Wednesday, April 28, 2010

Don't be the last fool standing

As I see more and more newbies coming in to the market, I thought it'll be only right to warn them that the market is not their mother to give them money, but to take it away from them. I must have repeated this countless times in previous post, but it seems I only see more clueless newbies coming in to participate in the market.

Some of the gripes I had with newbies are:

1. I'm in it for the long term

I cringed whenever I heard the word investing for the long term. It shows a few things - firstly, the person saying it believes that in the long term, every mother father stock in the market will rise. How long is long? From historical data, if you invest in STI, you won't lose any money after putting it there for 14 yrs. If you look at Joseph's theory in cycles, you also need around 12 yrs before we can say that we're peaking. All these are related to STI only, so if you're investing in individual companies, then you also assume the individual company's risk, which may not be correlated to STI at all.

So, the ultimate question is - are you prepared to hold it for the really long term - 10-15 yrs - all the time while your stock is bleeding, your capital locked up and seeing light only after that time period had passed? If you do not have the conviction, don't tell me you're buying for the long term.

2. While the attitude is to hold it for long term, there is no corresponding attitude to learn the market properly for the long term.

First deserve, then desire. If you do not wish to learn more about the market, yet wish to profit consistently in it, then you're like the weekend jogger who wants to compete with an Olympian athlete in a race. You might win him occasionally when he's not paying attention but when he does, you're dead. The odds are so against retail investors already, so why make it worse by not learning it properly?

Putting money in the market is like playing musical chairs. While the music is playing, everyone is happy. But when the music ends, do not be the last fool standing around mystified while everyone had found their seats. I repeat - do not be the last fool.

5 individuals but 1 chair - who's going to be the last fool standing?

3. The interest rate in banks is so low, so investing is good as it gives high returns

Yes, the interest rate is miserably pathetic at 0.125% per annum, but who ever heard of someone losing their principal sum by putting money in the bank, to the tune of 30-50%? That's how much you can lose by risking your money in the market. Don't just look at the returns, look at the possible losses! If you think you have a strong risk appetite (by filling those silly forms), ask yourself what you will do if you invest 30k but you are left with only 15k. Don't learn the lessons the hard way like me.

4. Greedy not to miss the run, yet no fear that the market will turn against you

Afraid to miss the market? Why so eager to lose money? If I know anything about the market, it's that it always give you second/third chances. There will always be opportunities, so why so eager to jump on in? Sincerely, without any malice, I wish that any newbies who put their money into the market loses their money when they first started. That will put them into the correct mindset. If anyone makes money, they start thinking that the market is like an ATM machine.

That's when the market starts clawing back the money given to you, often with a hefty interest put in.

Will people heed the advice? I bet most won't, there's why the market is as it always had been. Sounds harsh? Well, I know that money is hard earned, so don't waste it like that. Go smoke a cigar and have a good meal, at least you'll have some fun and entertainment.


AK71 said...

I learned the hard way... Sob... Still blue black in many places from the School of Hard Knocks! :_(

Createwealth8888 said...

If you are not keen to learn and upgrade your investing skills to do well in investing, then you got no choice but to work hard and save harder. Life like that. bo pian leh.

Anonymous said...

Hi LP,

Selective perception! People hear what they want to hear.

The older folks like my dad say the stock market is a crocodile pit. How apt.

When I first heard that, I thought not too bad la.. most ppl I know use their own money to buy the stocks. At most, they lost what they throw into the pit (that saving) and learn a lesson.

One particular friend lost couple of ten thousands in 2000 and decided not to buy stocks anymore. He invests in property instead. Luck? or? He owns 2 fully paid properties now. He still does not buy much stocks except the company he works with.

Another decided not to invest in anything at all after losing couple of ten thousands! even in 2003 when the great sales was on. He was adament to put most of his money in banks. Now?

Another, is still trying to trade, but refuse to cut loss when mkt direction is not in favour. cut loss when bleeding is too much too bear. Mkt turn around. Jump in again when mkt pick up and cut loss again when losses escalate. Ride on huge losses and take small profit since 2000. still doing. His savings is huge so the loss is huge.

Same situation, different responses.


Createwealth8888 said...

"The older folks like my dad say the stock market is a crocodile pit." How apt.

Don't worry about those crocodiles ..

Dou said...

Nowadays i feel newbies are funny.

Most of them does not know any things about stock and yet they dare to just dump all their money in without any analysis.

In fact they just want fast money which they think will drop from the tree of stocks

Createwealth8888 said...

"Don't be the last fool standing". Good advice; but, also "don't be the last fool sitting while the bull is still running"

Dou said...

lol createwealth8888

U seems pretty bullish to me haha

Anonymous said...

Hi LP,
Good analogy of the market behaviour (similar to playing musical chair - greater fool theory). It always pays to be on the cautious side (looking at capital preservation first before making profits). The more greedy one views the market, the higher chance of being emotional and carrying out poor investment decisions. The market is a great vehicle for investment only when one views it as an investment vehicle (by carrying out prudent investment decisions) and not some money tree giving out easy money.

Jeremy :-)

Createwealth8888 said...

Bulls and Bears will always come one after another. Do have some stocks and cash to live with them. Keep money management and risk control in your mind. Bulls and bears are your friends.

la papillion said...

Hey AK,

Well, me too. I just hope that newbies don't have to learn the hard way, but I don't think that's likely...

oh well :)

la papillion said...

Hi HH,

I guess ultimately it boils down to individual's response to the same situation. You know, some people crack under stress, some will strive harder under stress.

But interesting story that you related to us :)

la papillion said...

Hi Dou,

Haha, I think newbies 'everytime' is like that, not only nowadays :) I remembered fondly that I did such things too, so I thought it'll be best to advice people not to do such and such :)

la papillion said...

Hi Jeremy,

Long time no see :) Well, in my view, you can trade it too. But you better know what you are doing whether investing or trading.

I don't like to see people lose their money by just plunging into the market without knowing what's happening. Just a rumor at cna will send them to buy it because they 'don't want to miss the run'.

la papillion said...

Hi bro8888,

Always stay vested, yes. Nobody says to take out all your money when bear comes and put in all when bull comes. I don't think anyone can do it consistently.

I'm just cautioning the newbies not to put their money before putting the correct mindset and attitude towards learning the market first.

JW said...

Hi LP,

that's the reason I go mainly for dividend stocks nowadays, putting heavyweight into defensive sectors like SPH and Starhub...

It can go up, down, or stay stagnant, but it doesn't matter because it will likely remain in positive cashflow, and dividends will still flow out. In the worst case, it becomes a slow return of capital...

Supposed SPH and Starhub were to go bankrupt in two to five years time, I would have received sufficient divdends not to have too big an impact of loss.

la papillion said...

Hi momo,

You know the reason why you're into divy stocks...not all the newbies seem to know that. They just see, oh, this reit is so high in yield, better than banks, so I buy for long term. Period.

Gd luck in your strategy!

Anonymous said...

Hi LP,

Its interesting to keep track of these "real life stories" & of investment gurus too, some lose deeply and make a come back fast enough. Some super funds managers with value investment philosophy actually did not fire much during fire sales.

Interesting read:


la papillion said...

Hi HH,

I read that...he's the saudi prince who invested in C :)

Anonymous said...

All I'll say is, it happened yesterday. Today it still happens. Tomorrow, it will still be happening. Welcome to the real world noobs, as what they say.


Createwealth8888 said...

Real world noobs. Fully agreed. I have seen people who spend years in the market still noobs.

PanzerGrenadier said...

I still believe I need to be vested in the stock market simply because bank and fixed deposits are simply not even overcoming inflation!

However, the decision then for me is how much to stay invested during the cyclical bullish and bearish periods.

I am comfortable with 25% to maximum of 75% of investible capital in equities at any one point in time.

But as I grow older, I start to pare down my higher limit nearer to 60-70% simply because I realise I cannot get "rich" i.e. financially free without taking huge bets that could potentially wipe out my investible capital.

Thus, I am just trying to keep up with inflation and beating 2 x fixed deposit returns and blue chips (at value pricing) can achieve that realistically.

Be well and prosper.

la papillion said...

Hi Charles,

Yeap...welcome indeed to the real world :)

Hi bro8888,

ya, some people don't learn from losing money. I know a guy who lost consistently for 7 yrs in the market. Recently heard he changed his job as an accountant to become a trader.

I wonder what he is thinking about.

Hey PG,

Yes, it's not to exit the market entirely, but how much to put inside it.

I think your target can be done, definitely.