Stock investment is like playing chess – you have to play defence and offence at the same time, all the time. DB finance expert Boon Tiong Tan has some advice for wannabe day traders
While the stock market is hot, it is naturally easier to make money. It was so easy in the late 1990s that many amateur traders quit their jobs to become full-time day traders. But before you make that leap, know that even the brightest minds can lose their shirts. Faced with huge losses after participating in the South Sea Bubble (1720), Sir Isaac Newton said: “I can calculate the motion of heavenly bodies, but not the madness of people.” Here are some tips to help you avoid making the same (financial) mistakes he did.
Investing isn’t a onesize-fits-all proposition. Each person must find their own approach. If you’re always looking for a bargain, value investing will probably suit you best. If you’re always on the move, momentum trading might be your cup of tea. Are you most comfortable with fundamental or technical analysis or a combination of both? After a bit of trial and error, you’ll discover what works for you and which investment approach suits your personality.
The best – and only – way to learn about investing is to give it a try: ‘Just do it.’ If you want to find out how you’ll react when facing bull and bear markets, there’s nothing like committing your own money. In early September, the seemingly endless rally in US technology stocks abruptly came to an end. The high-flying Tesla and Zoom dropped a third in a week. Rollercoaster rides likes these are not for the faint-hearted. Think you’ve got nerves of steel? There’s only one way to find out.
Be honest with yourself
Psychology, temperament and character – more than intelligence – are critical factors in determining success in the stock market. You need to temper your hope to break even when your stocks are losing and your greed when they are winning. You need to fight the fear of missing out or you’ll soon regret buying high. The ability to control
your emotions is key.
Benjamin Franklin didn’t say honesty was about having the best morals – he said it was the best policy. This is good advice for investors. Being honest with yourself is crucial if you’re to succeed. It’s the starting point and foundation for good investment decisions. You need to take full responsibility for your results. You should never claim that the market is crazy and blame the world for your losses. If you aren’t honest with yourself, you’ll never learn from your mistakes; if you never learn from your mistakes, you won’t
improve as an investor; if you don’t improve as an investor, you’ll never be a profitable one.
To make sure you’re honest with yourself, make a point of recording all your trades and keep a journal on your investment thoughts. A journal might sound trivial or even childish, but many top investors recommend it. There’s much to learn from past trades. If a trade was good, remember it and try to do the same again; if it was bad, learn from your mistakes and try not to do it again. Our memories can trick us into feeling good about ourselves – we forget our follies and remember only our victories. Trade records and journals help you remain honest with yourself.
Do your homework
Another tip? Spend some time learning about financial history; familiarise yourself with events that rocked the markets like Black Monday (1987), the Japanese asset-price bubble (1989) and the dot-com bubble (2000). Knowing what has happened in the past expands your experience, and shows you that every party must one day come to an end.
If someone tells you: “These were the best stocks to own. They were big, well managed and, most importantly, they grew fast. No price was too high.” Which stocks come to mind? Amazon? Apple? Nope. Your friend is likely looking back to the early 1970s and talking about the Nifty Fifty – stocks like IBM, Polaroid and Xerox. These growth stocks rewarded investors with growing dividends and capital appreciation. At their peak in 1972, the Nifty Fifty had an average P/E ratio of 43 – more than double that of the S&P 500. What happened to these invincible stocks? In the 1973/74 bear market, while the Dow Jones Index fell 45%, they plunged 62%.
Consider both risks and rewards
It’s possible that you buy Tesla at US$350 and profit-take at US$2,500 (before the 1-for-5 stock split) but how likely is it? Good trades are those that are likely to make money, not those with a slim chance to make big money. Don’t confuse probability with possibility.
You should not trade stocks just because it is commission-free or because the Robinhood app is at your fingertips. Every trade should be based on good risk/ reward. Don’t be blinded by high returns and lose sight of the risks. Always look at both risks and rewards before putting on a trade.
Most investors pay a lot of attention to price and tend to overlook size; they think that in order to maximise their return, they need to maximise the size of their position. As a
result, their default position can end up being too large and outside their comfort level. Don’t just focus on making money. Focus on not losing money too.
When making money is easy and borrowing money is cheap, it doesn’t take a genius to figure out that you can make money with borrowed money. However, the obvious danger is that you can lose more than you have. The less obvious danger is that your emotional swing is magnified – more greed and fear, more hope and despair. You’re going to make more impulsive trades and more mistakes. Borrowing is like a drug, once you’ve enjoyed the extra return it brings you, you’re addicted.
In this age, with everyone living longer and more people facing career disruptions, learning how to invest is more important than ever. Legendary Wall Street trader Jesse Livermore offered this timeless advice a century ago: “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
Despite all the setbacks – natural disasters, pandemics, world wars, cold wars, trade wars – the world economy keeps growing and the stock markets keep scaling new heights. The Dow Jones was below 100 at the beginning of the 20th century. It is about 28,000 today. The Hang Seng Index was launched in 1969 at 158 and it now stands at around 25,000. Will these indexes continue to break new highs in the future? No one has a crystal ball but you probably want to bet on it. Just sit tight.
DB resident Boon Tiong Tan (CFA) has worked as a trader with banks like HSBC and Morgan Stanley for over 20 years. The author of A Stock Investment Book For The 99%: By A 99%, BT’s aim is to educate regular folk about the stock market and how to invest successfully. His book is available at Bookazine, Amazon and Book Depository; for information about the finance courses he offers in DB, email [email protected].Tags: Boon Tiong Tan, in focus