Recently,
I was browsing the website of an investment related company and come across an
article penned by an investment advisor. He is advising investors to be
cautious about the recent stock market rally. Another click, another advisor
advices the public to be optimistic on the current rally.
The noise
are everywhere…
Do you
know that 85% of the professionals in the stock market lose their money by the
end of the bull bear market cycle? Only 15% are able to get out of it with
their heads intact. So, if 85% of professional were losing money in the stock
market, how would a beginner or someone with zero knowledge would fare against the
masters? The logical answer would be the beginner may lose more money than
these 85% losers.
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Consider
an amateur basketball player playing against a professional basketball player.
Lebron James or Kobe Bryant are basketball professional players. Anthony Davis
is the top amateur basketball player in the USA and he was the number one draft
pick in the 2012-2013 season. Now, if Anthony Davis will go up against LeBron
James or Kobe Bryant in the NBA, what would be the result? It will be a
mismatch and Anthony Davis will be “schooled” by either Lebron or Kobe. Why?
LeBron and Kobe have been in the league for at least seven years. They are
veterans of professional basketball already. They know the rules very well,
they are quite familiar with their opponents, and they know when to attack and
when to defend basketball. They know when to give up a foul or a layup and they
know what it takes to win a championship. Anthony Davis? Oh he’ll get his due
later on but meantime, it will be a Lebron or Kobe show.
Now,
imagine an ordinary man or woman plunging in the intricate world of stock
market where learned and educated men abound. Surely, he will be gobbled up by
these sharks that make their living in the stock market. A professional versus
amateur, the result is a mismatch.
If 85%
of these professionals lose their money in the stock market, then how come it
is still advisable to invest in the stock market?
The Lucky 15% Investors
Most of the
15% investors who earn a profit in the stock market are not active traders.
Majority of the 15% smart investors are people who don’t care whether the
market is up or down. They rarely buy and sell within a month. They do not care
what is the daily price of the stock. What is most important to them is that
the company is doing very well, it is an established enterprise, has a real
growth, has massive potential to increase in value, and will last in your
lifetime. I am not saying that professionals do not make money at all. In fact
the 85% investors who lose money consist of every kind of investors. You have
the investors who have limited knowledge, investors with good knowledge and
investors with extensive knowledge in the stock market. Yes, all kind of
investors can be included in the 85% losers and in the same way, all kind of
investors can be included in the 15% investors.
One of
the strategies of the 15% fortunate investors is buy great companies every
month and ignore its daily fluctuations. They research, investigate, and make
enquiries about the companies. They are investing time and effort in order to
find great companies worth investing. In short, they do peso cost averaging.
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Peso cost
averaging is buying stocks on a regular schedule whether the price is high or
low. Normally, the interval is monthly. For example, you have P5,000 disposable
income every month and you decide to invest it in the stock market. Ayala Land
is a great company and you think it will grow in the next few years and will
last in your lifetime. You bought Ayala Land shares last March whose price is
P29/share with your P5,000 and it netted you 172 shares. Then last April, Ayala
Land share price is 30/share and you bought the stock with your P5,000 giving
you 166 shares. This May, Ayala Land share price is 31/share and your P5,000
gave you 161 shares.
