Friday 16 November 2018

Investing Meant Taking Risks


Many newbie investors starting their journeys in recent years like to "jio" others to invest!

As if don't invest is stupid or what?

Of course that's the strength of youth! They don't know what cannot be done. 

That's until they got their first big loss. 

Although STI has yet to experience a -20% bear market this year, at the individual stock level, some of these youths are starting to experience their first -50% losses.



This is healthy. And very normal.

That's how old fogeys that survived several bull/bear cycles learnt the hard way too. We are no smarter. 

I remember an old colleague lost just $5K and swore off "investing" in stocks forever!?

The pain of loss is too much for him to bear psychologically. I wouldn't encourage him to "invest" for his financial future. People like him would naturally gravitate towards voluntary contributions of CPF. So be it! Low returns (after inflation) are better than negative returns!



Another source of complacency is what we often hear from "bei kambings" - "If this stock crashed, Singapore will go down too!"

Well, if you have followed the US market recently, you would learn not to invoke such silly mantra as a reason for investing in a particular company...

Utilities are safe right? Defensive some more as during bear markets, people still need water, gas, and electricity. No?

And best of all, they give dividends too! 

Well, just ask investors of PG&E - the utility company embroiled in the middle of the California fire tragedy currently.



Anyone remember GE as in General Electric?

In 2018, its ranked by Fortune 500 as the 18th largest US firm by gross revenue.

The stock price today is back to their 2008 GFC lows...

Buy-and-hold anyone?

Or is it luck if their buy-and-forget stocks are still doing well? How many old fogeys will admit to it? 



If one of the biggest "blue chip" company is no guarantee, and safe and boring defensive utility stock for widows and orphans can also get you into trouble, please show me what stocks are sure "bao jiak" ones? Will never lose money for us?



I've deliberately left out our Singapore examples. There's a reason for it. 

Those of you who can remember a bit of our local financial history can easily recall similar examples in our STI.

That's the reason why old fogeys will likely underperform youths in percentage terms - we do include Capital Preservation into our investing thesis. Wink.









29 comments:

  1. In a powerful bull market, reckless newbies beat the old hands hands down. The old hands had better not advise about prudence. The rich newbies will argue "If you are right and I am wrong, why am I making far more money than you?" Who can argue with that?

    ReplyDelete
    Replies
    1. hyom hyom,

      Old fogeys are busy fighting yesterday's wars to have the time to "advise" others.

      Once bitten twice shy.

      If we get caught in another -50% bear market, even if we want to "advise" others, who would want to listen?


      What "credibility" do we still have?

      Its like shouting to everyone our multiple bull/bear cycle experience in investing is just the first newbie year times 20 or 30!?

      Face palm.



      Delete
    2. SMOL,

      I would expect old fogeys who underperform youths in percentage terms in bull markets because they include capital preservation into their investment process not to suffer massive losses in a -50% bear market. Even the good players suffer from drawdowns, so some losses is inevitable but not massive losses. Something is seriously wrong when capital preservation is incorporated into the process but massive losses were not avoided in a bad market. Time for self-review and deep reflection. Time to help oneself and not think about helping others.

      Delete
    3. hyom hyom,

      I would hope so too!

      But stranger things have happened and as I've alluded, we are only "prepared" for yesterday's wars...

      Its what we never expect - that will hurt BOTH youths and old fogeys alike :(


      I give you 2 examples:

      1) Putting money in money market funds is considered "safe". No one expect them to go below parity; yet this happened during the 2008 GFC!? Lucky the Fed intervened! Imagine the most "liquid" of funds can also lose money!?

      2) Who would give money to banks or institutions yielding negative interest rates?

      But quite a sizeable chunk of today's bonds are still yielding negative interest rates in REAL terms.

      Of course it looks foolish until you discover losing 1-2% is better than losing 20-30% in equities!

      Ouch!


      Delete
    4. SMOL,

      Market participants are exposed to risks and cannot avoid the losses that come from the unexpected(or even unexpectable) events. The objective of risk management for me is not about avoiding losses but avoiding massive losses.

      Suppose a market participant gets hit by money money funds breaking the buck in 2008 and negative-yielding bonds that defy logic. Sure he will suffer losses but I expect him to avoid massive losses with right level of diversification and position sizes. Hopefully, we can all avoid massive losses when hit in a bad year by unexpected events.

      Delete
    5. hyom hyom,

      You've hit the nail on its head!

      There is no such thing as NO LOSSES.


      Its like buying insurance.

      The moment we paid the premium, we have lost money as in flushing the premium money down the toilet when nothing happens...

      Risk management is the willingness to take a small loss to avoid a catastrophic loss as you've mentioned ;)


      Delete
  2. Aye I remember when I started out in '07, right before the top, made some money in straight equity exposure and felt like a champ. Then came the top and I went buy and hold. That feeling of losing money every single day during a bear was like slow bleeding, to see your savings dissipating by the day and you don't really know what to do. And the "wise finance books" are telling you you should average down and hang in there because equities make 8% per annum "in the long run". Yeah right. I pulled out a chart of the S&P 500 and realised it returned jack shit between 2000 and 2007. That was a quick affirmation in my investing journey that buy and hold ain't the way to go! Sure, 8% per annum is still correct but I don't have a 20 to 40 year outlook for realising returns, so I crossed over to the dark side which is another story altogether! I sure paid my tuition fees re buy and hold early on!

    ReplyDelete
    Replies
    1. SGRetailTrader,

      Ah! We have learnt from the same "crash got sound" University of Life!

      That's why I like to poke our own feet we don't trust, we trust others to tell us what shoes we should buy!?


      The best part of needing 20-40 years to see results is no one can fault us if what we "sold to" others turned out to be disaster...

      We could be long dead by then!

      LOL!


      Delete
  3. Your size of war chest will make a difference when you started investing in different part of market cycle

    ReplyDelete
    Replies
    1. CW,

      That's a given.

      Start with $100K, 20 years later got 10 bagger its $1 million.

      Start with $10K, 20 years later got 10 bagger its $100K - can't even buy a continental car, let alonge a HDB 3 room flat...


      So what's the greatest source of growth for our portfolios?

      If every year can inject $50K, 20 years later also $1 million!

      See? Investing not necessary at all ;)

      LOL!


      Which means, those who Earn More can focus on Save More ;)

      Those who Earn Less cannot depend on Save More!

      Investing is one form of Earning More ;)



      And that's not anyone and everyone can do it.



      Delete
  4. Hi

    Continuous investing will alleviate the amount of risks involved.

    Ben

    ReplyDelete
    Replies
    1. Ben,

      I would like to call you out on your "faulty" thinking...

      Unless you are a central banker who can print unlimited amounts of money to keep on buying "continuously".


      Motherhood statements anyone can say.

      If I would to "Trust but Verify" what you say, I can simply just ask HOW do you implement what you say in real life ;)

      Don't hit the face!



      Delete
    2. Smol,

      You have a point. To add on my views, the amount which I refer to "continuous investing" refer to the utilisement of cash in batches". I quote an example.

      If one has $1,000 to invest, he/she can invest $100 per month to average the market out over ten months. This is as good as citing the monthly saving which one manages to cater to.

      I quote my self as an example. As mentioned before, I quit the rat race almost a couple of months. I no longer have the luxury of the saving from the monthly remuneration from the full-time employment.
      I rely solely on the generated dividends from my investment portfolio for my expense. This is not taking into consideration of the emergency fund which I cater as a back-up in case of extingencies.

      I note that I do not use the entire invested dividend for my expense. There will be some excess (though not significant enough) after deducting the expense. I can use the some of these excess to re-invest into my existing investment portfolio.

      Ben

      Delete
    3. Ben,

      Ah! The Dollar Cost Average theory guy!

      Why? Because you use "if" ;)

      And its double confirmed when you shared are not doing it now in practice. LOL!


      Let me see.

      $1 million dollar portfolio got whacked by -50%. Continuous investing - which is averaging down - with $25K to $50K per year to minimise risk... Hmm...

      It would be better if its the other way round.

      $1 million portfolio got gutted -50%. Got $2 million opportunity fund ready to deploy to buy on the way up ;)


      Same same but different!


      Delete
    4. Smol,

      The second suggestion will be an uphill task for me. This is because I do not have another amount of fund (more than double investment portfolio). The first suggestion is the viable option.

      Make do with the dealt cards and choose the best possible option.

      Ben

      Delete
    5. Ben,

      Hence my poke to you ;)

      To do "continuous investing", we either need to be high income earner, or have a ton of cash rotting somewhere (like Warren Buffett).

      We choose a strategy that fits our own feet ;)


      Delete
    6. Smol,

      High income earner not in my league all this while. I prefer to be a low profile simple peasant with little nibble on monthly basis. This is considered as "continuous investing" as per my perspective. This may not be in your view.

      To each of our own.

      Ben

      Delete
  5. temperament,

    Yup, the old pearl of wisdom rings true:

    What does not kill us will make us stronger!

    ;)



    ReplyDelete
  6. temperament,

    Anyone and everyone!

    Just like any idiot can buy bitcoins when its going up; only the smart ones know when to SELL ;)

    ReplyDelete
  7. temperament,

    My grandma shared with me an old Teochew saying, "Go up mountain often sure will meet tiger one day..."

    Young and eager to climb up the mountain can be 100% (or use leverage) vested in the markets. If not how to hit FIRE by 35?

    But when climbing down the mountain, pray don't meet tiger happy oredi!




    ReplyDelete
  8. Smol,

    When one meets the "tiger", it does not always means "doom" as the eventual outcome. One would have gained valuable experience along the way and may have enough ability to subdue the "tiger".

    Ben

    ReplyDelete
  9. Ben,

    If travelling in the mountain, you'll make a "great" travel companion!

    Once we spotted the tiger, I'll leave you to "subdue" the tiger ;)

    That should give me enough time to get the hell out of there!

    LOL!

    ReplyDelete
  10. Smol,

    This gives me the chance to be "武松" doing it alone.

    It will be great if you could join me in tiger subduing the tiger. The odd of winning will be higher with you working hand in hand. Perhaps there is no need for a direct confrontation with you "sweet-talking" the tiger into submission.

    Ben

    ReplyDelete
  11. Ben,

    Sorry. You're on your own with the tiger ;)

    I subscribe to 留得青山在。。。

    LOL!


    I'm not much of a warrior in real life; trading maybe ;)

    ReplyDelete
  12. Smol,

    You are a warrior in specific aspect.

    https://singaporemanofleisure.blogspot.com/p/my-story.html

    https://singaporemanofleisure.blogspot.com/p/reason-why-i-am-blogging.html

    https://singaporemanofleisure.blogspot.com/2014/07/english-mandarin-dialects.html

    It's solely your "Warrior" befitting type of life journey.

    Ben

    ReplyDelete
  13. Hi SMOL,

    This is why the average person needs Big Bro to enforce savings. The specifics & details are another tricky debate. :)

    For CPF, I personally think the ideal will be 10% from employee, 5% from employer ... cannot be used for property or education or speculation .... subject to same medical use as now .... and all funds to have min 4% interest rate (like for SA & Medisave now) or until CPF grows balls to run it as an investment/endowment which GIC is doing now.

    The balls are for smoothing & sharing the returns with members, not for running the endowment/investments. ;)

    ---
    That's why I prefer ETFs, coz I'm too dumb & too lazy to really dig into individual companies.

    For your PG&E example I would counter with XLU :)

    Although it's been kinda popular of late .... funny considering Fed hawkishness .... Maybe the market is sensing that Fed will slow down its rate hikes??

    TLT also seems to be trying to find a bottom.

    Or most likely people expecting fireworks at G20 in Buenos Aires LOL!!

    ReplyDelete
    Replies
    1. Spur,

      ETFs are one of the most popular invention for trading since sliced bread!

      Yup, you are astute. Some are betting against the Fed ;)


      It will be interesting to see if this "bull run" of ETFs will hold out for the next cycle; or will the days of the stock pickers make a comeback?

      ;)



      Delete
  14. Hi SMOL,

    Good post! Stimulated plenty of thoughts, so I shall list them out one by one.

    1). I remember commenting on a fellow new blogger's post when I first started out blogging. Said blogger shared that investing is a gift that keeps on giving and has become an evangelist for investing among family, friends, and colleagues. I commented that such "sharing" as a thankless task. If others do well, it is that they are geniuses; if others don't do well, look at all the finger pointing.

    2). The over-leveraged and cui xiaodidi in my workplace recently mentioned that he is considering starting to "trade the markets" to earn money. He asked whether do I have any experience in the markets. My response? "Huh? Stock market very dangerous one leh. Can bankrupt one. I don't want to try lah." He could try hunkering down at work and start coming on time instead of trying fancy new tricks when he is already leveraged to the hilt and one of the weakest links in the workplace.

    3). I've been hunting for US utils to add to my portfolio. However, only 1 of them seemed to be able to pass my criteria. Yes, they are defensive and give dividends, but some are more defensive than others. I shall copy and paste what I shared with some of our friends not too long ago:

    In pages 157 - 158 of Security Analysis (6th Edition), Graham and Dodd warned bondholders of public utility companies that public utility defaults were not so much a result of a loss of earnings but due to the pyramidal capital structures and debt levels that public utility companies tend to expose themselves to.

    I think I am starting to see the same pyramidal capital structures and debt levels today!

    4). Politically incorrect, but sometimes I don't know whether to show concern or to facepalm. "Oops, forget to save money for marriage, I put all into stock market liao." "Oops, forget that after ORD, I need cash for uni tuition fees. All my money stuck in market. How now brown cow? =(" "Teehee, I put 60% of my networth into one single counter." "Oops. I suddenly 0% cash. How now?!?!?!" I see these types of blog posts I really don't know what to say.

    5). I was just telling the Butterfly and friends the other day. On one hand, you have a set of bloggers who extol the virtues of the stock market providing free money through compounding. On the other hand, you have another set of bloggers who practise cautious optimism; what the market gives, it can also take away. I asked myself honestly how come I so stupid and still have positive returns so far? It must have been luck. I am not unintelligent enough to mistake luck for skill.

    ReplyDelete
    Replies
    1. Unintelligent Nerd,

      1) That's why the bleeding heart is loved until some of his fan boys and girls lost money. Lucky they are a thankless minority.

      A bit like those make money never thanked big daddy; lost money go everywhere complaining big daddy never regulate this, never monitor that...


      2) Most are investing/trading to ESCAPE isn't it? I mean if career or business doing well, who would bother with taking risks in the markets?


      3) Ah! There are still stock pickers out there! You may want to benchmark with the XLU ETF that Spur mentioned ;)

      Some are top down; some are bottom up! I'm a cleavage man, yet I love legs too. LOL!


      4) Sometimes it takes EQ to zip-up. The opposite to the risk takers are those youths who voluntarily contribute to CPF SA account - greedy for that extra 1.5%? Or maybe super risk-averse?

      a) Oppotunity knocks; no chips so can't play :(

      b) Wait there's regime change in 20 to 30 years with new big daddy promising everything "free". Print money easy what?

      My dad bought his HDB 3 room flat in the 70s for $7800. The same amount of money if put in CPF, can't beat the current resale price for HDB 3 room in Queenstown now ;)

      But history may not repeat; big daddy now managing expectations that properties will go up to the the sky forever and ever!

      That warning HDB flats will become zero in 99 years was a great move to wake people up not to overpay!


      5) I was around during the Nasdaq 2000 startups euphoria. Everyone wanted to quit school/work early to start their own dot.com business.

      Well, we know how that movie ended :(


      Delete

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