5 Hard Truths About Investing

Lee Kuan Yew, Singapore’s most influential prime minister, published a book in 2011 called “Hard Truths to Keep Singapore Going.” In it, he provides a frank account of what Singapore needs to do to succeed, even if it means making people uncomfortable or not conforming to norms. Here, I look at five “hard truths” about investing that some investors may not be aware of, or have not taken seriously enough.

1. Investing is simple, but not easy.

The concept of investing is simple and intuitive: Deploy capital into well-run, strong companies to achieve a good and consistent return above inflation. However, the process of achieving this end result is not easy, as investors have to deal with their own emotions, read extensively, and also keep their eye out for risks and unexpected events. Investors must be prepared to put in the time, resources, and effort in order to do well in investing — there’s no such thing as a free lunch.

2. You could lose a chunk of money.

While everyone invests with an eye on making money, every investor makes mistakes, resulting in painful losses. This cannot be avoided as no investor (that I know of) has a perfect record of never losing any money at all. The key here is to ensure that any money lost is small and is offset by larger gains and dividends over the years. Investors should therefore focus their attention on managing their risks prudently rather than trying to avoid losses altogether.

3. Despite your best efforts, you will make silly mistakes.

As mentioned, no one is perfect, and despite our best efforts, we will end up making mistakes that look silly in hindsight. The key here is to continually document and learn from your mistakes so that over time, you become a much better investor. Treat mistakes as learning opportunities and paths to improvement rather than stumbling blocks to fume over.

4. You need to control your natural impulses.

Investing can be counter-intuitive and often requires that we act against our natural impulses. When share prices plunge, the tendency is for our brains to flash “danger!” and for us to make a hasty exit from our holdings, but this would be detrimental to our wealth as we would likely be selling shares at low prices. Conversely, when prices are soaring, our brain secretes endorphins that give us a pleasurable sensation and goads us into buying even more shares at expensive valuations. Controlling these impulses is key to ensuring we do not end up inadvertently buying high and selling low.

5. It’s not easy to beat the market.

Investors need to be realistic. It’s tough to do better than the index, although there is a segment of value investors who are able to achieve this consistently. Investing for knowledge and interest and also to beat inflation is a realistic goal, but trying to trump the index may not always be practical. The key is to keep fees as low as possible by minimizing unnecessary transactions and maintaining a long-term focus.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.