Investing vs. Gambling on the Singapore Stock Exchange

In my quest to achieve financial freedom, I frequently find it a challenge to separate between the thin line between gambling and investing. If you too invest in equities listed on the Singapore Exchange, you will find that there are the two primal forces at work within us whenever we make a decision to buy, hold, sell or do nothing in the market-- The forces of FEAR AND GREED.

Fear and Greed in the Stock Market
How do these two emotions work within us to complicate the already challenging decisions we make on the stock market? If you are an investor who is already investing in stocks and shares (equities) on the Singapore Exchange or if you are a newbie to the world of stocks and shares you will encounter these two emotions. They are part of our human DNA and to deny their existence is to deny our very own humanity.

The stock market as represented by the Stock Index, for instance, the Straits Times Index (STI), goes up and down according to demand and supply for the shares in a company. While the STI may go up or down or remain flat, the prices of the individual shares in companies also go up and down. In investments, what you want to do is to put buy shares in a company whom you think will rise in the future. The price of a share in a company is affected by many factors such as the company's profitability, its dividend policy, its future growth prospects, its fundamental business. The share price is a function of buyer's and seller's expectation of future cash flows either through capital appreciation (price of share going up) or through dividends.

Fear
Fear comes in because of uncertainty. No-one can completely predict how the price of a company's share will rise or fall in the future. Hence, when the price of a company's share goes up, you fear that you have missed out on capital gains when you did not buy its shares earlier. Conversely, when the price of a company's share goes down, you fear that you may be buying at a price that will fall in the future. This fear is very real and good investors are those who recognise this and invest based on their objectives, risk profile and their knowledge and understanding.

Greed
Greed comes in when you hold on to a company's share when it is going up and up and you want to sell at the highest price you can possibly get. Greed also sinks its jaws into us when we see the price falling but we cannot get ourselves to cut loss and sell the shares because we think it will eventually rise.

The combination of these two emotions make investing in shares an activity that is very close to gambling because we are trying to time our entry and exit of the price of a company's shares. We are basically taking a bet on how prices will move based on fundamental analysis, technical analysis and sometimes based on pure luck.

I too am victim of this gambling mentality to gain short term gains on the stock market. If you read personal investing books, most of them advocate an index fund approach. This is because experience has shown that only a handful of professional fund managers or investors can consistently beat the market or the index return. Hence, unless you are the calibre of Warren Buffet or Peter Lynch, you are better off doing regular investment into a low cost index fund.

However, you will find that the thrill of participating in SGX by punting specific stocks plus the added emotions of fear and greed can make a very potent combination.

How do I overcome these two emotions
To invest safely and not succumb to the gambling mentality of short-term gains, it is important to consider the following principles:

1) Determine your investment objective
- what is your investment objective for buying and holding shares of companies listed on SGX?
- what is your targetted returns and over what time horizon

2) Determine your risk profile
- what type of companies you pick will be affected by your approach to risk
- do you prefer blue-chip stable companies with established dividend payout or high growth small cap companies

3) Determine that amount of money you can afford to invest (and potentially lose!)
- investing in the SGX is not the same as a fixed deposit or treasury bill
- you can potentially lose ALL of your investment monies as the price of a share could possibly drop to zero should a catastrophic event happen e.g. major fraud, collapse due to business calamity, natural disasters etc.

4) Know yourself
- know that you also have fear and greed inside your DNA
- beware of what these two emotions can cloud your investment decisions

Fear and greed will always be with you. Learn to deal with these two emotions by having an investment objective and plan to achieve your targetted returns.

May you be well and prosper.