Hi, I’m Ian.
I’ve bumped into Mike, a friend of mine in a coffee shop. Here was how our conversation went:
Mike: “Ian, I heard from Andrew (another friend of ours) that you invest in the stock market.”
Mike: “So, what type of trading software are you using for your trades?”
Ian: “Not using any at the moment.”
Mike: “But, I thought you invest in the stock market?”
I could tell Mike was a little confused. Like most on the streets, I believe, Mike sincerely has misconceptions on what stock investing is, who stock investors are, and how stock investors differ from traders and speculators.
Obviously, it takes a lot more than a 15 – 30 minute conversation to get my message through. So, I’ve decided to blog about it. Here, I would like to do my part to introduce to you the often ‘misunderstood’ and unique world of stock investing so that you would have a much better insights on who we are, what we believe and what we do.
Therefore, here are the 3 misconceptions that most people have about stock investors.
#1: Stock Investors Don’t Use Trading Software
I know, the above statement is generic and is applied with exceptions. But here, I would like to make a point.
Stock Investors invest. Stock Traders trade.
Stock Investors know the business of investing is different from the game of trading. Let us not confound the two as it would be a mistake for us to do so. For instance, Warren Buffett focuses on acquiring and accumulating shares of great businesses at great prices. He is a businessman and most likely, you’ll find him reading annual reports over monitoring stock charts in front of his computer screen which professional traders do.
Am I saying ‘Investing is better than Trading?’
Not exactly. My point is, ‘Know Your Game. If you are into investing, invest. If you are into trading, trade. Mastering your game is key to making profits consistently in the stock market or in general, any endeavours in your fields.’
#2: It takes Low Risks to make High Returns
Have you heard the saying, ‘High Risks, High Returns.’?
Time and time again, I hear this preaching from several well-meaning unit trust agents. Personally, I have nothing against a sales pitch or meeting up with another unit trust agents. But, I find the following conversation rather disturbing:
UT Agent: “Ian, what do you invest in?”
Ian: “I have a stock portfolio.”
UT Agent: “Oh, you must be a High-Risk Investor?”
UT Agent: “Yes, stock investors are high-risk investors. You may consider investing in unit trust as unit trust is of lower risks. What don’t you look at our ABC Equity Fund?”
That’s an oxymoron.
Nothing can be further from the truth. First of all, true stock investors, like the Warren Buffett type, is by-far the most conservative and ‘Kia-Si’ type of investors I’ve ever known. Secondly, I find a significant portion of unit trust funds promoted in the local market are ‘High-Risk Equity Funds’. How then is it considered to be of ‘Lower Risk?’ I have my doubts.
Let’s switch back to stock investing. How can it be ‘Low Risk, High Returns’?
The answer is simple. Often, stock investors would minimize their risks and maximize their returns by investing in:
- Simple Businesses (Businesses that they can understand)
- Profitable Businesses (5-10 Years Track Record of Profits)
- Scalability (Businesses that are Expandable)
- Predictability (We Know Our Expected Gains before Investing)
- Exit Strategies (We Know what to do when Stock Price Goes Down)
Once again, am I saying “Stocks are Better than Unit Trusts?’
First, most unit trust funds invest in stocks. The difference is, ‘Who is doing the investing: You or Your Fund Manager?’ If you want to invest in the stock market but do not wish to do your own investing, then, go choose a fund. If you want to do it yourself, then, I recommend you to improve your skills as a good fund manager yourself.
Secondly, I’m here to clear two misconceptions:
- Stock Investors are Conservative by nature.
- Unit trusts may not all be Low-Risk Investments. Funds should be assessed individually. You’ll still need to do some homework before selecting one. (Please don’t ask me which fund or company I go with as I build my own portfolio.)
#3: Stock Investors Don’t Invest on Hot Tips
Back to my conversation with Mike.
Mike: “So Ian, what are the good stocks to buy today?”
Ian: “Well, there are plenty to shop around. You can be picky and choose.”
Mike: “Ian, what are you buying today? Any Hot Tips? Don’t worry if it goes wrong. I won’t blame you for it.”
For a start, I’m not one who is stingy on information. It’s a great pleasure of mine to exchange ideas and learn from one another. However, in regards to this question, I find it difficult to answer. Why?
Let us assume that ABC Bhd is a good stock. Would you invest in it today? Or, would you invest in it tomorrow? As you can see, your returns from ABC Bhd would be different if you invest at a different price at a different time from another investor. Hence, I believe it is redundant for me to answer the question: ‘What stocks to buy?’.
What about brokers or analysts who churn out stock tips every now and then? Do I rely on them? Not really. I believe, it is also redundant to follow stock tips provided by them. Why?
This is because we are all different individuals, created by God uniquely with different background, characteristics, preferences, financial status, motives, set of skills, on investing or trading.
For instance, a stock analyst could be a stock trader who trades on a stock’s momentum. Personally, I’m a stock investor who looks at the financials of a stock. Thus, I would not seek tips or advices from him as he is different from me and would have adopted a different strategy to make money from the stock market. Hence, it’s better to know your game than to receive hot tips from your friends, relatives, brokers, and analysts.
Hopefully, I have, in a small way, shared with you a glimpse of who stock investors are in nature. Of course, there are so much more for you to explore. Here, if you want to really know the differences between an investor, a trader and a speculator of the stock market.
Stock 101 Quiz