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Trading to put food on the table.

Sunday, February 26, 2012

I read an article in today's Sunday Times by Goh Eng Yeow on how to sniff out good stocks to invest in. However, I am not going to blog about sniffing out potential winners in the stock market. I am going to blog about something that's probably less exciting: the day trader who wrote to him saying how he lost a big fortune in the stock market last year.

"With mounting bills, and zero financial reserve left, and no job, the current state of mind is like losing a wing man in Tom Cruise's Top Gun. Every day is a challenge mentally and physically to put food on the table..."

I know of friends who have lost big time in the stock market. Personally, I lost a six figure sum in the stock market before as well. It was definitely a nightmare and no one should have to suffer like this. So, can we avoid such an experience?

Well, the only way is probably not to invest in the stock market. As long as we are going to invest in the stock market, we are taking on risks. The idea is to reduce such risks as they cannot be removed.

I think a very pertinent question to ask before we take that first step as an "investor" or a "trader" is to ask ourselves if we are ready. By this, I do not just mean if we have the necessary knowledge required to do fundamental and technical analyses. I also refer to whether we have our safety nets in place. This is even more pertinent a question if we were to be a full time "investor" or "trader".

I know of people who dream of making it big as an "investor" or a "trader". Personally, I am not qualified in any way to say that their dreams are just dreams. Although I do not know of anyone on a personal basis who has become very rich investing or trading in the stock market, there could be people out there who have done so.

However, no matter what our aspirations, embarking on any journey without a contingency plan (or several contingency plans) is a terrible mistake. It would be like going on a sea journey on a ship without lifeboats. Would you do that?
I remember a fellow blogger telling me that if we are making a living from the stock market, we would need to have regular income from the market as frequently as possible. Otherwise, there would be no food on the table. To me, that sounds like having no contingency plan.

So, I replied that "If a person is making a living trading the stock market full time, I expect that he should have a sizeable capital. If he has very little capital and he depends on his gains from trading to put food on the table, a prudent thing to do is to find a salaried job."

If a person has a sizeable capital, he could put it to work investing in stocks which offer decent yields of 5 to 6% or S-REITs which could yield 10% per annum even at current prices. The dividends and income distributions would be a nice supplement to his earned income. Earned income? Yes, don't give up our jobs unless our passive income from the stock market is enough to replace our earned income.

Investing in the stock market need not be a high risk activity. It is only a high risk activity because individuals allow it to be so.

Individuals sometimes put their lives at risk with dreamy ideas of what the stock market is and what they could achieve. Dreams could then become nightmares.

Take it from me. I have been there before.

Related posts:
1. Seven steps to creating passive income from the stock market.
2. Create more passive income with limited capital.
3. How did AK71 overcome his losses and grow his portfolio?

31 comments:

OT83 said...

So ak can give up your job since your passive higher than your earned income?

I also lost xxxxx before :(

AK71 said...

Hi OT,

Technically, I could. However, there are other considerations.

I think there isn't anyone out there who has not paid school fees to Mr. Market before. We are not alone. :(

INVS 2.0 said...

Hi Ak71,

Not investing in the market is the real risk. Inflation rate of 3% - 4% erodes the value of money everyday.

People who keep their money in the safebox or simply in savings deposit that pays 0.05% are paying "school fees" to the govt and the bank.

That's why I don't like the idea of CPF. Not only does the 2.5% can't offset inflation, it also erodes my money where it can be invested in 10% S-REITs. I don't buy the story of "CPF is for your retirement", that sounds like telling me, "you are lousy at financial planning, so let me plan for you with CPF scheme but I take a bigger bite" :(

Dividends Warrior said...

After all is said and done, Life is basically about putting food on the table.

Sighz.......

I just hope I am able to put "better" food on the table as time goes by.

AK71 said...

Hi INVS 2.0,

I agree with you to a point and I have blogged about it here too:

To protect our wealth, we have to take risk.

As for the bit on CPF, we are on dangerous grounds here. Hahaha... ;p

AK71 said...

Hi DW,

I don't know if we need to put better food on the table. We might want to put better food on the table. ;)

As I grow older, I just want to keep my life as simple as possible. I am sure you have read about some of my simple meals. ;p

INVS 2.0 said...

Hi Ak71,

Use active income to feed passive income until it can 'sustain' by itself. For eg. dividends generated is sufficient enough to re-invest and regenerate more without adding extra funds. Good idea. :)

Glad I have just found a temp job after being jobless for 2 mths since ORD. :)

AK71 said...

Hi INVS 2.0,

Yes, anyone can do it. :)

Congratulations on being a productive member of the local proletariat. ;)

INVS 2.0 said...

Hi Ak71,

Thanks, I am indeed a proletariat. :(

Need to work for many decades before I can become an aristocrat. :/

Ray said...

Trading full time adds a different pressure to succeed / refuse to cut loss for traders. Trading takes alot of discipline and having no back up cash flow to lay the dinner on the table certainly obscure their decision making.

Even if my passive income > active income, I would see myself working until I'm of retirement age, which as of today seem to be 60+ but im looking more at 50 to 55 instead.

As for CPF, im not a blind white-supporter but I feel that the govt needed a scheme to guard against citizens splurging their money and end up demanding the govt to take care of them.
CPF is there to ensure they have savings, I cannot think of a better plan so im going to agree with the govt on that.

AK71 said...

Hi INVS 2.0,

We are all in the ranks of the proletariat. It is just that the world today is a lot more complicated than it was before. So many new vocations available but we are all worker bees. :(

AK71 said...

Hi Ray,

Yes, I am still working but I hope to retire by the time I am 45. Why 45? I think I would still be sufficiently energetic do things which might be physically more demanding at 45 instead of 55, for example.

As for the CPF, I am all for helping people to help themselves. So, I support the scheme too. This is another example of what Singapore has done right. :)

INVS 2.0 said...

Hi Ak71,

CPF is only good for those without much financial plans for their retirement. Most peoeple, unfortunately, do not care about their retirement and spend money like drinking wine. CPF is good for them.

But for me, and with people who are savvy about their own finances, I believe the CPF money can be used for better purposes rather than leaving it helplessly in the govt account for only 2.5% and until 65-yrs-old, which I don't know I can live that long or not. :(

I feel that there should be flexibility to decide who should be inside the CPF scheme. Like motor insurance, if your track record or NCD is good, your insurance company will reward you lower premiums. That is, I suggest the govt to lower the age of withdrawal of CPF money based on the track records of individuals. For eg. a person who spends less, has no history of bankrupcy, not much personal debts, etc, should be awarded an earlier withdrawal. :)

Serendib said...

@ INVS 2.0,

I was just as peeved as you back in the day, but the CPF is here to stay, for better or for worse. If a chap a decade older to you could offer his 2c of advice, just imagine your CPF-OA as saving up for your housing/property downpayment, at a better rate than a saving account (at least in the current environment). I treat my CPF-SA as the 'bond' portion of my portfolio, which allows me to put far more of my cash investment into riskier assets such as equities. In fact in good years I even top-up my CPF-SA with cash. Hopefully when they finally removed the 4% floor the 30-year SGS bond will be yielding this rate or better.

AK71 said...

Hi INVS 2.0,

We have a paternalistic government or so it has been said. Unlike the head of a household who might have to be responsible for his 2 or 3 children (yes, I am being optimistic whichever way you look at it), the PAP government feels that it is responsible for all our citizens (again, I am being optimistic).

People like you are probably in the minority and it is probably also hard to say if anyone could ever consistently do well managing his own money. So, a bit of a safety net is always good. :)

INVS 2.0 said...

Hi Serendib,

Perhaps you are right. But I would rather put into equities that pay 5% - 6% than the 2.5% in CPF. Savings account is a no no but good for me to accumulate emergency funds for sudden illnesses or accidents and investment funds to exploit a weaker market. Imagine my money is trapped till 65-yrs-old, which is a whopping 4 decades++ later for me. Of course you can say CPF is risk-free but to me, by upping the minimium age of withdrawal is like a risk to me. Ok, I am pessismistic about my lifespan. 65-yrs-old seems hard for me to survive illness-free. :( Last time can withdraw at 55-yrs-old, right? I wish there is a policy for good record holders to withdraw at 55 or below. :)

I think different age groups have different perception towards the CPF but for me in early 20s, this thing is like a stumbling block. -_- But well, to each his own lifestyle and finances. :D


Hi Ak71,

I grow up in a paternalistic environment with strict rules and traditional values (that explains why I can watch Yongzheng Huang Chao without falling asleep?) Haha!

But when the time is right and has come, I will have to negotiate my freedom to decide my own life. I feel I should be more responsible for myself instead of letting the upper gens to manage my life. :) :)

INVS 2.0 said...

...continued

Ah, housing payment. I visited a private condo showflat by Fareast Org (can't buy public housing as I am a single) the other day and was told I can cover 20% of the unit's price with my CPF. :) That's the only thing I can mobilise my CPF into a better purpose.

But it's too early now (thankfully the agent accompanied me throughout despite knowing that I am too young and poor for a $600k unit). :D :D

AK71 said...

Hi INVS 2.0,

I am sure you have been well brought up. :)

As for viewing condominiums now, I wouldn't bother as asking prices are still rather high despite all the "discounts". I believe prices would continue to soften towards the end of 2012.

Look at all the GLS happening in 1H2012. Lots more condo in the pipeline. Developers are becoming more conservative in their bids and we see successful bids lower in value compared to plots sold earlier in the same vicinity.

Another 20% decline from current levels is not unrealistic.

Patience will be rewarded. :)

INVS 2.0 said...

Hi Ak71,

Exactly. When I saw the $600k tag for a 1-room 640sq ft private condo unit, my eyes pop-ed out. No, I was not thinking from a poor undergraduate-to-be's point of view but the market. It is really expensive. I think that one should cost around $500k or so. Let's wait for a few years more and see what happens. I should be out of Uni by then. :)

AK71 said...

Hi INVS 2.0,

My research shows that adding to the record number of unsold units as at end of last year, we might see unsold inventory and vacant condominium units going to new highs by 2014/2015. Unless developers become more realistic in their asking prices, it would only get harder to find takers.

I know that CDL is opening their Bartley Residences showflat 12 hours a day from 10am to 10pm daily in an effort to sell as many as quickly as possible because new and similar launches are likely to be lower in prices. I have a feeling that buyers of Bartley Residences might end up regretting their decision. Chances are they might end up with a loss of 15% to 25% over the next 12 months.

Ray said...

For the investment savvy people, obviously they will resent the CPF, which locks away their money and giving very low ROI.
But without it, there will be chaos in the society where the spendthrift (or gullible uncles who really think the young PRC women really loved them for their personality) will end up with no money for retirement.
These people will become liability for the govt and I will support a govt that set up measures to prevent that.

AK71 said...

Hi ray,

Well, I do not resent the CPF either. I think it is a very good idea. Helping people to help themselves. :)

Without it, younger generations could end up supporting retirees in future. The burden could see personal income taxes going to 30 or 40%! Heavens forbid!

INVS 2.0 said...

Hi Ak71,

Thankfully the upper gens in my house are good at calculating finances. :)

There should be a separate version of CPF that rewards good record holders or household with good finances, like motoring insurance premiums. If you are a good driver, you will pay less when your NCD improves year by year. CPF should be the same. Spendthrifters get punished with higher withdrawal age while frugal people get earlier withdrawal. Hope this is more fair for both sides. :D

Thanks for your research on the housing market. At least I know my money is not going to sit inside the CPF till 65. Hopefully I can get a better discount when the property market experiences a fall in demand. :D

AK71 said...

Hi INVS 2.0,

You are welcome. We are all on the same boat and I am happy to share what I know. It is not as if I have tons of money to buy up all the money making assets in Singapore. ;)

As for your idea on modifying how the CPF works, I get your drift. Time for you to write to the Forum or CPF Board. Of course, if you do not mind, you could contribute as a guest writer to my blog. Just email me the article and I will be happy to post it. I have editorial rights, of course. ;)

Ray said...

AK, you are on a Carribean cruise, I'm on a sampan ;)

AK71 said...

Hi Ray,

That's amusing. Haha... As long as we have life saving devices on board, we are OK. ;)

RayNg said...

AK,

Quote "Personally, I lost a six figure sum in the stock market before as well."

Would you share with us what went wrong during that time when you lost 6-digit sum?


AK71 said...

Hi Ray,

Reopening an old wound. Not something I like to do. -.-"

Well, you might get an idea by reading this blog post:

Excuse me, are you an investor?

Ignorance plus an adventurous spirit. Not a good combination. -.-"

RayNg said...

Hi AK,

Sorry to remind your wound. My bad.

I think your blog on "excuse me, are you an investor?" summarize it well.

My intention asking that question was that many people envy your success in investment but they may not realize the "pain" one went through.

失败是成功之母。

AK71 said...

Hi Ray,

I lacked a mentor on my journey as an investor and many things that you see me share in my blog in the last few years I discovered on my own.

A very important lesson I have learnt in my almost 2 decades as an investor is that people tend to throw caution to the winds when times are good. Yes, we all feel a little invincible sometimes.

However, when the bad times come and they always do, those who were feeling less invincible and who had a meaningful sum of money put aside would do better. If I didn't have a war chest ready in the last crisis, I wouldn't have what I have today. :)

AK71 said...

When we invest for income, we don't have to worry if the stock market closes for a day, a week, a month, a year or a decade.

The Singapore Exchange's securities market temporarily ceased trading as at 1138 hours Singapore time, the bourse operator said in a statement on its website on Thursday (July 14). Source: http://www.straitstimes.com/business/companies-markets/sgx-securities-market-temporarily-ceased-trading

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