Please note some of the things said here are in tongue in cheek.

In March 2020 when the first phase of Movement Control Order (MCO) was implemented due to the threat of Coronavirus, Online broker Rakuten had more than 11,000 new accounts activated, a 100% increase from the previous month. On 18 May 2020, Bursa posted a record 11.2 billion shares worth RM4.4 billion traded. During this period, we have heard a lot of successful and inspiring stories through various of our WhatsApp groups on how many people had made so much money in the stock market, just by doing day trading through the internet.

Have you heard anybody losing money? No, I have not.

Let us look at a stock, Green Packet (GP). It is a hot stock in one of my WhatsApp group, a very matured group of intellectual and successful individuals.

I have written a piece on this in the link below,

https://klse.i3investor.com/blogs/kcchongnz/2020-05-30-story-h1507920188-Green_Packet_warrants_is_there_really_such_a_big_frog_hopping_around_th.jsp

GP’s share price rose from 42 sen on 23 March to RM1.44 on 18 May 2020, for a gain of RM1.04, or 244% in less than 3 months, on some hot news. Weren’t there a lot of people making a lot of money? I am sure.

But what about when the share price dropped from RM1.44 to 70 sen at the close today on 18 June 2020, for a loss of more than 50%, in a month?

It is okay. Nobody lost any money. It is good that those who made so much money from the previous rise of stock price have avoided losing big in this drop of share price in exactly one month. Really?

Yes, making big gain like the above is the ticket to financial freedom. But avoiding big losses, also like the above is more important. Why?

Let us assume we have a portfolio of two stocks equally weighted with weights W1 and W2, one good stock and one bad stock. Over a period of say 5 years we made a profit R of 200% for the good stock but we lose 100% on the bad stock. Our portfolio return would be 50%.

Portfolio return = W1 * R1 + W2 * R2

=50% * 200% + 50% * (-100%) = 100% - 50% = 50%

If we have two good stocks, one makes 150% and the other 50%. Our portfolio return would be 100%.

Portfolio return = 50% * 150% + 50% * 50% = 75% + 25% = 100%.

This later portfolio return is twice better than the first one. That is because although the positive return is lower for each stock, we have no loser.

With the above, I always wary about trying to avoid big loss in the stock market. My basic principle in investing is always to be prudent. Losses will happen in the stock market, but we should try to minimize the losses by following the tips below.

If you can avoid losing money in stock investment, or at least minimize the chance of losing big money, half of your battle in investing is won.

What are some of the things to look for to minimize or avoid this downside?

1. Do not listen to stock tips, rumours, and hypes

“Do not buy stocks purely based on tips, rumours and hypes”.

https://klse.i3investor.com/blogs/kcchongnz/2020-04-13-story-h1505955007-Don_t_listen_to_stock_tips_kcchongnz.jsp

Many people speculated in the stock market based on rumours and tips and had lost money. That is the normal herd mentality. Most of them had lost so much that they just refused to talk about the stock market anymore. Most of them know many of their friends and relatives who had lost a lot of money doing the same thing in the stock market. None of them know anyone who had become rich.

History has shown the expected outcome, again and again.

The logic is simple. People who follow stock tips and rumours are mostly short-term traders and speculators. Trading and speculating are a zero-sum gain; you gain will be from the loss of others. If everyone, or the majority can make money from the stock market following stock tips and rumours, who are the generous people, the syndicates, insiders, investment bankers? Or is it the other way?

2. Do your own homework

Always do your own homework when investing is a stock. Do some analysis yourselves is especially important before investing in stock tips and rumours. It is a must. Check if the stock is of a good company. Then do some valuation if it is worthwhile to invest in. Only after doing your homework, you will then have a better chance of success.

https://klse.i3investor.com/blogs/kcchongnz/2020-05-11-story-h1506997567-A_stock_investment_tip_Always_do_your_homework_kcchongnz.jsp

You, only you, are the one you can depend on. There ain’t no tooth fairy in investing.

But how to go about doing your own homework?

3. Acquire the right knowledge in investment

Read, watch, practice, experience, review, continuous learning, come out with your niche and circle of competence in investing. Spend some time, effort as well as some money too to learn and acquire knowledge of something which is particularly important in your personal finance.

Treat investing in a stock as investing in part of a business. Then you must understand the business; how it makes money, is it making good money, is it a risky business etc. All this information is conveyed through the annual report and financial statements. Hence, first learn about some basic accounting, which I think is the most important in stock investing. There are a lot of resources out there, some are free in the internet, some are paid services of many of them are useful too, which I have seen. There are also some investment books available in the book shops. One of them is the below,

Please write to me if you are interested to purchase one posted free to your address at,

ckc15training2@gmail.com

Never stop learning. Business in this world is fast paced, always evolving and ever-changing. The best way to stay on top of it is to never stop learning and always be in the know.

4. Respect valuation

The above image says it all. Your return depends on the price you pay. No matter how good a company is, if you overpay for it, it is unlikely that you will get satisfactory return.

5. Do not let your emotions drive your investing

To avoid the downside in investing, investors must stop dwelling on the daily fluctuations of their stocks. Stocks will rise and fall daily and hourly, but in the long term, they have always risen in value.

Fear is the enemy of investing because it makes you dump your stocks meant for long-term investment when the market is down. It also keeps you from taking advantage of rare “fire sale” opportunities. The best time to invest in stocks is when the herd panics and prices plummet.

On the other hand, some investors sit on the side-lines in the early stages of market upturns out of fear then start to feel the fear of missing out when the market shoots up and they jump in when the stock price has risen a lot. Greed then comes in. By then, much of the bull market may have passed entirely, and they have bought the stocks at high price, ready to be corrected in price.

Anger and frustration can make you dump fundamentally sound investments just because you get tired of waiting for them to show progress in stock price. Yet overreacting in frustration and impatience often robs you of your best investments and ideas.

Some investors are emotionally attached to specific stocks and fall in love with them, ignoring their changing fundamentals. They remain often biased on their investing decision and are reluctant to sell when fundamentals clearly deteriorate, and as a result, lost big in their investment.

Conclusions

Most people think about how to make big money in the stock market, ignoring risks and the probability of losing big in the stock market. They tend to follow stock tips and rumours and the herd mentality, and highly affected by emotions in investing. As a result, most of them lost money, many of them lost a lot of money.

Recognising the above short coming, and acquiring some investment knowledge and experience, and do some homework themselves will help to mitigate the problems and improve the outcome of the long-term return of their stock investment.

K C Chong