if you have indeed learned to recognise such things, Dr Wise, it surprises me that you are still working a five-day week on a government salary when you could long ago have retired on an enormous investment fortune.

So please prove me wrong when I assert that you have even less experience of investment than you have of mahjong.

I think that your knowledge of financial markets is limited to the rules you impose to regulate them and that you do not really understand how they work at all.

Go ahead. Show me in practice with your money that you know what makes a winning hand on the stock market, that you can calculate risks and rewards and that you recognise when it is time get in and get out.

In the meantime, I ask you to pull out a dictionary and look up the meaning of the word 'childish'. It perfectly describes your published commentaries.



Mahjong dynamics don't mix with stock investing rules, Doc