“KC, it was wonderful getting to meet you in person and knowing you personally. Keep up the excellent work in educating a new generation of young investors”. From my friend Dr. Yeoh in Penang
While the investment bankers and some individuals are propagating the use of margin finance to invest in the stock market to get exaggerated return from the stock market, but when I am confronted with the question above on this topic, I usually say “No”, unless you have sufficient knowledge in fundamental investing. Why?
How do most people invest?
There may be a lot of people who seem to be good in investing in the stock market, and some do make some extra-ordinary returns. However, most have lost money, and quite a number of them have lost huge amount of money. And that is not surprising.
In my previous article appended below:
I have mentioned that a friend of mine and his friends previously working in Singapore had been using this strategy of following stock tips from friends and reading from newspapers, magazines and in forums. All his friends, including himself, lost huge amount of money doing that. Their CPF money in Singapore had diminished in value by half or even two thirds in the 1990s following rumours and tips.
I have also talked to a number of my friends since I came back from overseas a few months ago. The investing experience of all of them is the same. All of them and their friends lost a lot of money in the stock market. I haven’t heard of any exception.
I have just talked to three of my golf kakis this evening in the club house, all retirees, one was in sales, one in the air force and the another a banker. The story is the same; they and all their friends lost a lot of money in the stock market in the 1990s, and now they follow Rod Stewart and don’t want to talk it any more. The retired banker said his friends, and remisier friends initially made a lot of money, but all had vomited back, and owe the “Along”, asked for his help, and had disappeared themselves since. None eventually made any money.
Yes, it is that bad. I haven’t heard about any exception, except maybe one or two in i3investor boasting of millions they had made. So do you still wonder why my advice of not investing in the stock market on your own if you do not know anything about the business?
What do the research say about the investing experience of retail investors?
Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets regarding the 20-year returns of some asset classes.
Based on their analysis, the average investor had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the market return of 8.4% during the same period. To put that into perspective, an investor invested $100,000 in the S&P500 20 years ago would today have a total portfolio of around $502,000-compared with only $156,000 for the average investor. This return is not even enough to beat inflation and the total money left today can’t buy the things one could buy 20 years ago.
Brad M. Barber and Terrance Odean in their paper “The behaviour of individual investors” confirms that collectively individual investors trading on their own under-performed the market. However, this average performance of individual investors masks tremendous variation in performance across individuals. This means those savvy individual investors would have done much better than the average, and the lower half of individual investors much worse than the average. The underperformance was due to information asymmetry, overconfidence, sensation seeking and action chasing, failure to diversify, easily influenced by rumours, tips, media and internet forums etc.
So what is your chance investing in the stock market if you do not have any investing skill?
Back in Bursa about four years ago when I first started dwelling in i3investors, some people in the forums asked me about stocks whether they are investable of not, and I have summarized those lemons and recorded my first article “2014 Christmas Reflection of Pitfalls Investing in the Stock Market” below:
The stocks involved are summarized in Table 1 in the Appendix.
If one traces back those stocks three to four years ago, they are some of the hottest stocks then, and individual investors, unfortunately always follow hot tips, rumours, hypes and fads in putting their money in the stock market.
The portfolio of stocks has lost an average of 51.2% from about three years ago, compared to the gain of the broad market of 11% during the same period, or a negative alpha of a whopping 62.2%! The median return of the portfolio is even worse at -64%! All stocks, without exception, underperformed the market by huge amount. There is only one stock returned positive results, but a meagre one at just 6.6%, but the losses are mostly of huge double digit.
Mind you, prior to that time, many of them had already loss huge amount of their stock prices from their peak, some even more than 90%!
Take a look at the price charts of those stocks below and you will understand what I am talking about. yes, today I am not going to talk about the boring fundamental stuff. Let’s just talk about stock charts. If you are interested in the fundamentals of these stocks to see why they performed that badly, please refer to my articles which were published 2 to 3 years ago in the link below:
"A picture paints a thousand words"
KNM was the darling of the market and its share price was chased up from about 30 sen in August 2003 to RM8.00 in April 2008. It had big plans; foraying and making its foot prints all over the world with big acquisitions and paying premium prices. Within a year, its share price plunged to RM1.00, rose up to RM3.50 within 3 months in June 2009, down to RM1.50 within one and a half year in November 2010, rose up to RM2.60 again in January 2011, and then all the way down to less than 40 sen, before rising up again to above RM1.00 in August 2013. It is now trading at 42 sen. KNM's long-term shareholders' predicament haven't ended yet, have they?
How many punters have lost huge amount of money in those ups and downs?
- Asia Media
Somewhere in September 2012, AsiaMedia announced bonus issues, share splits and free warrants. Punters looking for “free money” chased the share and jacked it up to the adjusted price of RM2.40 within three months from about 70 sen in June 2012. From its height, it plunged to 70 sen in days. It is trading at 19 sen now. Tell me how much had those hoping for “free money” would have lost? Or do you believe that those individual punters had made heaps buying at 70 sen and sold at RM2.40?
Hibiscus share price was chased up by 80% from RM1.50 to RM2.70 in just four months from August to December 2013. This was just because it has acquired a stake in a drilling company, and given some MOU and licenses to explore oil in some countries. Go to Hibiscus forum during that time and see how this stock was touted then. Meanwhile the company has not made a dime yet and has been bleeding cash since listed and have made some cash calls. Its share price dropped by 32% to RM1.84 in just three days after Christmas in2013 when it failed to find oil in its oil prospecting operations. It closed at 19.5 sen on 9th September 2016.
Tell me again, how many punters with this investing strategy of “Hope” have lost their pants and 欲哭無淚?
- Guan Chong
Tell me, who made money and who lost money with this volatility of its share price recently, syndicates, insiders, manipulators or the poor retail nvestors, the new suckers?
- China Stationery Limited
Need to say anything about this Chinese company, CSL? What about XingGuan, Maxwell, XingHe, HBGlobal, ChinaOuhua, K-Star, CAP, XiDeLang? Didn’t XingGuan also give “free money” not long ago?
Look at the share price charts of MP Corp, Ivory Properties, London Biscuits, and Smartrack. What do they have in common regarding their share price movements?
- MP Corp
What is the trend of Ivory share price? Ivory share price closed at 41 sen on 9th September. What would be your damage if you subscribed its IPO some years ago?
- London Biscuits
London Biscuits makes profit every year. It also has good cash flows from operations almost every year. Why is such a dismal performance of its share price? You can find the answer if you know the language of business, clearly.