10 Lessons Learnt from Mr Market: Part 2

This is a two part series where I consolidated all my reflection and lessons learnt into two posts. You may refer to the first part over here. This is so that it will be easier for one to refer to and hopefully these lessons learnt  so that it will be easier for one to refer to and hopefully they are relatable to what you have experienced in your investing journey.

6. Importance of ignoring noises, managing your own emotions and believing in your own research

Forums can be a good place for investors to learn from one another, but people might unintentionally or intentionally spread fears to others, leading some to get swayed by it. You might have seen posts or articles a few months back where members discussed how much the stock market will drop based on past historical data. 

I think this scared a lot of people including myself. This made managing one’s emotion more difficult. Some people would try to panic sell in order to reduce their positions amid the virus outbreak. This is normal for investors to react as it is not easy to manage one’s emotion in this situation. Investors would like to lock in profit or stop further losses before things get worse. 

I admit that I am not as prepared as investors who have already been through SARS outbreak, Global Financial Crisis as this is the first time encountering such a black swan event. This event has made me understand that it is important to have a plan and stick to it.

We can plan out what trades we can execute if such an event were to happen again. For example, one can set aside capital to average down to capture the opportunity to buy at a lower price. Also, we can also look into buying defensive counters or counters that will benefit in this situation so as to have a buffer in to buy defensive counters such as Gold ETF or counters that will benefit in such event so as to reduce mark to market losses every day. What’s more important is that we should not sell stocks to lock in profit or minimise losses and hoping to buy back later at a lower price as we cannot predict future stock market movement.

7. No one can predict the future, time in market is better than timing the market

So you thought that you can buy later at a lower price after selling some or all of your positions, only to find out that the market recovered immediately after you sold. You realised that the US market has recovered and is breaking new highs. This made you think that the worst is over and became FOMO because you do not want to miss the opportunity to ride the uptrend only to find out once again the things changed for the worse. 

One mistake that I made is to re-enter the market due to FOMO and buy in with a lump sum amount instead of purchasing it in batches. If I were to buy in batches, I will have more bullets to average down in the case the price goes down. Nonetheless, I am thankful that despite the foolish actions that I made, I still have capital to weather the losses and average down if necessary. 

It is indeed that selling stocks and hoping to buy back later at a lower price is a fool’s game. For those who made this action is praying that the market can be in their favour by going even lower but no one can predict the market movement. If we were to stay invested, we won’t be able to miss out on the uptrend opportunity if the market recovers faster than expected.

8. Importance of buying in tranches

As for averaging down, the point is that we do not know at what price they will bottom so it is important to average down in a systematic way such as buying in at every 10% or 20% paper loss to reduce cost price. This way, we can conserve our capital and also hope to catch the bottom eventually. It is also important to not be fully invested and to leave enough capital to average down 2-3 times. Some mentioned that warchest acts as a buffer for emergencies as well as a good check on emotions during volatile times.

I believe that buying in tranches is tricky in the sense that it depends on which cycle market is in. For example, it is recommended to buy in tranches when the market is crashing. Some might argue that one shouldn’t catch the falling prices but I feel that this will reduce the probability of missing the boat. 

If we are referring to the current market condition where it has bottomed since 3 months ago and with Federal Reserve’s QE Infinity, I believe that one can decide whether to all in or still practise buying in tranches. Buying in tranches now is risking the remaining funds cannot be deployed unless there is a major pullback. On the other hand, all in right now is risking that if there is a major pullback, investors have to risk setting aside more money to average down since the market has risen significantly since it bottomed.

9. Dollar Cost Averaging has its own good in a “Kangaroo Market”

It might come as a surprise that I was only stressed and making mistakes in stock picking. As stated in my previous blog article, I started investing in IVV with FSMOne in January and I am still continuing making purchases despite the situation that is happening now. The reason for not feeling the same way is because I am always buying at small amounts and that Dollar Cost Averaging enables me to average down if the market is on a downtrend. As I am still a NSF where my capital is limited compared to other investors who have a full time job, I feel that I have higher margin of safety to stay committed to regular savings plan than to stock pick in lump sum. 

So this event has made me understand that stock picking is not for everyone as it might make people feel FOMO and to chase for prices. With dollar cost averaging, we have the discipline to purchase small amounts regularly and most importantly, it is more healthy for our emotional well-being. At the end of the day, health is more important than making our money work harder.

10. Importance of not over-investing in the stock market

It might be unfortunate for some investors if they have already deployed all of their warchest before the crash. It is a black swan event that we do not think that it will happen. Aside from this, having significant holding power is imperative in riding out this crash.

Even if one have thought of topping up from their savings to take advantage of the crash, it is important to check your cashflow to forecast and predict whether it will affect your daily livelihood. Case in point, I had plans to top up in case the crash intensified. However, I have plans to utilise a significant amount of my savings and expenses to prepare for University life after I ORD in July. I have an Excel sheet that tracks my cashflow so I pump in numbers that I can predict and control to check if there will be any cashflow issue when I need the fund in the coming months. So after playing with the numbers, I discovered that I am able to meet my purchases even after topping up.

I believe that people have different risk appetite, I have friends who are willing to set aside 90% of its available cash for investment in this crash. Personally, I feel that this is risky if one does not have consistent cash inflow as the cash will just run out in matters of month.

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4 thoughts on “10 Lessons Learnt from Mr Market: Part 2

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