What every stock market newbie should remember
Aries Baloran used to find contentment whenever he gazed at his collection of Jordans and Kobe Bryant sneakers. He had 120 Jordans, 15 Kobe collectibles, all in all around 200 pairs.
When he was not playing hoops in his mind, he was going around Italy—where he has been working as a gardener and waiter—on one of his five bikes. His total investments for his sneakers and bike collection? Around P1 million.
Now, instead of bikes and shoes, Aries collects stocks. He often tells me his life changed that very instant, when he heard me say: “Money is never the most important thing. But knowing how to handle money allows us to do the things that are most important for our loved ones.”
He was one of the few who was able to open an account in 2020 before COL Financial had to temporarily reject new requests due to record-breaking client acquisition. Imagine: COL used to open only 40,000 accounts per year. Suddenly, there were over 400,000 accounts opened in the first nine months of 2020. “It was crazy,” COL founder Edward Lee says.
COL isn’t alone. Other online stock brokerages like Philstocks experienced a 77-percent rise in new accounts in 2020.
More time, more money
These new traders are not your usual retail investors. With a lot of time on their hands and surprised at the extra cash saved from the usual “gimmicks” and Instagrammable steak meals they suddenly couldn’t have, these 20-somethings are highly aggressive. Internet-empowered, they will post their massive gains on their social media pages, and a fresh drove of their flock will swoop in and try to replicate those.
Aries, for his part, says he has made a lot of mistakes. He was gripped with the fear of missing out (FOMO), as these investors laughingly call it. He bought GMA 7 at P1 per share and sold it at P7. It is now at P13.84. He says he should have studied fundamental analysis first, instead of technical analysis. He should have thought long-term instead of going for quick gains.
For 25 years, I have seen the bears and the bulls shift in a heartbeat from heart-thumping hiphop routines to beautiful ballets. But when the claps and boos die down, what remains are those who have adhered to time-tested investment principles.
Here are some of them:
Buy stocks as a business. Stocks are not just numbers on a screen. They are growing, living organisms with pain points and growth points. You won’t get into business with your friend if you didn’t know the product, how your friend was going to run things, and if he had the right people. Why buy a stock just because your friend said it made him 100 percent return in a few weeks? If your conviction is based on your friend’s prediction, chances are you will sell at the first wrong turn and lose money instead.
Remove all notions that you are a rational investor. No one can outsmart the market itself. So create systems and protocols for every market turn. Learn the market cycles and decide IN ADVANCE what you need to do for every gyration. But since you are aware that your brain is not wired for discipline—and that is precisely why young investors are inflicted with FOMO and YOLO (you live only once attitude)—create the system that will help you discipline yourself when trading. For example, predetermine at what point you are comfortable cutting your losses or capping your gains. These take the emotion out of investing.
Invest for the long-term instead of daily quick gains. You might not notice it, but your friction costs from constant churning may be eating your profits. If you crave the excitement from trading, separate your portfolio into long-term investing and short-term trades. Put more in long-term investments: boring blue-chips that hopefully you buy at lower than their intrinsic value; and then, maybe 5 percent of the total can be used for your “sexy speculation trades.”
Figure out what your hurdle rate is and let it guide how you monitor your investment performance. Aswath Damodaran says that your hurdle rate is the return that you need to make, based on the risk that you are taking, after taking a look at market size, growth and earnings potential. While you won’t get things right all the time, it is important to know when you made the wrong call and then recalibrate. The best investors are not those who do things right all the time, but those who know how to refine their strategies. Without knowing your hurdle rate, a lot of mistakes and losses can become bigger mistakes and losses.
Do not invest your money for tuition, rent, or medical procedures. No matter how high the earnings you are projecting, no matter how seemingly sure the returns can get, keep your emergency funds intact and never dip into it for investing. This way, you will never have to withdraw at a loss, in case the markets are crashing while your blood pressure is skyrocketing.
If you can’t do all of these, it’s okay. Invest in equity index funds instead. You pay the lowest management fees among all the different equity funds and with a lower capital, you are investing in the 30 best listed companies in the country. That’s instant diversification at low costs.
Salve Duplito is a financial literacy advocate with shows in ABS-CBN, and online through her SalveSays Facebook, Youtube, and Kumu social media pages. She is also president and CEO of Empower and Transform, OPC.