I received this from a reader recently:
Reader: I want to give up investing already. It is so difficult. I started a few months ago and I have already lost 40% of my original capital by investing in equities. Don’t you feel insecure when you invest in equities? How do you “stay calm and collect dividend” when the market is fluctuating every day?
Warrior: Wow, what did you invest in? The markets that we have access to from Singapore did not crash 40% lately. Even with the issues that Turkey is facing, its stock market declined 25% (not 40%) from its peak at start of this year to now.
Reader: I bought options and invested in a high growth stock. But the options tanked and I lost most of my money there. The high growth stock was recommended by my friend and know what, the next day after I bought its share, its share price started to drop and never recover since then. So, I am sitting on a lot of paper losses.
Warrior: Oh I see, options are high risk stuff. You can gain or lose a lot within a short time. It is not for amateur like us. What you were doing was gambling and not investing. There is a difference.
Sounds familiar to many of us, right?
I must admit at my younger days, I fell for it too. I wanted to make money the fastest and “easiest” way. I envied people who made a lot of money from the stock market overnight … 10%, 20% just like that. I chased after stocks based on rumours. I bought warrants and “cheap cheap” penny stocks for the maximum returns. I asked my broker what the latest market talks were and bet on buy high sell higher.
The outcome => I lost a lot of money! Looking back now, I was rather foolish.
I had treated the stock market like a casino and placed bets to get the highest return within the shortest time. But I was no trader. Sometimes I knew nothing other than the name of the companies that I bought.
Over time, I learned my lesson and became wiser.
Investing in equities is not gambling.
By buying the shares of companies on the stock exchange, we are investing in real companies which have businesses to run. DBS, Singtel, ST Engineering, Capitaland …. famous and visible to all of us on the business they are in.
These companies make money using the capital we invested and share the profits they made with us through dividend. You can view it as they borrow money from us to make more money and then repay us the interest to the “loan” that they receive from us.
As a shareholder, we are technically owners of the companies … but in reality, because our stake is only 0.0000%, we cannot sway or influence the decision of the companies’ decision. We can only decide our own actions – to buy, to keep or to sell the shares.
The most tangible returns to us are either through the higher share price or dividend.
To get higher share price, the companies need to grow its business (other than riding on Mr Market’s mood). But like we all know, growing a business is easier said than done. Competition is keener and more global than what it was in the past. Our mama shop downstair is no longer just competing with the mama shop below the other block … it is now competing with giants – Redmart, Lazada, Amazon, TaoBao etc from overseas => unless this mama shop has a special competitive edge, it will find it extremely difficult to make money, not to say grow its business.
Hence, I prefer to obtain my returns primarily from dividend and not share price.
If I get both, its bonus. Dividends come from cash flow. If the company has a strong moat and is able to defend its market share and margins, it can generate enough cash for re-investment, grow its business and still return some of it as cash “reward” to us. For companies who can sustain dividend payments, even if they have an exceptionally bad year, they can still maintain dividend payments. It is a more sustainable source of passive income compared to relying on share price gain.
Hence, I invest only in stable, dividend paying companies and measure my success based on dividends I receive.
Once you recognise that you are a co-owner and your returns come only because the company your invest is doing a great business. Then you will take efforts to understand their business and accept the way they do business before you put your money in. Make sure you do your own research and don’t buy on rumours.
This is also the approach to stay calm …. if you have done your research and you know that this is a good stable dividend paying company, then don’t be too bothered with daily fluctuation in their share prices.
And very importantly, don’t borrow money to invest => I can guarantee you that you can’t sleep if you do so. Peace of mind is priceless.
So far, this approach has given me a better return than my “gambling venture” when I was younger.
Invest your money wisely, don’t gamble it away.
Small punt from time to time is ok … I still do it at times though getting lesser now. An most of the time, without saying, I lost … Money is hard to earn, so don’t lose it easily.
If you are just starting to invest in equities, I would even suggest to you not to jump into individual companies yet, invest in some index funds first and see if you can tolerate the volatility and recognise your risk appetite and tolerance. Every one is unique and different when it comes to tolerating losses.
Read books to know how to analyse the business via the financial statements. Then Try your hand in researching the company and taking a view ….
Just to share a story about risk tolerance … my mum asked me a few years gap … “Can you help me to buy a share that won’t lose money?” … my reply to her … “Then keep the money in the bank. There is no risk free investments in equities”
Today, my answer will be slightly different, “Buy Singapore Saving Bonds loh :-)”
Have a great weekend folks.