Hi, I’m Ian.
I’m a dividend investor and I’ve been earning dividend income quarter after quarter from a portfolio filled with highly profitable stocks in both Malaysia and Singapore.
I believe, stock investing is a simple means, available to all of us, to generate a sustainable source of passive income, thus, propelling us one step closer to achieving financial freedom.
With that said, however, I realized that most who have started hopeful failed to be rewarded from their stock ventures. I’ve learnt, in most cases, this often stems from having unrealistic expectations on what stock investing is from the investors’ point of view.
Thus, I also believe that it is important to get the fundamentals right prior to making your first investment in the stock market. In this article, I’ll share the 5 misconceptions that most people have on making profits consistently from stock investing. They are:
Misconception #1: I ‘Play’ the Stock Market
A common question: ‘Ian, do you ‘play’ the stock market?’
My usual response: ‘Nope. I don’t ‘Play’. I invest in stocks to make money.’
Let me explain. First, a stock is a corporation, which has an ongoing business or businesses, which has real customers like us, where it derives sales, profits, and cash flows. The stock market, like Bursa Malaysia and the SGX, offers us a marketplace to buy, hold, and sell shares of these stocks. This means, if you buy shares of a stock, you are effectively a part owner of an enterprise where you are entitled to have a share of its profits for as long as you hold onto it.
This is why, successful investors like Warren Buffett, buy stocks with having a mindset of holding onto them forever to enjoy recurring income for a very very long time.
Misconception #2: ‘High Risk, High Returns’
A mutual fund salesman commented: ‘Ian, since you’re a stock investor, this means, you’re a high risk investor.’
My response: ‘I beg to differ. I hate taking unnecessary risk.’
Here is one of the many ways to look at ‘Risk’: It is having uncertainties to an outcome from an investment. For example, you ask an investor: ‘Bro, why did you buy ABC stock?’ He would reply: ‘For capital gains.’. If you continue with a question: ‘How much do you expect to make from this stock?’ Chances are, he is clueless and is risky as he doesn’t know what he is doing.
Here is a golden nugget. Savvy investors have already calculated their returns from an investment and have standard operating procedures (S.O.P) thought out before getting into it. This means, in all case, whether stock prices would go up, go down, or go sideways, savvy investors know what they should do to manage their stock portfolio.
This is called ‘Portfolio Management’ and it is vital to maximize returns from an investment with as minimum risk as possible.
Misconception #3: ‘I Bought a Growth Stock’
A friend: ‘Ian, I’ve just bought a counter known as DEF Bhd.’
Ian: ‘I see. Why did you buy?’
A friend: ‘Because its stock price has gone up by 200%-300% over the past 6 months. It’s still growing so I buy. What do you think?’
Sincerely, I wish investing is as simple as finding out what sort of asset class has gone up rapidly, grab some of it, and piggyback your way to investment success. Unfortunately, it is often ‘not-the-case’ and, like my friend, most are just chasing fantasies and fallacies. This is how most got suckered from stuff like Bitcoin. It’s not that Bitcoin or any other cryptocurrencies are risky. It’s just that many buy investments without first understanding them.
So, what is a growth stock?
It is one that has built a track record of growing its sales, profits, cash flows and assets sustainably over the long-term and has the financial resources to invest for future growth. Instead of chasing hot tips, savvy investors tend to focus on stocks which are predictable, sustainable and expandable over the long-term as they are truly ‘Growth Stocks’ that would grow their wealth.
Misconception #4: ‘You Don’t Make Much from Dividend Stocks.’
Here is another general consensus: ‘I don’t invest in dividend stocks because I invest for capital growth.’
If you believe the above, pardon me. You’ve been punked.
Research has found that: ‘Dividend Stocks Can Give a Multiple of 43 Times More Capital Gains than Non-Dividend Paying Stocks.’ Here, it is tabulated if dividends received by investors are not reinvested. If one decides to invest its dividends back into his portfolio, your gains would be so much more.
Thus, investing for dividends is also investing for long-term capital gains.
Why? A few reasons. First, stocks that pay growing dividends consistently are ones that have financial means to invest and expand. Second, savvy investors, especially low-risk mutual funds, pension funds, banks and insurers are most likely conservative and risk-averse in nature. Hence, they prefer to invest into investments which pays out dividends consistently as they need to show that they can invest profitably and deliver profits to their clients. Hence, there are stronger demand for dividend stocks, boosting their chances of capital gains.
Misconception #5: ‘What Stocks Should I Buy?’
Here is what some people believe when beginning their journey to invest in stocks.
First, they saved money. That’s fine. Second, they choose a stockbroker. It is not harmful. Third, they pick some stocks to invest or bet on if they are just ‘Playing Stocks’.
Unfortunately, that’s how most people get disappointed after making a few investments here and there.
Instead, I’ll share how to get it right if you wish to profit from your first few investments right from the start. First, invest in sound investment education. For a start, this includes learning how to read financial reports. Second, take what you’ve learnt and practise reading financial reports. Why? Because you can only tell whether a stock is good or bad by reading financial reports. No investment decisions can be made without reading them.
Then, and only then, you can find yourself a suitable stockbroker and make your investment.
If you don’t know how to read financial reports, I think, it is a good idea that you invest first in acquiring this invaluable skill that lasts for a lifetime. With that said, however, I think, it is helpful for us to find stuff that works and do not overspend on education …. because you need capital to start investing.
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Stock 101 Quiz