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An Ang Bao For Investors This Chinese New Year: How To Avoid Losing Money In Stocks

We’re soon going to bid the Year of the Monkey goodbye and welcome the Year of the Rooster. During the Chinese New Year celebratory period, one trademark sight would be Ang Baos, or red packets.

Ang Baos generally contain money and are given by elders to the younger generation as a blessing. Although I won’t be giving away money per-se here, I do have an Ang Bao to distribute: Three useful tips on how we can lower our odds of losing money in the stock market.

1. Be very careful when extrapolating macro-economic trends to stock market gains

It’s easy to imagine that oil and gas stocks would naturally do well if oil prices were to rise. But, reality suggests others.

From 11 February 2016 to 21 December 2016, the price of WTI Crude Oil doubled (it climbed from US$27 to US$53).

But over the same period, a collection of 50 Singapore-listed oil & gas companies had seen their stock prices decline by 11.9% on average. And within that group of 50, 34 of them actually had saw their stock prices fall in the timeframe we’re observing.

The aforementioned 50 names may not be a complete list of all the oil & gas-related companies listed in Singapore. But, I think they are a representative group, considering that:

  1. there were only 54 oil & gas companies listed in Singapore back in November 2014; and
  2. the list of 50 includes some of the biggest players, such as Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51), as well as the smaller entities, such as KS Energy Limited (SGX: 578).

This massive discrepancy between the movement in the price of oil and the change in the stock prices of the Singapore-listed oil & gas companies highlights a critically important idea in investing: An economic trend (changes in oil prices in this instance) and the performance of a stock can be miles apart.

2. Pay close attention to companies with high-debt

Debt can be used in a smart manner by companies to create value for shareholders. But, debt can also be a source of big trouble, especially when companies start piling it on.

The late Walter Schloss, who is an investor with a great long-term track record, once wisely said: “I don’t like debt because it can really get a company into trouble.” It’s such a simple yet powerful statement.

Fishmeal producer China Fishery Group Ltd (SGX: B0Z) is a vivid example of the potential destructiveness of debt. The company first got into serious trouble in November 2015 when HSBC took legal action against it because of debt-related issues. You can see in the chart below how China Fishery had been heavily-leveraged (as alluded to by the high net-debt position) for many years prior to the HSBC spat:

China Fishery Group's Balance Sheet (2)
Source: S&P Global Market Intelligence

China Fishery ended up filing for bankruptcy in June 2016 after having suspended its shares from trading since November 2015.

3. Adopt a long investing time horizon

Here’s a chart showing the odds of making losses in the Straits Times Index (SGX: ^STI) from 1 May 1992 to 12 January 2016 for different holding periods (the returns do not include dividends and inflation):

Straits Times Index's odds of making losses from May 1992 to January 2016
Source: S&P Global Market Intelligence

As the chart shows, the longer you hold your stocks, the lower your odds of making a loss. A holding period of one day means it’s a coin-flip for you when it comes to making a gain. But when your holding period is measured in years, your odds of success goes up dramatically. For the timeframe under study, the Straits Times Index has never delivered a loss for an investor with a 20-year holding period.

With that, I’d leave you with some well-wishes for the Year of the Rooster. 新年快乐! (Happy new year!)

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.