Many people have asked me whether it is the right time to jump into the stock market. My usual answer is, “I don’t know”.
This is based on my having no information about the individual who has sought my opinion. I don’t know what he/she likes, what he/she expects from investing in the stock market, what his/her long-term financial goals are, and most importantly, to what degree of risk this person can withstand.
Investing in stocks is riskier than putting money in a bank or buying a bond. You may get richer, gaining a profit of over 50%, in a week, or you may become poorer, seeing your stock value tumbling down by 50%, in a week as well. So, unless you can ensure that such potential loss, if it happens, will not give you a heart attack or make you commit a suicide, you’d better stay away from the stock market.
I believe that wise investing in the stock market can contribute to everyone’s wealth creation in the long term. Amongst the different asset classes, stocks typically offer the best way to beat inflation. Earnings of most listed companies will keep increasing when their businesses expand. These will be reflected in higher stock prices and more dividends.
Many people would disagree with me and say that investing in stocks is similar to gambling. In fact, they are alike in many ways.
First of all, they both involve risks. That is, gamblers and stock investors cannot accurately predict the outcome with great confidence. If it turns out to be a profit, they would claim that they have done their homework well. However, if it turns out to be a loss, they would blame it on the stars and fate!
Secondly, you rarely hear the “bad news” or losses. When was the last time you heard people say they lost their money in a bet, be it a football pool, a state lottery or an underground one? Similarly, stock investors normally brag about their profits, but always keep mute about their losses. They often say their stocks are for long-term hold when the prices move south.
Thirdly, both gamblers and stock investors are addictive to their activities, which they claim to be their main source of income. They often spend time discussing about them with friends in hope for getting to hear more “predictions” from well-known astrologers.
To me, stock investment can be considered gambling or full-fledge speculation when investors buy only on hope and not on sound knowledge of the underlying stocks. Once they randomly commit their money into something based only on instincts, they are immediately engaging in taking unnecessary risks.
In Thailand, it is unfortunate that there are more stock speculators than investors. As reported by the Stock Exchange of Thailand (SET), over 60% of market participants are retail investors who seek quick profits. They rely very little on fundamentals of stocks and depend more on the “hot tips” that they receive from their brokers. We often hear about investors who trade a single stock 2-3 times in a day – they buy on rumours and sell on facts!
I doubt that these speculators can achieve their financial goals, either short-term or long-term, by trading stocks in the SET. Quick profits, if any, can entice them to go into the market more often. However, just like gambling, it is more likely that their luck will run out someday. In addition, few speculators would factor the brokerage fees into the calculation of net profits.
Having said all that, I find that speculation is not all bad if it is in the right proportion. In your stock portfolio, there can be a few stocks that you can hold for more than three years, a few that you hold for a year, and a few that you plan to sell in a month. As long as you know exactly why you buy or sell each stock, and the proportion of speculative stocks is less than 25% of your portfolio, you can consider yourself an investor.
Some of the basic knowledge you should have before investing in a stock:
- What does this company do? Why is it a good business to be in?
- How is the competition, locally and internationally?
- What is its earnings forecast? What has been its track record?
- What will impact its earnings; i.e. oil prices, exchange rates? To what extent?
- How is its management? How transparent and effective are its policies?
- How liquid is this stock?
- Is the current price attractive? Why?
- When will you sell the stock? Why?
If you have all the answers to the above questions, you can be certain that you are becoming more of an investor than a speculator. Prudent investing will reduce risks and give you a better chance of winning the war – or achieving your financial goals – instead of just winning a battle – or gaining short-term profits.
Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.
December 6, 2000
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