Author: Ho KhinwaiKhin Wai is a Year 3 Banking and Financial Services student from the School of Business Management (SBM). He started his foray in finance in 2011 and has his roots in value investing. Archives
December 2013
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We, as humans, have come a long way since the old Stone Ages. We have evolved remarkably, disposing of our wooden branches and hunting abilities and invented technologies and built efficient infrastructures for the growth of mankind. However, our innate primal instincts and certain habits have unfortunately, not been lost. Some of these habits have prevented, and will, again and again, prevent us from reaching our maximum potential and being successful in the stock market (or any other markets). It is important to know some of these common human characteristics and traits so that you can have a better chance of catching yourself before you make an investment or trading mistake, and possibly avoid such future occurrences. Impatience Investing or trading is somewhat similar to fishing. Besides being able to look out for good, undervalued stocks (if you are using Fundamentals) or a stock that happens to be breaking out of a trend or pattern (if you are using Technical Analysis), you also have to have the patience to wait it out, if you cannot find a good stock to invest in, or if your stock price is still pacing around a trading range and hasn't hit your target price. Most beginners end up selling their stock too early below their take profit price or whenever they see some profit. While most traders and investors do make good money, they are not maximizing the full potential of their strategy, and may lose out in terms of additional potential profit. Greed Most beginner (and some professional) investors and traders face this faceless monster countless times in their investing journey and succumb to it each time. Beginner investors are the ones most likely to succumb to greed as early as in their first few trades. A phenomena called "Beginner's Luck" sets in as most beginners will likely to do well for the first few trades. Some investors will see an uptrend in the market and they then make a mistake by increasing their positions or buying into more stocks which they feel will profit. Then, a market correction comes and they immediately sell off their entire portfolio, incurring a loss. This is why having a strategy is important. Always stick to your strategy. Fear "Fear" is the best friend of "Greed". The two go hand in hand to destroy all your plans on being a successful investor or trader. Why? It's possibly human nature to be afraid and be greedy when money is at stake. External factors such as family concepts of money, and the emphasis money has on society also plays a big subconscious role in the way you manage your money, especially when you cannot see where your cash is going to. The fear of losing money is the number one factor that drives certain human decisions. A famous study was conducted with a group of people on risk. Each individual in the group had $1000 and they had the option to either (A) take $50 and leave the room with a total of $1050, or (B) put their $1000 as stake for a potential chance to walk away with a total of $2000. The findings were that most people in the group chose option (A). As we can see from the case here, fear is not necessarily a bad thing. Fear can help us safeguard our money in a very conservative approach. People like to know that their cash is safe, while still growing. That is why Fixed Deposits are still so popular in the investment arena, albeit not yielding high returns. However, fear is definitely not RATIONAL. When markets move against an investor's position, panic will set in. Alarm bells will go off in his head and he will be contemplating whether to cut loss or hold on. Cutting loss is not a bad idea, but a better option will be to assess the situation & probability of a reversal, go back to your strategy, and make any adjustments to your stop loss position before deciding to exit a trade. Inertia (Stubbornness) Alright, you have a nice trading strategy that has been back-tested and working for you. Odds may be a 90% probability of winning in a trade, but don't forget that 10% of loss that is still as important, if not more important, to take note. There will bound to be times when your trades turn out wrong, or that you have invested in a stock with failing fundamentals. Do not be stubborn and think that your price will come back up again. If you notice that you may have made a mistake, accept it, and immediately do the necessary action to limit your losses. Do not "hope" that the market will do some miracle and raise your stock prices up to where it had been before, because the odds are too slim, as proven historically. Some traders or investors have a stubborn habit of being a "hybrid" investor. That is to say, taking a short-term and long-term perspective on a particular counter at the same time of trading. For example, a stock a trader has just bought has dropped in price. He has analysed TA on the stock, and has set his take profit exit at exactly one week from now. As the stock falls in price, the trader thinks, "Oh, it's probably just a correction, I'll buy more to AVERAGE DOWN my costs." In this way, he has taken a longer-term view on the stock, which is now incongruent with the initial objective of why he bought the stock (to speculate). Sometimes, the stock successfully rises to hit his target price. But many other times, the prices just tumble and it may be months or years before the price rises to the same level again! Averaging down is not a bad thing to do, when you have a strategy in place WHEN you bought the stock. If it's something you have decided at the point when the stock price goes into a continuous fall, then it might be better to just cut losses. Herd Mentality (Crowd-Following) Herd Mentality is when an investor jumps on the bandwagon and invests along with the crowd, which usually is very optimistic about the market. Everyone seems to be buying stocks in that point in time and you're thinking, "I shouldn't lose out in this wonderful opportunity. Everyone is in the market now and prices are trending up!" One golden rule by Warren Buffett is, "Be fearful when others are greedy, be greedy when others are fearful". Such optimism and continuous "BUY" calls on almost every broker's research report signals that the uptrend is nearing its end, and it is time to get out of the market. One book puts it this way, "When the majority of investors have committed all their surplus money in the stock market, where else can one find more cash to fuel the demand in the stock market?" Investing with the big boys If you have already owned a trading account, you would notice that your brokers will send you constant research reports and hot alerts about a particular stock. Some investors may also look into what big, institutional players in the market are buying (eg. Temasek Holdings, GIC, DBS, OCBC). It is safe to say that these big players have sufficiently analysed their own investments and have the potential to see share prices grow. But, the major risk in following big players is that they may go on a sudden sell-off and profit taking, hence plummeting the share price quickly. As a retail investor, you do not have the information the big players have. Your trading systems may also not be as fast and high-tech as theirs. Hence, it is best to do your own homework before you start buying any securities.
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2/8/2022 09:14:04 am
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