This guest post was contributed by Irving Soh, Investment Analyst at Dr Wealth.
It can be surprising how little (or much) other people know about the industry you work in.
I once had a friend (let’s call her A) comment to yet another friend (let’s call him B) about how all designers/psychologists were basically artsy-fartsy people with no real ability to pay attention to numbers or mathematics.
For some background context, A is a business graduate, and B is a graduate of psychological science.
What happened next was a public bashing via tongues so bad it must make what Hulk did to Loki look gentle in comparison.
What I was paying attention to, however, wasn’t the details.
It was the pre-existing belief that A had somehow developed about people like B, and the industry B was in.
Similarly, today, I’m looking to address some of the same false beliefs or myths about investing in stocks, which I’ve seen people spout too often.
I’m going to do so in a way that hopefully clears things up. So keep your eyes peeled, and keep your mind awake.
Let’s dive in.
#1 – Investing is Risky
Risk, unlike what most people think, is a combination of quantitative and subjective. What that means is that risk is actually both a number and a matter of ability.
An untrained driver behind the wheel is risky. A trained driver far less so.
An untrained soldier performing war operations is risky. A trained soldier is far less so.
A diver diving without equipment is risky. A well-equipped diver far less so.
A trained driver sleeping behind the wheel is risky. A trained driver alert and awake far less so.
An untrained investor stepping into the market is risky. A trained investor far less so.
A trained but emotional investor stepping into the market is risky. A trained but unemotional investor, far less so.
Finance professionals use the term “sharpe” (pronounced sharpie) to identify risk/return ratios.
A resourceful investor who is trained can understand whether an investment he is considering should be taken up based on its risks and returns using the Sharpe Ratio as a gauge, sort of like how a driver can check his speed to see if he is imminently in danger of being issued a speeding ticket while maintaining optimum speed to get to a place.
Simply put, should you risk $10 for $5? Or should you risk $10 for $10?
I presume economics demand at least a fair ratio of risk vs reward.
Investments get even better when you can risk $1 for $100.
How do you determine the Sharpe ratio with a number? That I will leave for you to find out more. But in general, the higher the number for the sharpe ratio, the better.
What I am getting at is the basic principle of how much you are risking for how much you are getting.
Let me give you an example pertinent to the stock market.
Presuming ABC company has $100 in lands and buildings per share. And its share is trading currently at $50. Is it a safe buy?
If the business isn’t dying and looks to be facing no major problems that can be foreseen, I’m very willing to always buy shares in such a company.
Why is that the case?
Because the amount I’m risking per share is $50. Whereas the amount I might be able to get back, the true value, is $100. I have even greater upside if the business is a successful, growing one.
My risk? $50. Flat. Not a single cent more.
My reward? $100 or more. Can go up depending on business performance.
I’d take those odds any day.
What people really mean when they tell you it's risky, isn’t that its risky.
What they’re really telling you, is that they don’t understand the basic concepts of a) how to value an investment and b) the basics of risk vs rewards.
#2 – High-Risk High Rewards
This is an elaboration of the above concept.
The general idea people have in their heads is that without sufficient risk-taking, investors will never be able to earn sufficient returns to achieve his/her financial goals.
This naturally leads to greater amounts of irresponsible risk-taking such as borrowing money or retirement savings to invest into something, only for it to go horribly wrong and explode in the investor’s face.
This is codswallop.
Don’t believe an iota of it.
High risk does not in fact mean high rewards. How can $10 of risk somehow magically mean $10 of reward?
The idea is ludicrous.
What investor would willingly look for such an investment as opposed to looking for a risk of $1 to a reward of $10?
The core idea of seeking risk in the name of seeking rewards needs to be deleted from your brain.
Instead, you need to think about looking for lower risks with higher rewards.
I’ll give you a hint.
The answer as always is in the balance sheet. And if you know how to interpret a company’s balance sheet, you will always know at the minimum what you’re getting into.
If you don’t, then stay out of the stock markets. Treat the markets like your playground and the markets will treat you like a plaything –chew you up and spit you out.
#3 – Investing Is Expensive
There are two main issues with this argument.
The first is that it's subjective. The second is that it's relative.
Subjectively, $10,000 might be expensive to a guy earning $3,500. But it sure won’t mean a thing to a guy earning $1 Million in salary a year, will it?
And relatively, a property is tens of thousands of times more expensive than buying a stock. I can buy a share of Apple for less than US$200.
I can’t even get an agent with $200 if I wanted a piece of property.
But let’s approach it from a more even keel.
The average salary in Singapore is allegedly $5,596 per month.
Assuming average expenses of about $1200 – $2000 a month, that means the average person on the street gets to keep about $2,000 –$3,000 from their income.
After a year, they can easily build a portfolio of stocks, Bitcoins, bonds, derivatives, or mostly anything they want but property. You may even go for Straits Times Index Exchange Traded Fund (STI ETF) if you are afraid of the hassle of stocks investing.
So is investing expensive?
I’d say no.
Unless you spend everything you earn or you earn too little, investing is hardly expensive.
If you spend too much, cut down on your spending.
If you earn too little, try to find ways to increase your monthly take home salary.
There are plenty of ways to improve your take home pay nowadays. Getting a critical skill (data science is really hot now) can do that; upgrading your education can do that.
Or if all else fails, just do what you love and practise common sense. I watched a pair of brothers who were cooks and opened a stall in a deserted coffeeshop less than 3 months ago.
Today, they run the whole show from afternoon to night, and their food is always sold out.
#4 – There Are Easier Ways to Make Money
No. Not really.
There are 3 ways to really make a lot of money in this world:
- Be a top level executive in an MNC, or a super soldier in a particular field.
- Be an entrepreneur.
- Be invested in the stock markets.
Of the three, the first requires 60-hour work weeks and devotion to the field, typically after years of experience. You don’t get paid when you sleep. You don’t get paid for being absent. And you don’t get paid when you’re leaving the workforce.
The second requires an extremely high pain tolerance. A ridiculous amount of ability to be independent in problem-solving. Good networking skills. A good head on your shoulders. The willingness to manage. The ability to manage. And the ability to be 3–4 steps ahead of your opponents and competition. You get paid only when you set up the colossal machine. The initial cost is rather high. And there’s probably a middle to high level of involvement from you.
The third requires that you are emotionally balanced or even better, absent, and almost robotic. That you are active as little as possible. And that you recognise a great business when you see one. Then, buy into it when the price is fair or great. It pays you when you sleep. Grows for you without your involvement or assistance. And doesn’t require too much time.
So no. There’s really no “easier ways” to make money – in terms of the population as a whole.
Of course, as always, what is “easy” is subjective.
So as an individual, if you find entrepreneurial efforts particularly energising or work particularly energising and you find investing extremely difficult, that’s ok too. Go for it.
Most people however, don’t find work or entrepreneuring energising. In which case I’d heartily suggest you to try out investing.
It’s not as difficult as it looks. And I would say in fact, most of the skills necessary aren’t difficult at all. It’s the mastery of self-control. Self-doubts. And human bias. Those are the ones you might find more difficult to master.
Is it easy to make money? I leave that to you. Ultimately, that’s your choice.
All I can say is, it’s definitely not true in relation to property.
And while it might be true for some of you out there, it’s not true for most people.
People often repeat what they have been told without thought and follow without qualms. Learn to question those around you. Seek to educate yourself. To grow. To evolve into a more sophisticated, learned individual.
Or you’ll forever allow the myths and un-rigorous thoughts of those around you influence your decisions and life.
For the worse.
If you do take up the role of learning however, you could both reward yourself and change the paths of those around you. Many rewards in your own value as a human being lays that way and I leave that for you to explore.
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