The stock market can humble you
The stock market is a congregation of diverse ideas from people of varying backgrounds.
It is interesting because the share price movement of listed companies provides an avenue for investors to make or lose money.
When it comes to investing, there is also a wide range of approaches such as value investing, fundamental analysis, technical analysis, short-term day trading and many others.
We frequently hear debates between investors advocating their way of investing is the best way to make good returns. For example, those who believe in making fast money will always opt for stock tips or momentum trading.
Conventional wisdom of value investing is far too slow for them. The thrill from chasing the hottest trending stocks regardless of whether it is backed up by earnings render reason and risk irrelevant.
From the start, they regard the stock market as a platform to make quick bucks, hence patient investing is never part of the equation.
For this reason, we often hear the saying, “90% of retail investors lose money in the stock market”. I am not sure where the source for this data is, but the phrase has been repeated many times through the years.
If the majority of retail investors lose money, should we even be encouraging the public to invest their hard-earned monies in the stock market? Taking a step further, are retail investors the only ones who lose money in the stock market?
Meltdown of inflated stocks
Despite the strong recovery of our local bourse in 2024 with the FBM KLCI crossing the 1,500 level and reaching a 16-month high, the sentiment for the past two weeks has been somewhat impacted by the limit downs and unusual market activity (UMA) queries on a dozen stocks.
Many of the stocks that were affected were those whose share prices rallied without substantial earnings to back up their inflated valuations.
What is of particular concern is not so much the inflated valuation but rather the manner the share price ascended as well as the sell-off within a short period of time.
The authorities including Bursa Malaysia and Securities Commission (SC) have issued a joint statement assuring investors that the fundamentals of the Malaysian stock market remain strong and should not be a cause for any concern.
The regulators further stated they are closely monitoring recent market conditions considering the heightened volatility in certain stocks.
In the event any irregularities are detected, the SC and Bursa said they would not hesitate to take the necessary regulatory actions to preserve the integrity of the market.
It is my personal view that the meltdown of inflated stocks in Bursa which happened was a matter of time.
Most market observers and those in the capital-markets industry would recognise these companies as “ticking time bombs”.
Of course, no one would be able to ascertain the exact timing when the meltdown would happen.
however, the best way to avoid losses in the stock market is to avoid investing in companies with inflated market capitalisation not backed by fundamental earnings.
For now, I am relieved that this contagion was only limited to highly leveraged companies, where the shares of these companies were pledged to third parties for financing facilities.
Although some would say that retail investors are victims once again, this time around, I believe some funds, brokerage houses and remisiers who were entangled in this mess were also badly hit.
To take things to another level, an industry veteran based out of Singapore made headlines when his Rm1.5bil asset under management hedge fund shuttered due to losses resulting from the wrong investment strategies and decisions.
In a brutally honest letter written to his clients, Chua Soon hock of Asia Genesis decided to throw in the towel when he lost around 18% of clients’ monies in the first month into 2024.
he made the wrong bet going long the China, hong Kong stock market and shorting Japan stock market. It is important to note that Chua is not a young lad fresh out of an investment bank who decided to raise funds to set up a hedge fund.
he had decades of experience in the capital markets working for big names like Salomon Brothers, Koch Capital before coming out of retirement to relaunch his Japan macro fund.
I have respect for Chua because of his willingness to publicly admit the mistake he made and chose to protect clients’ capital by returning all clients’ money before shutting his fund thereafter.
While the move is indeed drastic and appeared to be very harsh on himself, it is actually far more honourable than many hedge funds or cryptocurrency outfits that imploded entirely without returning a dime of clients’ monies.
even back home in Malaysia, I have seen funds losing 50% of clients’ money in a single calendar year yet continue to operate business as usual.
They simply just shut the non-performing fund and set up a new one to market to public who is none the wiser.
Investing and patience
The above-mentioned instances show that not only retail investors lose money when investing in the stock market. Institutions and seasoned professionals can also lose substantially when the market or stocks turn against you.
As much as investing can be potentially lucrative, the risk is equally significant. Your best friend when investing is knowledge. Your best ally when investing is time.
If you combine knowledge and patience, odds are you will outdo your peers and beat the market.
Retail investors have the unique advantage of investing at their own pace without deadline, key performance indicators or having to be answerable to clients.
There is no pressure to show track record or deliver returns in order to pay the bills. If retail investors can be cognisant of the risk in dabbling in speculative stocks, half the battle is won.
Another very simple ethos to subscribe to is that money simply does not grow on trees. There is no such thing as “durian runtuh”. Well even if there is, it does not happen to the majority of us.
Humility goes a long way
It is a heavy burden investing other people’s monies. You can afford to be reckless with your own money but not others. This is a crucial mindset because it will ensure that you do not cross any red lines when pursuing returns on investment.
By throwing out your personal ego or having your ego deflated by market forces, it gives investor an edge over others. As the stock market humbles you, humility helps you walk a longer journey.
This serves as constant reminder to my team and myself especially when entrusted by clients to preserve their wealth.
I would also like to take this opportunity to wish all readers Gong Xi Fa Chai and happy Chinese New Year.
To the others, happy holidays.
May the Year of the Dragon bring forth good health and prosperity to you and the family.