How To Avoid Losing Money

If you are a regular reader of Take Stock Singapore, you will know that I share my garden with a pair of Oriental pied-hornbills.

Their return every evening has been a pleasant interlude to my daily routine. That was until, one day, when they didn’t come back. In fact they went missing for a couple of months.

Their absence concerned me.

Deafening noise

Then suddenly, they returned to a fanfare of noise. It even alerted the security guard downstairs, who shouted at them to keep quiet. But even though the Indo-Malayan hornbills are native to Singapore, I doubt if they understand Bahasa Melayu.

The noise my feathered friends made could border on deafening.

Two birds could not possibly have made that much of a din. In fact, there were now not just a brace of the black-and-whites but three birds. There was a new addition to the family – a very boisterous baby hornbill.

This, you might think, could be a convenient segue to the power of dividends.

I could, for instance, talk about how two fertile hornbills could multiply over time to produce lots of new offsprings, in the same ways that Real Estate Investment Trusts such as Suntec REIT (SGX: T82U) and Ascott REIT (SGX: A68U) have paid  distributions.

The free market

But that would be too crass a conclusion to draw from such a beautiful gift of nature.

Instead, it was the behaviour of the male hornbill that caught my attention.

He would perch on one of the higher branches and watch over his young issue, without being overly protective.

That said, he would not hesitate to create a commotion, if and when he thought that the young hornbill was in peril.

The financial world can be full of dangers too. But thankfully in Singapore, we have two regulators who act to ensure that the financial markets are stable and operate with integrity.

But there is only so much that regulators can do.

Moral Hazard

A regulatory framework that is too overbearing can stifle the free market. We certainly don’t want to see that happen in Singapore.

What’s more, legislation that forces issuers to bear all the risks and losses will not work either. If investors ever thought that their losses would always be made good, then moral hazard could encourage reckless investing.

One of the best – though not the only – ways of avoiding losses is investor education. Investors need to familiarise themselves with the workings of the markets.

But even well-educated investors have to accept that losses are sometimes inevitable.

There are never any guarantees in the stock market. Nor are there any magic formulas that we can apply, which will ensure success, every time.

But time and again, we find people investing in companies that they know nothing about. Unfortunately, buying stocks on ignorance is still a popular pastime, especially when it comes to penny stocks.

Going to zero

They somehow think that penny stocks can be an easier way to making money, big time.

Sadly, if a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, $2 or just a few cents at a pop. You can lose everything you invested.

Here at the Motley Fool we encourage the buying of wonderful companies at fair prices. Wonderful companies include those whose futures can be predicted. Wonderful companies have other important attributes too.

But if a company’s future cannot be predicted, then it cannot be valued. So, it is important to understand the story behind the company.

Wonderful companies tend to have brilliant stories. If you are going to invest in any stock, you have to know the story.

My challenge for you today is to write down in one sentence the story behind every company in your portfolio. We have to be able to describe the company a la Peter Lynch – in other words, with a crayon.

I can. Can you?

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.