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Following SIA’s volatile trading last week when it issued rights to raise S$15B through equity and mandatory convertible bonds, some friends have asked if they should invest in SIA now at close to their 52-week low, or if they should subscribe to their rights issue.
I actually don’t know, and it doesn’t matter, because I invest and not speculate.
Individual stocks are risky
Notwithstanding Eagles Hospitality Trust’s notice of defaults and voluntary share suspension, locking shareholders out of the market despite falling close to 82% from its IPO price following escalating troubles, Chinese Starbuck’s competitor Luckin’s Coffee financial fraud wiping 75% of its market value and other popular corporate failures such as Enron’s bankruptcy saga in 2001 and Hyflux’s bankruptcy in 2019.
These are just several cases that are publicized in the media. When investing in individual stocks, investors are exposed to security selection risk that’s not going away. You could pick a good apple, but you are equally likely to pick a bad one because you are relying on strong corporate governance in the company to protect your interests. Just look at SingPost, when it’s former CEO made loss-making and questionable acquisitions in the US to expand its e-commerce share.
There are also many corporate governance issues that can potentially add risk to your investments. Some companies have structures where the CEO holds the majority shareholding and controls most of the decision-making process. JD.com, for example, has corporate bylaws that state that the board of directors will not be able to form a quorum without its CEO for so long as its CEO remains a director, adding a level of key-man risk especially with ongoing rape allegations on its CEO.
Investing in the market averages out the risk
When you invest in more than one company, you split out the investment risks into the basket of stocks. If you have 20 companies in your portfolio, if one company dies, you lose 1/20 of your portfolio. You might not be too concerned.
Similarly, investing in the broad market reduces your individual stock risk to almost negligible, exposing you to only ‘market risk’, which is the risk of putting your money into the stock market. This risk is basically exposed to everyone who invests in the stock market because prices move up and down on a daily basis in response to investors’ changing expectations about the future and risk appetite.
When people say the stock market averages 7% a year, it refers to the return you get if you invest broadly and in a diversified manner like the S&P 500.
Avoid getting overly attached to stocks
I am guilty of this, as it’s entirely possible to get overly attached to your coveted stocks. I know many people love banking stocks like DBS and HSBC because of their sweet annual dividend yields. They will just keep buying banking stocks regardless of their prices, and never sell them.
There’s always an opportunity cost to think about. While you can reap sweet dividend yields, you could potentially miss out on the 10-15% yearly growth in stock prices when investing in a growth stock like Amazon or Visa.
You are also doubling your bets on the stock if you average down, increasing your risk of losses if the company eventually becomes less profitable. Take a look at the stock prices of local companies like Noble Group, SPH, Sembcorp, Starhub. Or even global companies like German/Swiss banks and airlines.
You can never beat the pros
There are tens of thousands of full-time stock researchers, financial analysts and automated algorithms watching for buy and sell signals on individual stocks every minute.
They have the resources, expertise, and experience in managing millions of dollars of portfolio value for their clients and can easily execute a block trade that moves the market in a blink of an eye.
You might have a degree in accounting and love pouring through balance sheets and cash flow statements to find winning stocks. Or maybe you have your so-called fundamental analysis skills and you can identify highly undervalued companies in a snap, but how would you know that the current stock prices have not factored in these known fundamentals?
Individual stock investing is best if you have insider-knowledge (obviously illegal), or if you are feeling extremely lucky and you are certain that you have higher odds of success than the aggregate knowledge of all investors in the stock market.
It definitely feels like gambling, with a much higher probability of winning.
And hey, I get that the adrenaline rush from a winning bet makes you high. But until you see the lows, you won’t learn.