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

My Stock Market Investing Journey

When it comes to managing money, my philosophy is always to give as much as you can afford to those in needs. Firstly, give to the church and Christian organizations. Secondly, to charitable organizations that provide medical cares and those that helps the poor. Thirdly, I will render support financially to any of my relatives. This is my way of laying up treasure in heaven. (Matt 6:19,21). As such, I don’t really have a lot of savings, never more than $50k as emergency fund. But I am not concern about “rainy days” or having lay-off from my job as I believe God, Jehovah Jireh is my provider when I am really down in need.

¹⁹ “Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal. ²⁰ But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. ²¹ For where your treasure is, there your heart will be also.

But as I get older and near to retirement age, I realize that soon I will be out of job and out of money. $50k can probably last less than 2 years with frugal expenditure. Facing with this reality, I need to think of what happen when this day come in a few short years. Then in 2014, Pastor John Koe came to preach in Riverlife Church. He talked about how God helped him to invest in the stock market. This was the first time that I heard about preacher talking about stock investing. To me stock investing is equivalent to gambling. Yet, here is a pastor who is still investing in stock. This became the turning point – perhaps the stock market is the place to provide another income after retirement. And so the journey to understand and learn about what stock investing is all about begun in December 2014:

Stage 1: Stock market = Casino

The stock market is a risky place. That is what I used to believe. You just put money in and hope the price will go up. It all sound so random and luck. So, it is best to be avoided. But as I started to read more about trading and investing in the stock market, I find that there are actually technical analysis that help you to know how the market moves. Being an engineer and having acquired a technical and analytical mindset, the casino imagery of the stock market began to dissipate and risk can be managed through careful analysis and understanding of stock price action. I am still learning …

Stage 2: Stock market = dividend money tree

I also started read about how other people invest their money. One of the common ways is through dividend. You buy a company and the company give you money yearly, half-yearly or quarterly. Hopefully, the dividend continues every year and even grows bigger.

2 very inspiring investors using dividend method as passive income are:

Lady you can be free:  http://ladyyoucanbefree.com/

A Singaporean stock investor: http://singaporeanstocksinvestor.blogspot.sg/

You will be amazed how much their dividend is every year. And they are just in mid forties. I encourage you to learn from them if you want financial freedom.

And so, I started to buy blue-chip stock. Sure enough I began to get dividends and got excited. But when the dividend comes, the stock prices of the companies dropped and continue to drop with no upside. I started in early 2015, when the Singapore stock index is the highest, close to 3200. It reaches the highest at about 3500 in April-May 2015.  And so, growing a dividend money tree is good only when the Stock index and stock prices is near the bottom. Or else, you have to continue to manage it when you buy at the peak prices like I did. After suffering some losses, I need to think what I should do. What should I do when the price drop?  Through common sense reasoning, I should sell my shares. And when it stabilized at the low, I bought it back. This way, I still have my stock and made money due to the sell-buy price. After trying it out a few times, it seems a good strategy for falling stock prices that I hold. That forces, me to learn more about stock trading rather than stock investing. And so, putting the paper losses aside, my journey to stage 3 began in end 2015.

Stage 3: Stock market = treasure field or minefield

My initial experience of stock trading is like finding treasure, looking for stock that look good and will be moving up soon. Occasionally, the technical analysis shows that it is moving up and so I found treasures. Sometime though, the price move against me and it is like stepping on a minefield. Making losses always hurt and create fear to continue in the stock market. Thankfully, my gain is always greater than my losses and God has been good in my learning journey so far. But I believe the stock market is not about finding treasure and avoiding minefield. There has to be a more systematic approach of entry and exit from the stock. And so my journey of learning continues to stage 4 in mid-2016.

Stage 4: Stock market = oceans with varieties of fishes

Actually, the stock market is an ocean with many types of fishes and sea creature. These are the different types of stocks – companies, REIT, ETFs and the common one that I familiar. The rest, I am still no interested. Just like catching fishes, there are many ways to trade the stock market. At this moment, I am still using a “line and hook” to trade with tiny bait, so to speak. I need to build confidence. Some stocks are easy to catch. Their up and down are so easy to see. Even if you made mistake, just wait for it to correct itself and move up again, so long as you never buy at the 52 week price, which I always avoid, having learn the mistake from 2015 when I first started. In fishing in the stock market, I need to control my emotions and follow closely to the technical chart. Sometime, my emotion got me excited when the price is falling I quickly throw my line and hook to buy. That is when I caught a “falling knife” and got losses. These are the time where I made losses. Otherwise, I am pretty OK. My trades are still very very small because of the lack of confidence. Also, my target is to exit those lose stock made in 2015 which I am still holding. So it became a stumbling block to move forward.

Be Financially Free

I wish I had learnt all these in my younger days. All it takes is actually 20 years to be financially free. Think about it, if you start working at the age of 25, earning $2.5k a month, you can actually retire at the age of 45 – 50. For the first 5 years, one should save about 20 to 25% of his salary. He should also learn all he can about stock investment and trading. After 5 years, with the knowledge and saving, he can then start to do some investment when the stock cycle is conducive to go in. Youth has the advantage of time.

There are 2 resources God has given to all of us, if you are born healthy. They are time, and your life. Firstly, always keep yourself healthy – eat well, exercise, sleep and rest. Next use your time to grow in wisdom - learn, experiment, increase knowledge and skills. Once, you have the knowledge and skills in almost anything that you set your goal in, you can then launch out to achieve it with your healthy life.

And with that I leave you a good verse from the Bible to chew on it:

¹⁵ Be very careful, then, how you live—not as unwise but as wise,¹⁶ making the most of every opportunity, because the days are evil. (Eph 5: 15,16)

Agape