lesson #5: is stock market good for you?

a couple of weeks ago, an officemate asked me if the people at the office got the idea to invest in the stock market from me.

i was surprised that people at the office started investing directly at the stock market. i was even more surprised that she thought i had something to do with it. i asked her how she knew they were doing it and why she thinks i had something to do with that. “oh, you know, that was mostly what they have been talking about the past few weeks and i know you are a believer of the stock market so they may have picked that up from your blog or something.”

i seriously hope nobody picked that up “from my blog or something”. investing in the stock market requires different set of skill set and requires a lot of psychological preparation. as a retail investor, you could drown yourself in a lot of stock market literature and still screw it up if you do not have the discipline to study your plan and stick to your plan. and the last time i check, you cannot buy discipline. it is just not available for purchase anywhere.

and more often than not, people lose money at the stock market for the lack of it, not so much for not understanding enough fundamental or/and technical indicators.

i thought that for the benefit of those who are seriously considering venturing out to the stock market, i would like to share what i have learned along the way of doing it.

know why you are investing at the stock market. let us settle an assumption that like me, you are not doing it for a living. you are not a trader or a stock broker. the only reason why you want to put your money at the stock market is because you want to grow your net worth in fifteen to twenty years time and you are willing to set aside money for this every month, not whenever you feel like it or only if you have something “extra”.

for the sake of your children’s future, do not put invest in equities that money you are going to use to send them to college in five years time. never venture into the stock market because everyone you know is really “getting into it”. do not buy stocks if your risk tolerance for losses is very low (the quickest indication of this is if you have the itch to keep monitoring your portfolio every day, multiple times a day because you have the need to know where you stand already).

my banker gave me a very wise advice a couple of years back. always know what you are saving (or investing) for. once you know what you want that money to do for you and when, finding the right financial vehicle to get you there will be easy.

invest the money you are willing to forget for a long time with high returns come greater risks. buying only blue chips stocks is not a guarantee for loss-proof portfolio. the market overreacts even at the slightest fear or optimism. putting in money you are likely to use for a definite expense in a definite near future is a very risky thing to do.

never borrow money to invest in equities. do not use your next month’s rent. do not use the money you are supposed to use to pay off your credit card bills. do not invest money you do not have. never finance your investments in equities.

set aside the money you are unlikely to withdraw before ten, fifteen, twenty years. just as it takes time for the giant, profitable companies to get to where they are, give your money time to start working for you.

the key is in cost averaging, not timing the market. even for the ones who do this for a living find timing the market is hard. and i kid you not, they watch the market all the time. for us retail investors with full time jobs, we do not have that luxury of time. invest in the market in small quantities but consistently. put in the same amount every month, regardless of whether the market is up or down. doing it this way will provide you an average cost that will be lower than the market in the long run because you took every opportunity to buy when the market was in the low end and you have minimize your exposure by limiting the money you invested when the market was at its peak.

know when to cut losses and move on. investing in the stock market is not an emotional exercise. determine when to cut loss and when that point is reached, do it. at some point in your investment period, you will pick the wrong stock. follow your plan and cut your losses and then move on.

this was the hardest lesson for me to learn. during the early months of venturing into the stock market, i bought a speculative stock to try it out. i bought it at its artificial high of 24/share. i watched it went down to Php20, and then Php18 and then Php15. because i did not cut my loss at a predetermined point of -20% loss (around Php20/share), i held on to the stock desperately in the hopes that it will bounce back. it didn’t. today, that stock is trading at a mere Php5/share. i have lost 75% of my capital beause (a) i bought a stock that did not pass my set qualifications and (b) i did not cut my loss when i should have.

know when to sell but keep your core shares. another difficulty for retail investors is selling when the target price is reached. this is influenced by the fear that the price of the stock may keep going up, thus, losing the opportunity to sell at a much higher price. set multiple target price levels and sell a part of your holdings when those levels are reached. but keep your core shares. as long as you are buying valuable stocks, your core shares will be fine. and on another hand, selling a piece of your holding will enable you to take advantage of the temporary spikes in the market price.

develop discipline. this is the most basic requirement before venturing into equity investing. without discipline, you will find yourself running after the bull and struggling to escape your losses. without discipline, you will make the same bad decisions over and over again. without discipline, you will find yourself in a far worse financial position before you started investing.

the next time you heard someone urge you to put your money into equities, do an honest to goodness reality check. the stock market is a very powerful wealth multiplier. but if handled incorrectly, you will end up like that gambler who is trying to beat the house. and as the famous saying goes, no one beats the house. not consistently, anyway.