Have you wondered who made money from investing in stock markets? Is it a zero sum gain, ie someone’s loss equals to someone’s gains? How about those investors who “buy and hold” on to shares and seeing them decline in value?
Assuming that Company XYZ started a public company with 10 original investors/shareholders putting in $10,000 each at $1 per share. Company used initial capital of $100,000 for operating the business Overtime, the business made losses constantly each year. New investors will only be willing to buy from the original investors based on the current valuation of the company. This valuation will be lower than $1 per share say 30 cents per share. The 10 original investors lost 70% of their investments. Assuming that the company continued to make losses, the second set of investors/shareholders will lose money on their investments when the share price dropped to 10 cents per share. These second set of investors lost about 67% of their investments. The third set of investors having picked up the shares at 10 cents per share lost every thing when the company was liquidated with zero return on liquidation.
In the above scenario, who made money on their share investments? All made losses on their investments when the company did poorly in the business. Some investors recover only a fraction of their original investments. This is the peril of “buy and hold” strategy. The sooner one can sell their investments early, the better he/she can be. Losses are limited instead of total losses. Lesson learned is to sell early when the company is not looking bright.
This brought to mind the case of Hyflux. Shareholders like me will get zero from their shareholdings.
Another lesson learned is that shareholders must watch the company’s operations, the business environment it operates in and the performance of management consisting of the CEO and the Board of Directors. These factors affect the market valuation of the company.
Some examples include Singtel, SPH, SingPost. Market values of these shares came down by 42% to 55% for me. Some of these valuations may be permanent diminution.
Shareholders like me tend to buy on the belief that these companies are brand names with a good future. I did not cut losses at the earliest opportunities. That was a mistake.
To steer a business to profitability, the CEO with his/her Board plays a vital role. If they were to fumble and make wrong investment decisions, shareholders are at the receiving end of their follies.
I am not a day trader or short-term trader. I agree that these share traders make money by buying and selling using the spread of share prices. The higher the volatility of share prices, the happier these day traders will be. Someone’s gains are someone’s losses. This is too speculative for me and I do not have the time to watch the market.
Final lesson learned is that one is better off buying a basket of different company shares. This is spreading the risk of equity investments. Buying into a single company and buying big in a single company has the risk of “putting all eggs into a single basket”. You either strike it very rich or you lose greatly.
Copyright © 2021, limkimtong for Living Investment
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.