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7 biggest investment lessons from a decade of investing

With more people diving into stock markets these days compared to a decade ago, here's 7 biggest lessons from investing so that new investors don't make the same mistakes that I did.
7 biggest investment lessons from a decade of investing

With more people diving into stock markets these days compared to a decade ago thanks to new technology like robo-advisors and cheaper commissions, I think it's also a good time to share my 7 biggest lessons from investing so new investors (hopefully) don't make the same mistakes that I did.

My investment journey started almost a decade ago before national service when I was already interning in a corporate finance department for a major GLC. As an intern then I was allowed to play with Bloomberg terminals, co-developed an in-house bond purchase program and looked at how credit companies like S&P and Moody's were scoring businesses for credit.

Thereafter I went to study 3 years of accountancy at NTU to grasp the nuances of financial statements and Financial Reporting Standards so that I could also learn to better make investment decisions.

So hopefully, with that background, you can benefit from some of what I've learnt (thanks to the Internet) and if you're not that shy, share yours as well! Let's get started.

Disclaimer: Content is provided for information only, this is not financial advice.

Don’t get too emotionally attached to any stock

I say this from the perspective that many investors hold on to their losing positions too closely because they become too emotionally attached to a company they had invested in.

While it's completely good practice to be doing your due-diligence about a company and buying it if you think it's a good investment, sometimes we tend to forgo the whole forest just because of one tree. Beware of behavioral bias that tend to only reconfirm your views about an investment.

which brings me to my next point...

Hold index funds / passive ETFs for the majority of your portfolio

Yeah, they are probably the most boring investments because there's no human input from the process of deciding what stocks to own and when to own it - you just own the whole market.

There goes your chance of boasting to your friends at the cafe telling them how much you made in your investment in Tesla or Zoom.

But for most average investors, you don't need to beat the market. You just need to get market returns over the long-term which is supposed to help you compound your investments. You don't have to take higher volatility risks for your investments by speculating on a sector, region, company or theme.

For every investor who's beating the market, there's one who's under-performing the market. Do you have the time to constantly monitor your portfolio, look for potential winners, sell losers quickly and react quickly to new news flow all the time?

That's why I hold the majority of my portfolio today in passive diversified market-tracking ETFs. I also leave a small portion of my portfolio to speculate on stocks and industries that will outperform - this is the 'fun' part of my investment. It doesn't hurt to have fun with money, but it shouldn't be 100% of your money.

Read also: Why I avoid individual stock selection

What you think doesn’t matter, it’s what the market thinks

One thing I've learnt is that it doesn't matter what stock or company you think it's good, it's what the market thinks.

I've held several good companies in the past after doing months of due diligence. Strong operating cash flow metrics, growing earnings per share, slightly undervalued, market leader in Singapore, net cash position, and so on.

But the market doesn't think that way - maybe because of the lack of analyst coverage and institutional interest. The price of the stock stagnated for years while the market index rose in the double-digits.

Would you then sell this investment after holding it for so long or hold it for longer, hoping that one day the market discovers about this undervalued gem.

It's not an easy process, and if you are in it for returns, you might sell off your winners at the wrong time.

Manage your risks properly - don’t take too little or too much risk

This one is about risk management, just like any other investments or anything in life. Taking too little risk means you get too little returns, you lose money due to inflation or you lose it to someone who can make better use of your money.

Too much risk and you may experience psychological trauma, start having wild thoughts about your life (such as this Robinhood trader who committed suicide) or let your investments affect your general well-being and how you interact with your family and friends.

I like to play it a little on the safer side just so I can sleep comfortably at night. No need for the highest returns - moderate returns with slightly less risk so I can stomach the insane volatility when I check my portfolio.

You can also acclimatize to risks - which strengthens your ability to stomach volatility. If you invest in Bitcoin, which has an annual volatility of 45%, then the stock market 10% volatility shouldn't scare you at all and you might even set a high risk appetite.

Don’t chase high dividend yields

Never just buy a stock just because it has high % dividend. Never. I think this applies to many older folks (some have no idea what's a good versus a bad stock so they just buy whatever is high yielding for passive income).

There's a reason for high dividend yields and that's muted growth. Dividends come from earnings and if paid out to shareholders, sacrifice the ability to be reinvested into the company for growth.

No company growth means no earnings growth, and potentially no future dividend growth.

Because dividend yield is a function of dividend per share divided by price per share, high dividend yields might not be just because the company is giving out a lot of dividends, but because the company's price is depressed due to negative market sentiment about the company's future.

If you like to buy a cash-generating company in a mature and stable industry like utilities and telecommunications, then you'll find a lot of such companies with high dividend yields there. But if you see a headline popping 8-9% dividend yield for a company, I suggest digging deeper and asking why.

Averaging down is not always a good strategy

I realize that averaging down is a common investment strategy that is similar to doubling down on your bets at a game of Poker.

While you can lower your average cost of owning the stock, you might find yourself having a larger share of a losing investment while you take a contrarian approach to the market, in hope that the stock prices rebound.

You will also find yourself taking a disproportionate amount of risk in your investments, since now large parts of your portfolio are concentrated on this one stock.

Today, I average down only on my ETF portfolios, and avoid doing so on my stock holdings (unless I am very very confident about my bets). Because broad stock market ETF portfolios are so diversified and the ETF cannot go to zero unless all holdings in the ETF go to zero, averaging down my ETF position is a good way to lower my average cost for any long-term holding.

Money can be made in all markets - upwards, downwards and sideways

The last tip I want to share is that most investors only think of buying low and selling high. In other words, they are long-only investors. However, there’s money that can be made when the market is trending down or sideways as well.

In downwards trending markets, you can make bearish bets and reap returns when prices are falling. You can also bet on volatility spikes and trade options on the VIX. This perspective helps you hedge your positions in a counter-trend.

Obviously it's easier said than done, and there's usually no need to time your entry and exit positions for most investors. You probably heard the saying time in the market is better than timing the market. That's because you cannot perfectly predict when the trend changes and when it changes back.

According to JP Morgan, if you just miss the 10 best days in the US stock market over the past 20 years, your overall return would be 50% less!

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