Hello readers!
With the recent roller-coaster in the economy - probably only midway through - investors worldwide were sent into a series of euphoria and depression every now and then. These swings of emotions could severely impact one's decision in the market, affecting from beginners to even veteran fund managers. Volatility is seeping into the modern economy and there is no escaping it, since the beginning of the stock market, the ease of trading nowadays brings about a more aggressive breed of 'investors' who some may classify as 'traders'. While the line between the two is relatively blurred, and most people doesn't lie in the extremes, Benjamin Graham thought of investors who are people that are buying into a business (in terms of stocks) because of it's sound fundamentals, while traders buy into stocks because they think that they can sell it for a higher value.
I believe that extremely rarely do anyone sit on these extremities, but depending on whichever one is more closely aligned to, an individual could be closer to becoming a investor or a trader/speculator. First and foremost one should identify his or her own investment patterns, temperament, approach etc. and to determine how close to the end of either spectrum they are - to think one is the other will inevitably end badly. Personally I align myself more towards the investor spectrum and here I'll share more about why so.
Please note: I have nothing against traders nor deny the potential profitability of it - I'm just sharing about why I chose the investor path.
Shares that are good for investing in might not be good for trading
Traders don't usually have long holding periods, they move shares in and out of their portfolio faster than most people change their clothes. Therefore asking a trader to hold a stock for several years could sound rather ridiculous to them, a few friends of mine who were traders made about 10 trades a month. In comparison, Warren Buffett held coca-cola stocks for 28 years (and counting)!
Most traders deal in penny stocks which sees extreme fluctuations nearly everyday, I personally had one which went up more than 100% of my entering price in a month - and subsequently crashing to even lower than that in the following month (not surprised). Because of that, many traders participate in something called shorting. It is basically borrowing another person's share(s) to sell in a speculation that the price will drop - and the difference will be the trader's profit.
One reason I do not short shares is that the potential loss is theoretically limitless, because your loss comes from the share price's gain. Coupled with my (and majority of others I presume) personality of 'if I wait it out it might be okay', should the share price keeps rising so does your blood pressure. One should also note that shorting a dividends paying company would result in YOU paying the dividends. On the other hand, if i buy into a share, worse case scenario - the company turned out to be an empty husk, doing illegal stuffs, went bankrupt, etc. - I only lose the amount of money I initially invested in. However, this is DEFINITELY NOT the reason one should buy shares. If you're buying shares with the assumption that 50% of the time the company could go bust and 50% of the time they could be the next Microsoft, why not just play jackpot instead?
Point in view - Minimizing losses
Commissions, commissions and more commissions
It is usually seen in the earlier years that brokers are celebrating the end of every day happily, even when the stock market isn't doing too well. This is because no matter what the 'investor' buys or sells, the broker earns a commission. During market shocks when the masses are selling to cut losses, or those that are sweeping up cheap stocks (good move mostly), the broker earns.
Personally, all the shares I bought thus far saddled up commissions paid of about 280SGD, and I don't even buy in massive amounts. Assuming I have a portfolio of $20,000, and this year profit of $1,000 (5%), should I sell everything to cash out, I would be only earning 1000 - 560 = $440 of profits, which equates to about 2.2% of my capital, even dividends pays out more than that!
Point in view - Minimizing losses!
A good company does not necessarily means a good stock
While it might sound nonsensical, a strong company with strong financials, management etc. might have already been recognized (perhaps too much) by the economy and thus investors are rushing to buy their shares, causing the price to skyrocket to much more than the company is actually worth. Although one might argue that if a company continue the grow, the actual value of the company might start to catch up with the market value, history has always proven that this phenomenon always results in a bubble that bursts no matter how well the company is doing. This is because it doesn't take long for the market to realize that a company is grossly overvalued - and of course everyone starts to sell it.
That is where opportunity arises, the modern market likes to over-exaggerate things even more than before, best described by Benjamin Graham's Mr. Market - a manic-depressive guy that always over-values or under-values securities. I learned about this through the hard way, and I realized that (losing) money is the best teacher out there. While traders generally don't bother about fundamentals such as annual reports - as they are historical data probably from months back- since they don't hold their shares for long, I believe that any investor, or any intelligent investor as stated by Graham, fundamentals of a company holds the utmost importance in their investing principles. To buy into any company without any prior research already exposes yourself into a huge gamble, as Warren Buffett said, "Risk is not knowing what you are doing." Therefore, one should only enter if it is evaluated that the there are not much potential downside or 'safety margin', while preferably having a high upside too.
Point in view - Minimizing losses!!
What to bring away from this
Before anyone starts investing, or perhaps you already are, many people focuses too much on the potential gain that they ignore all the risks that comes along with it. When they see that a share rises 50% in a month, they buy in expecting it to repeat itself, and vice versa. That is not going to happen, even if it does, they're just lucky. However, you're not lucky, so don't invest like it.
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