Investing is like riding a cart on a road full of potholes. Many unexpected things can cause you to trip up, giving you a rough time.
Just ask billionaire investor Bill Ackman, whose hedge fund Pershing Square Capital lost US$400 million betting in Netflix after the company reported a decrease in subscribers for the first time in a decade [news].
Or the investors who sued Elon Musk for failing to disclose his intention to buyout Twitter promptly, after they had sold the shares [news].
Or closer to home, holders of the Lion-OCBC Securities Hang Seng TECH ETF, who had lost more than 50 percent over the past year due to fear of regulatory crackdown on Chinese tech firms.
Those were just some of the bigger, headline-grabbing events. Been in the pit long enough and you will know there is never such a thing as a dull day in the world of equities. Something is always happening that is attributed for the meteoric rise of Stock X, or the sharp drop in Index Y.
To an outsider, the stock market and its mood swings may seem so bizarrely chaotic, it makes the person think twice about investing in stocks altogether.
The truth is, none of these market movements is really within anyone's control. And may I add, none of these is really about investing either.
The public stock exchange exists mainly for the purpose of price discovery. Beyond the initial capital raising for the company, it gives people a yardstick to gauge how much one can trade stock certificates for cash daily.
Newswires publish commentaries (to explain why a stock price or an index changed from previous day) because readers crave stories to make sense of the fluctuations and it helps to capture eyeballs for advertisement revenue.
But I argue that is NOT investing. Following the news and tracking prices closely do not make us savvy investors. In fact, the information overload can distract us from doing what is most required.
The real task of an investor is to identify the enterprises with the highest probability of earning predictable positive returns over the long run.
While the share purchase price can make a difference to the mark-to-market PnL, picking the correct company can have a bigger impact. This is because the right company should earn a profit consistently, thereby increasing its cash and its net asset value. Even when the stock price does not move a cent, the fact is you are the fractional owner of an enterprise that is now more valuable than the time when you bought the shares.
When I first started investing, I did not understand the above truism. Stock price movements influenced my psyche. I found myself equating a stock price drop to an erroneous judgement on my part. Did I forget something? Are others seeing something that I'm not? Or am I simply lousy at this analytical stuff?
No doubt the ego gets hurt, especially if I cannot find any explanation to justify the price drop. The fear of having made a fatal mistake always lingers.
Fortunately, after years of sticking through the trials and tribulations of the stock market, I am a little wiser. Most companies that I had invested in turned out fine. When the fundamentals are intact, the stock price usually rebounds.
Now, I confess I still get queasy when I buy into a stock and the price drops further. But I no longer question my own evaluation of the company. Likewise, I have learnt to be chill after I sold a stock and the price keeps rocketing. (Seller's remorse, I'm invincible against you. Muahahaha!)
So to the rookie investor out there fretting over his or her unrealized loss, here is my advice - don't beat yourself up. It's only part and parcel of investing. If you have done your homework (i.e. studied the fundamentals carefully) and you are confident in the future prospects of the company#, have trust in your own judgement. The stock price will eventually recover, sooner or later.
Just ask billionaire investor Bill Ackman, whose hedge fund Pershing Square Capital lost US$400 million betting in Netflix after the company reported a decrease in subscribers for the first time in a decade [news].
Or the investors who sued Elon Musk for failing to disclose his intention to buyout Twitter promptly, after they had sold the shares [news].
Or closer to home, holders of the Lion-OCBC Securities Hang Seng TECH ETF, who had lost more than 50 percent over the past year due to fear of regulatory crackdown on Chinese tech firms.
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| Percentage chart of Lion-OCBC Securities Hang Seng TECH ETF (Source: Yahoo) |
Those were just some of the bigger, headline-grabbing events. Been in the pit long enough and you will know there is never such a thing as a dull day in the world of equities. Something is always happening that is attributed for the meteoric rise of Stock X, or the sharp drop in Index Y.
To an outsider, the stock market and its mood swings may seem so bizarrely chaotic, it makes the person think twice about investing in stocks altogether.
The truth is, none of these market movements is really within anyone's control. And may I add, none of these is really about investing either.
The public stock exchange exists mainly for the purpose of price discovery. Beyond the initial capital raising for the company, it gives people a yardstick to gauge how much one can trade stock certificates for cash daily.
Newswires publish commentaries (to explain why a stock price or an index changed from previous day) because readers crave stories to make sense of the fluctuations and it helps to capture eyeballs for advertisement revenue.
But I argue that is NOT investing. Following the news and tracking prices closely do not make us savvy investors. In fact, the information overload can distract us from doing what is most required.
The real task of an investor is to identify the enterprises with the highest probability of earning predictable positive returns over the long run.
While the share purchase price can make a difference to the mark-to-market PnL, picking the correct company can have a bigger impact. This is because the right company should earn a profit consistently, thereby increasing its cash and its net asset value. Even when the stock price does not move a cent, the fact is you are the fractional owner of an enterprise that is now more valuable than the time when you bought the shares.
When I first started investing, I did not understand the above truism. Stock price movements influenced my psyche. I found myself equating a stock price drop to an erroneous judgement on my part. Did I forget something? Are others seeing something that I'm not? Or am I simply lousy at this analytical stuff?
No doubt the ego gets hurt, especially if I cannot find any explanation to justify the price drop. The fear of having made a fatal mistake always lingers.
Fortunately, after years of sticking through the trials and tribulations of the stock market, I am a little wiser. Most companies that I had invested in turned out fine. When the fundamentals are intact, the stock price usually rebounds.
Now, I confess I still get queasy when I buy into a stock and the price drops further. But I no longer question my own evaluation of the company. Likewise, I have learnt to be chill after I sold a stock and the price keeps rocketing. (Seller's remorse, I'm invincible against you. Muahahaha!)
So to the rookie investor out there fretting over his or her unrealized loss, here is my advice - don't beat yourself up. It's only part and parcel of investing. If you have done your homework (i.e. studied the fundamentals carefully) and you are confident in the future prospects of the company#, have trust in your own judgement. The stock price will eventually recover, sooner or later.
# People hate bad news, but let's be honest here: If you have NOT done your homework and you are NOT confident in the future prospects of the company, you need to admit it was a wrong decision and take your loss. Learn the lesson and be a better investor.
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