Are You Guilty of Speculating The Stock Market?
By Marcus Seetoh - February 13, 2021
- Everyone learns how to trade / invest differently in the stock market. No one is equal in terms of their knowledge and skills sets. Different strategies and methods are used both in the short term and long term approaches.
- Some people learn directly from mentors / friends. Some people learn from paying money to attend courses from the more experienced traders / investors or even the so-called 'gurus'. There are those who read financial books or went through some form of certification or attend business school to learn their craft. Some people learn from 'FOMO' which is fear of missing out while there are those others who self-learn though searching the tons of free online resources while taking baby steps to test the market.
- I was that one that build my craft through self-learning online. Although I did not study / learn through the appropriate channels, my main investing method is still the strong belief in conviction and not speculation as the way to go.
- I will like to share some of the things that I experience happening around in real life but don't really see such active and open discussions about it.
What is Speculation?
- In my own words without any definition from Google, executing a trade or to purchase something in the stock market with no proper fundamental and/or technical analysis done to the asset that you are trying to possess. There are no strong belief or basis present in the situation which could have convinced yourself that you must get a piece of the asset.
- Speculation essentially is just 'Market Noise' which happens in the short term. Market noises are just distractions that provide you with additional information which may not help you to decided whether to invest or not to invest in that asset rationally.
1. Forums / Media / Earnings Report / Group Chats
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| Google.com |
- eg. Wallstreetbets Reddit forum started to gain traction worldwide in January 2021 where a group of retail investors wanted to perform a 'Short Squeeze' for certain stocks such as 'GameStop' which was shorted by institutional investors. By the time the news were out in the mainstream media, it was already too late to hop onto the profitable 'train'. The 'train' that was very profitable had already left the platform before the actual big news hit the media. There are some who were lucky to buy upon market news but the big question to ask yourself was whether did you think that you managed to go up the profitable train or the not profitable train?
- Whatever happens after the news were broadcasted on the media was already considered as market noises. If you had the thought process of jumping on the next train (bandwagon) to buy low and sell high, my friend, you were already too late to enjoy the profits of those people who were the early majority to purchase 'Gamestop' shares or Options in December 2020.
- You, being the latecomer gatecrashing into the party later in the night thinking of making a big buck but this action was only going to help out those early majority who bought alot of shares and Options to earn more money for them and not for yourself.
- When you enter into the market at that time, you are helping to boost up the share prices of 'Gamestop' to exorbitant levels for a company that is clearly on a decline in their business model.
- Moreover, with market noises there was no way one could actually tell whether the surge in stock prices will continue for how long more before everyone started to sell in a domino effect.
- Stock market prices can be manipulated in the short term by many different market methods such as 'Pump & Dump', 'Short Squeeze' etc. Hence, this is a very high risk strategy of buying low and selling high because you may think that you got into the stock at the 'low' but it could be the 'high' that you got yourself into unknowingly. 😖
- Furthermore, be extremely careful of buying or selling stocks when there are huge media frenzy such as the period of 27th to 29th January 2021. Because everyone wanted to get a piece of the action for Gamestop, people started to buy their shares and many of the brokerages (Robinhood, Tiger brokers etc) started to perform some form of order restrictions such as limiting people from buying shares of Gamestop.
- But not sure why other non-speculative stock orders were affected in the process as well. On the 28th Jan 2021, I wanted to sell of some of my Options which had nothing to do with Wallstreetbets or even Gamestop but I was not able to do so on the Tiger Broker platform. My orders were not able to be processed during a 3 to 4 hours time window and this clearly affected my profit and losses for those options. I reached out to Tiger Broker customer service to lodge a complain to get them to do a thorough investigation. In the end, they push the ball away from them saying that its not their fault for orders not going through their platform and its the stock market issue due to the short squeeze of the Gamestock saga.
- The moral of the story is that if you want to hop on to buying speculative stocks, be careful that your plan may not go according to what you want to do which is to make a quick buck to buy low and sell high. If the brokerage platform suddenly becomes unresponsive at that time duration when you want to sell your stock, good luck to you as the price might drop before your order is able to be processed by the brokerage platform and you will make huge losses instead.
2. FOMO from friends etc through Word of Mouth
- Another more common type of market noise is listening to what people are buying and just go for it.
- There is nothing wrong with listening to your friend's advice or listening to your friend sharing his/her shopping list or portfolio of stocks. But the key matter is he/she might tell you just half of the story that certain stock is good because of this reason and that reason but he/she will not be able to tell you when you should sell your stocks or how long you should hold your stocks for if you get what I mean.
- eg. Someone might say Facebook stocks are good as they have competitive moat and have a history of positive revenues. Listening to these will make you wanna purchase a piece of their stocks even more.
- But the fact of the matter is after you buy that stock, what's next you know??? How long should you hold the stock for? Should you purchase more shares in the near future? How much more shares to purchase if you want to? What is the fair value of Facebook stock now? At what price should you purchase more stocks? Should you sell your shares once you made some profit or buy and hold? How much profit you want to make before exiting? Should I hold it for 3 years?
- These are the questions only you yourself can decide and no one is able to help you. Its very simple to just buy a stock based on what people says, but more importantly is can you manage the list of questions that I listed above once you owned that stock? If you cannot answer all those questions above, you purchased based on speculation.
What is Conviction?
- In my own words without any definition from Google, executing a trade or to purchase something in the stock market with proper fundamental and/or technical analysis done to the asset that you are trying to possess. There are very strong belief or basis present in the situation which convinced you that you must get a piece of the asset.
- You avoid market noises, those 'shiny news and metrics' and see investing / trading as a system with proper planning and calculated risk.
- Conviction is something that is intrinsic in nature and you very much must know the business of that stock very well and is able to make a rational decision to buy its shares.
- eg. when you want to purchase a stock with conviction, normally you don't buy what is popular on the news etc. You will first research on a basket of stocks that you are familiar with and from there, you study their business and slowly eliminate those that do not fit into your investing criteria. It is the same logic as dating where you network with different people of the opposite gender and you slowly cast out those people that do not meet your dating criteria if this makes the explanation relatable to you better. 😂
- This really depends on what kind of investing method (dividends or capital appreciation) you use and this will ultimately affect what kind of stocks you should be searching for. eg. There are growth stocks, there are REITs stocks, there are dividend stocks and if you are risk-adverse there are also ETFs. There are also local Singapore stocks, overseas US and UK stocks so many to choose from hahahahaha.
- Once you have filtered out a shopping wish list of stocks, depending on whether you believe in using fundamental analysis and / or technical analysis to purchase what you want from your wish list.
- This includes setting up your stock holding duration, what price to enter or what price to exit, do you want to lump sum invest or DCA every month, set a stop loss plan or set a profit exit plan etc and many more such as portfolio diversification, allocation and optimization.
I hope this shed some light and enlighten you in one way or another in your investing journey. All your hard work happens before you enter a trade / order in the market and not after you enter the market then you start to plan when should I sell the stock, when should I buy more of the stock in the future etc. As always, do your due diligence before entering the market. 😀
1 comments
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