5 Ways To Lose All Your Money In Stocks

Admittedly it’s not a very popular question, but conceivably one we should all ask ourselves at some point in time.

Investing in stocks has always been a risky endeavor. With the share price in a constant state of flux due to various factors such as financial reports and future prospects, investors have had to content with volatility frequently while dealing with equity.

If the share price does recover over the long term, then that’s not a big issue. The problem is that not all stocks manage to pull themselves back together over time. This could be due to scandals, deteriorating business models, or poor management.

From time to time, less-experienced or unaware investors would even end up stepping on ticking time-bombs such as First REIT and Hyflux, losing most or even all of their capital in the process.

The question then becomes; how do we assess, identify, and side-step such hazards?

The rest of the article will lay out 5 common mistakes investors tend to commit in stock investing which come with very high price tags. Do consider reviewing your investment strategy for any of these common mistakes as well.

Business Model? What’s That?

A company’s business model is essentially it’s operational plan to earn profits. This model will vary cross different industries and also produce different results.

While some enterprises tend to experience strong demand for their products or services, others may operate in industries which are in fact, non-essential or prone to disruption. Such businesses might not be ideal to own as their business models could be unstable or unprofitable.

Ultimately, without the ability to generate profits, a company will surely go under. By understanding the business model, investors can avoid stepping into such traps and putting their capital at risk.

Aren’t We Supposed To Leave It Alone?

You wouldn’t leave your pet at home alone for more than a couple hours would you? In the same way, we shouldn’t leave our investments alone without reviewing their performance from time to time as well.

Of course, we are not asking you to check on your stocks every hour or day; but having the practice of doing periodic reviews on the financial metrics of your investments would help you sense-make how it’s business is faring.

Personally for me, i do reviews on my investments twice a year, in line with the release of their financial reports. This helps me gauge the effectiveness of business endeavors launched by management, and also decipher the financial impact of direct competitors and disruptive trends.

By monitoring your investments occasionally, we can stay up to date on their performance, and deduce whether the initial investment thesis is still on track.

Buying Hyped Up Stocks

Hold on, let me get the umbrella; because this is likely to be a contested topic.

There are many stocks out there which trade at extremely high PE and PS multiples. These counters are likely to be extremely popular, or “hyped up”, due to their vastly attractive business models, which result in overwhelming demand for their shares.

While many investors believe that those metrics are justifiable as the company’s revenues and profits increase over time, i tend to lean in the other direction.

To me, buying such overvalued stocks can be risky, as they might drop closer to their intrinsic value at any time, especially over the short term. This would result in a trough in their share price, especially for investors which brought near the highs.

In the worst case, investors might have to lock up their holdings in cold storage for the long term, as there is no guarantee of the stock price ever recovering.

Go Big, Or Go Home

Another minefield. While some advocate deploying most, if not all of your capital into one or two promising counters to achieve extremely high returns, i would advise against doing so as you would be unwittingly exposed to systemic and external risks.

A common analogy i tend to use is the business model of property brokerage companies such as Propnex and APAC Realty. While the business is asset-light, has good demand, and comfortable profit margins, it still has to accommodate the wishes of government bodies such as the URA.

In a worst-case scenario, a major regulatory change could alter it’s business model drastically for the worse, sinking it’s share price in the process.

A good guide for diversification would be to allocate your funds between asset classes that have low or negative correlations so that if one moves down the other tends to counteract it. If that sounds too complicated, then at least spread out your capital across 5-10 stock counters in different industries to safeguard yourself from a total knockdown.

Ignoring Major Disruptive Trends

An apt example for the last mistake would be Comfortdelgro Corp.

In it’s heydays, the company used to be a major player in the local transport market through it’s taxis. With the appearance of Uber and Grab in 2017 however, taxi revenues have fallen greatly due to the mass adoption of ride-hailing apps which removed many of the pain-points of getting a cab.

They’re not the first; and they won’t be the last. Major disruptors such as Machine learning, IOT, Cryptocurrency, and Robotics are already taking shape. Some of them are even in the early stages of adoption right now.

The general rule of thumb is that once these technologies reach a stage where they are both practically viable, and can be deployed without absurd costs, market demand will likely push them into mass-adoption rapidly.

Fortunately, such events do not happen overnight, and a savvy investor who has his eye on the horizon can avoid such mishaps handily.

To Conclude

Imagine losing all your hard-earned money saved over decades due to a hyped up stock crash. Or losing an important sum of money meant for your kid’s education all because of a sudden regulatory change.

These are not just folk tales, but true and harrowing events which have happened to careless or unlucky investors in the past.

As retail investors, we truly are the masters of our own fate. Therefore, we need to ensure we are up to the task by gaining the essential knowledge, and constantly polishing our stock-picking processes. In doing so, we can safeguard our capital for the future as well.

Casey H

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