Take Risk & Manage Risk

 Are you courageous enough to face challenges? Daring to take risk? Dare to fail?

I just read of a 26-year old man who lost about $400,000 in the stock market. He had saved up to US$300,000 with his frugal living. He started well, with US$5,000 on a US stock called AMC and made it to $15,000. Then he bet on silver and increased his capital to $50,000 within a short time. Next, he wanted to move to a safer stock and chance upon Ali Baba, a very well-known and profitable Chinese e-commerce stock listed on the New York Stock Exchange (NYSE). Ali Baba stock price was falling due to the Chinese government clamping down on all tech-stock and the price looked attractive. That’s when he put his money (US$300,000) into Ali Baba. As the price kept dropping, he put in another US$100,000. (All he had up to that time). Painful as it was to see the price kept dropping and taking a mental toil on him, he finally exited the stock after 9 month in October 2021 with about US$20,000 left. You can read it HERE.

https://www.vice.com/en/article/bvnn3a/i-lost-dollar400000-almost-everything-i-had-on-a-single-robinhood-bet

AliBaba price chart (keep falling)

I respect this young man. Time is on his side to recover from any failure. That is the beauty of youth. He work hard, frugal and save every dollar that he earns. He is hard-working, read a lot about investing and learn how to trade and make progress initially. He dare to take risk. That is what I also like about him. People who dare to take risk and challenges are usually courageous. They dare to fail, learn from it and come out stronger. To be fair to him, he traded on a very good stock – Ali Baba. So, what is the mistake that he made in his investment? Let us learn from King Solomon, the wise man from of old (Ecclesiastes 11:1-6 NLT):

#1. Don’t be afraid of risk (Ecc 11:5-6)

Life is full of uncertainty. Be humble enough to admit that we do not understand every activity of God, who does all things (Ecc 11:5). Because of our limited capabilities, we need to work hard – “plant in the morning, busy all afternoon” (Eccl 11:6) – that is: do everything you can to improve and grow. Our hardworking will pay off with profit even with risk and uncertainty. That is what King Solomon told us.

Then he explained how to mitigate this risk in Ecclesiastes 11:1-4.

 

#2. Diversify your portfolio (Ecc 11:1-2)

Divide your investments among many places, even across the seas (into other countries). In the stock market where there is a high risk, don’t put your money only in 1 place or only 1 or 2 stocks. If that stock get hit and price falls (like Ali Baba), all your money will wipe off. That is what happen to this young man who lost almost all his $400,000. Practically, I think it is good to spread your money across different kind of stocks – equities, Exchange Traded Fund (ETF), Real Estate Investment Trust (REIT), and Bonds; all of which have different level of risks. But do not spread it too much until you lose focus. Keep it to 10 -15 stocks, with each stocks not more than 10% of your capital. I personally invest only in Singapore (home ground is always familiar and safer) and good stocks with strong fundamental and profitable business. Time is not on my side and so, there is no point to venture across the seas now. If you are younger, yes, try “across the seas”.

#3. Prepare for rainy days (Ecc 11:3)

Warren Buffet, the richest investor of our time said: “"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

Here, we know that rainy day, or bad times will always come like a dark cloud or a rotten tree that is going to fall. We may not know when it will happen, but it WILL SURELY happen to a stock market crash whereby every stock prices fall by more than 20% - 50%. And when that happen, it is the opportunity to buy good stocks at a very cheap price. It is important to have sufficient cash on hand to serve as a bucket for you the catch the falling price and buy at undervalue price. The mistake this young man made is that he did not keep his US$100,000 as his bucket and not buy in Ali Baba when it is the only stock that is dropping while the stock market is still not crashing. I personally hold about 40% of my money in cash and wait for the rainy day. This cash can form 2 buckets to collect the rain twice.

 

#4. Don’t wait for perfect timing (Ecc 11:4)

On the other hand, rainy day don’t come often. It happens only once in a decade or so. So, he who wait for the perfect timing will never start planting or investing. Always start small and learn as we grow. This is what the young man who lost his US$400,000 do it right. He started small and learn along the way.

 

 Life is about managing risk and continue to plant and grow. What kind of risk are you most afraid of? Be strong to face it.  But don’t take too much risk until you can’t sleep. If that happens, cut it off, take the loss and let go. Stock market investing is no different.

Agape