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Hard Truths About Investing

With the sharp rebound in the stock market last year, the proliferation of the F.I.R.E movement and financial content online, it's easy to see why many are enchanted and drawn to the stock market.

Be it high growth stocks in the technology sector that sky-rocketed last year, or dividend aristocrats that compound wealth over the years, the stock market has become a source of passive income for many individuals.

While many content creators are drumming the benefits of investing, there are some hard truths of investing that are not commonly discussed, mentioned, or talked about.

The goal of this post is to share and recognize some of the potential pitfalls that most investors may overlook.

1. Buy Low, Sell High.

Most of us would have come across this adage.

However, it's easier said than done.

The low of a stock market generally comes about when there is uncertainty in the economy.

For example, the Covid situation last year was a nerve-wracking period. The stock market nose-dived and few investors had the courage to hold on to their portfolio. Much fewer had the guts to buy in during that period.

The most common comment I heard is, "I will wait for it to drop further before I will buy."

Or, "Let's wait and see how the market reacts before I plunge in."

To be fair, there's nothing wrong with waiting at the sideline.

What could be wrong with sitting on the sidelines while the story unfolds?

Better to be safe than sorry!

Well, what could go terribly wrong is that an investor may have missed one of the best and fastest bull markets in history!

It reminds me of this quote:

A calm sea does not make a skilled sailor.

If you want to profit (handsomely) from the market, you must have the courage to do what others aren't.

And that brings me to the next point.

2. Investing Takes Discipline.

It takes discipline to invest on a regular basis.

It takes discipline to manage your emotions when your portfolio is in the red.

It takes discipline not to overreact when the market is down.

And more importantly, it takes discipline to acquire the necessary knowledge so that you know what you are doing.

(If you don't have the interest to learn to invest, then you may be better off getting assistance from a robo advisor or a knowledgeable financial advisor).

If there's anything that I had learned from my portfolio blowout in the 2008 Global Financial Crisis and studying successful investors thereafter, they are very disciplined in their methodology.

3. There Is No Protection From Losses.

Amos Tversky and Daniel Kahneman first came up with the theory of loss aversion.

Even the Orcable of Omaha, Warren Buffett said this,

Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One

No one likes losing their hard-earned money.

Yet, in the stock market, no one can give you any protection.

People who promise you high returns with guarantees tend to be scammers. And it's easy to fall into these traps, not because people are stupid, but the loss aversion is so strong that it overwrites their logical minds.

As of now, I have a total of 76 positions in my portfolio.

28 of them are in the red.

That is close to 37%!

Some are really bad mistakes. Some I reckon are temporary blips.

I do believe that if I hadn't been willing to take on these "high" risks, I wouldn't have been able to identify some of my biggest winners like:

And to be fair, it's not because I'm good at picking.

It's because I understand that...

4. Growth Takes Time.

Another great quote from Buffett,

No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.

Humour, insights and wisdom all wrapped up in two sentences.

The other side of the coin is...

Learn to be patient.

(And if you want to learn how to be patient, the fastest way is to teach your parents how to use zoom if they don't already know.)

5. Right Focus, Right Results.

I noticed most people tend to focus on the price of a company or unit trust.

While there is nothing wrong with that since it's the easiest metric to measure, it may not often lead you to the most ideal outcome.

Let's illustrate this with the example below.

Which of these companies are more likely to double their share price in the next 10 years?

Current Price (as of 28 Aug 2021)

  • Stock A: $1,865

  • Stock B: $321

Don't tell me.

I am guessing that it's Stock B, isn't it?

Well, you are right.

In fact, even if you were to choose Stock A, you are also right.

Both companies have the potential to double in the next 10 years.

However, if I were to ask which is more likely to double their share price first, the answer will be...

Stock A.

Allow me to explain why I think Stock A will double faster than Stock B.

A is Mercadolibre, the Latin America of Amazon, while B is Sea Ltd. Do you know Shopee or Garena? They are part of Sea Ltd.

Both companies have very similar business models while serving different markets.

Mecadolibre has a market cap of 92.7 billion.

Sea has a market cap of 172.7 billion.

Market cap is nothing more than the size of the company.

And I believe most of us would agree that the smaller the size of the company, it is easier for the company to double its size.

Bottom Line

Through my roller coaster investing journey, I had learned that:

  1. Buying low and selling high may require more courage than public speaking.

  2. Even in investing, discipline is required.

  3. No one can protect you from losing money. If there ever is any guarantee in investing, run far far away from this person.

  4. As much as getting nine women pregnant sounds like a fantasy to many guys, we are better off sticking with one woman and have a happy family. Patience is the key. (But please don't just have 1 stock or unit trust in your portfolio, diversification is another key in investing.)

  5. Focus on the right things and results will come naturally.

If you have further questions, feel free to leave a comment below or reach out to me.

Disclaimer: The stocks mentioned are not to solicit transactions. This post is meant to be for education only. Please do your own due diligence before buying or selling. If uncertain, consult your trusted financial advisor. Past performance is not indicative of future performance.

Disclosure: I have positions in all the stocks mentioned in this post.

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