Here is a question:
‘My investment capital is small. Should I trade stocks first to boost my capital so that I will have a much larger capital to do value investing?’
To answer this, let me first recite you an infamous children’s story:
Long time ago, there was an old mother lamb.
She had three little lambs. They lived in a cottage in a far away land. Soon, her little lambs grew and the time had come for the mother lamb to send her little lambs to the world to seek their fortunes.
The eldest lamb was very lazy. He built his house out of straw in a few days. Then, he boasted to his siblings on how quickly he managed to build himself a house.
The second lamb worked a little harder than the eldest lamb. But, when he hustled, the second lamb couldn’t help but notice how fast the eldest lamb finished building his house. Hence, he speeded things up by building his house out of sticks. Very soon, he finished and joined the eldest lamb for some leisure and fun.
The youngest lamb worked hard to build a house made of bricks. He couldn’t give two hoots to his brothers when they boasted to him how quickly and efficiently they built their houses and they teased him daily for being a slow builder. Then, months later, the youngest lamb moved into his brickhouse.
Not long after, a big bad wolf passed by.
He was hungry and he smelled mutton.
Thus, the wolf crawled his way to the straw house where the eldest lamb resided. He said, ‘Little lamb, let me in!’. The eldest lamb answered, ‘No, no, not by the hairs of my chinny chin chin!’. The wolf huffed, puffed, and within a single blow, blew his house down. The wolf killed the eldest lamb and had a wholesome dinner.
The next day, the wolf came to the stickhouse where the middle lamb resided. He said, ‘Little lamb, let me in!’. Just like his late elder brother, the second lamb replied to the wolf, ‘No, no, not by the hairs of my chinny chin chin!’. Then, the big wolf huffed, puffed, and blew his house in two blows. The wolf found the second lamb hiding in his bedroom. He killed the lamb and ate it for dinner.
On the third day, the wolf came to the brickhouse where the youngest lamb lives. Likewise, the wolf called out to the youngest lamb, ‘Little lamb, you smell awesome for dinner, please let me come in!’. The youngest lamb replied, ‘No, no, not by the hairs of my chinny chin chin!’. The wolf huffed, puffed and blew the brickhouse. But, to the wolf’s surprise, the brickhouse did not move a bit. So, he tried again. He huffed, puffed, and blew the brickhouse harder. To the wolf’s amazement, the brickhouse still did not move a tiny bit.
Then, the wolf saw a red chimney on top of the brickhouse. He climbed his way to the chimney, in an attempt to sneak into the house to eat the youngest lamb.
But, the youngest lamb saw it all along. He made a big pot of boiling stew, waiting for the big bad wolf. Then, just as the big wolf came down from his chimney, he slipped and fell right into the pot of boiling stew. The wolf was cooked alive and a few hours later, the youngest lamb enjoyed himself a gourmet dinner.
Ian, What Does This Story Have to Do with Stock Investing?
Well, it is quite a lot if you really think about it.
The story is a typology of how people try to make money from the stock market today.
The question is, ‘Are you building a straw house, a stickhouse, or a brickhouse?’
What is a Straw House in the Stock Market?
For a start, straws have no backbone. If we blow a straw towards one direction, it bends towards the direction. But, if we blow it in another direction, the straw would bend towards another direction. People who build straw houses are lazy. They don’t wish to learn about stock investing and they always want to find out what is the next flavour-of-the-month or year in the stock market. As such, they tend to buy stocks without much research as they want to make a quick buck.
But, most often, straw houses do not survive the blow of market crashes (wolf). That is why we find panic selling and disappointed faces in a market downturn.
What is a Stickhouse in the Stock Market?
Well, have you heard of what a candlestick is?
Basically, a candlestick is a type of price chart used by technical traders to make fast money in the stock market. Unlike straws, sticks would put in more effort in interpreting stock price charts so that they could time their entry and exit when trading stocks. But, their motive is to make short-term profits quickly.
There are many who claim to be trading gurus in the stock market.
There are many more who aspire to attain what these gurus have achieved.
My question is, ‘What is the proportion of people who actually get there?’
But, for me, I do not intend to build a stickhouse and thus, let’s move onto:
What is a Brickhouse in the Stock Market?
Bricks are hard, solid, and tangible. They are the real deal.
For instance, as investors, we study a stock’s financial results before investing in it. Why? This is because we would base our investment decisions on solid facts, datas and information which are obtained from credible sources. We would like to know if a stock has a solid track record of profitability, good governance, and is in great financial position to invest for the future before investing.
Yes, it takes time and effort to study them but from an investor’s viewpoint, it is absolutely worth it. This is because an investor knows that he is building a stock portfolio that resembles a brickhouse and he doesn’t mind laying his bricks one at a time. Speed is not an issue. Steadiness is.
Investors understand sustainability is key to building stock portfolios that would withstand market crashes. Thus, instead of chasing returns, investors shall work on building investment systems to strengthen their stock portfolios so that they can survive multiple market crashes and economic crises in the future.
Conclusion: Should I Trade Stocks to Boost My Capital?
Well, what kind of house do you like to build at the end of the day?
If you wish to start building your house with straws and sticks, it may be hard to switch to bricks in the midst of constructing the house or stock portfolio. It may not be practical to build a house made of straws, sticks, and bricks.
But, if you want to have a strong brickhouse at the end of the day, it is better to begin constructing your house with bricks and build a solid foundation from it. I believe the issue is not so much about the amount of bricks we have, as I didn’t have many bricks at hand when I first started building my portfolio. Instead, the more important thing for all of us is to just start building with the little we have and progress along the way.
It is okay to be slow. But, make sure it is steady.