Famous Misconception Quote for Investment/Trading

There are some famous quotes that I learn when I am still a newbie to investing/trading and I found it ridiculously funny and technically wrong after I do investing and trading for years. I would like to share it here as you know, sharing is caring 🙂

  1. High Risk High Reward

  2. Greed/Fear

  3. Buy Low sell High

  4. Investing only for rich people

  5. Investing is really risky, and I’m not really a gambler at heart.

1. High Risk High Reward 

This is the #1 saying. When come to people who “sell” you an investment or talk investment with you, they always like to use this quote. Aiya, high risk high reward ma!

But the truth is, high risk high reward is one of the worst investment or trading that you can get yourself into. Risk and reward is derived from a calculation ratio, not just by pure saying. They are actually risk to reward ratio.

For example, if you buy a stock A at 10 dollars per share for 100 shares, you made a 1,000 dollars investment. The reason you invest on stock A is you expect the price can go up to 11 dollars and when it go down to 9 dollars you will cut loss. This will lead to a 1 dollar reward to 1 dollar risk. This is a 1:1 risk reward ratio. So for the same example, now your reward price is still 11 dollars but you have to cut when it go down to 8 dollars mean, your risk reward ratio has become 2:1 which at the starting is a bad choice of investment. This is because you let your risk greater than your reward. You have to be twice right to break even if you made one investment/trade mistake.

With the same understanding then we go to another example, now imagine you buy a stock A at 10 dollars per share for 100 shares and you expect it will go up to 12 dollars which the loss might be at 9 dollars. So now you risk 1 dollars to get 2 dollars, 1:2 ratio! and so on…

So if put high risk and high reward it just simply mean, if you invest 1,000 dollars you should get 2,000 dollars in return, if not all your 1,000 dollars will be gone (1:1 ratio right?). But is that the real picture? Normally if we see the investment product the ratio seem like always 1:1  or 2:1 and higher…seldom the reward ratio is higher than risk ratio. For example, product A give a 10% return but if market didn’t do well you might be down 10-30% of your capital. 1:1 to 3:1 risk reward ratio! Like what? Simply ridiculous right?

So where does high risk high reward come from?  It is just a term created by the seller so that when they sell you something, they have a better reason to risk more of your capital. For some they use leverage, for example, same example just now, imagine you buy a stock A, but imagine now instead of 1,000 dollars for 100 shares at each share of 10 dollars, the fund manager now use your 1,000 dollars to act as a collateral to buy 1000 shares. What he use is leverage, let say a x5 leverage, so same risk reward ratio but now is amplified by x5. So when the share price down to 9 dollars, your capital will be gone half. Supposedly is 1 dollars lost multiply by your 100 shares which is equal to 100 dollars but now you have to multiple another 5 (as he use x5 leverage), so your loss now is 500 dollars instead of 100.   So when your profit is up, instead of 100 dollars you will get 500 dollars. Unfortunately, normally you will get around 250 dollars as “forecast” for the profit, so you have to risk 500 dollars for 250 dollars profit which using high leverage to form so call “high risk high reward”.

For me, I won’t go for higher risk than reward, my investment or my trading strategy normally is at least 1:1 RRR(risk reward ratio). Most of the time are 1:2, even 1:3 above. Why go for high risk and high return when there is plenty of low risk high return available in the market.

Undeniable there is always risk in investment but when people tell you about high risk high reward, think again. Remember, investment or trading is not a form of gamble, we are not throwing our money and let the luck decide the outcome to us. Everything can be calculated (Heard before calculated risk? Risk management!).

** This is  just a level 1 sharing, the next level will be how to set proper stop loss as the risk reward might not be so perfectly fit into 1:1, some time it will be like 1.3 : 1.5.  But the key point is a good investment or trading should have higher reward than risk, at least the same.

2. Greed/Fear

Another pair of saying is greed and fear. One of my friend told me when his investment loss money and he say he shouldn’t be greedy (the share price did increase before it plunge heavily, like 20% down). But how greedy is greed. How fearful is fear? One of the Warren Buffet famous quote, “be greedy when others are fearful” , so if we look at the chart, the market seem bullish but how we know when it shows people are greedy? When market keep plunge, how we know what level is fearful? The price can keep go higher and the price which leading to low can get lower.

Catch when the price is getting lower and people are fearful and you thought you applying Warren Buffet saying but you don’t realize you might catching falling knife, worst, the company shares that you buy goes bankrupt.

This saying is like please go to Destination A as early as possible or as late as possible without giving people date and time.

The thing is an investment and trading rarely got any relation with emotion. They are always back with strategy and plan with calculated risk and reward. Unfortunately, lots of investors and traders don’t have that and they go in with either profit or lose capital mindset and let emotion take over them. Which I will say, is very sad.

But is it greed and fear will not come into play for a professional or good investor or traders? Of course they did. As they are human too, they have emotional too but they won’t blame a loss trade/investment on their emotion.

Greed is just a description of a person desire when become too wishful without solid evidence to back their investment or trades while fear arise when they feeling over anxiety and overwhelm with no clue on what is happening next. A good traders or investors simply just transcend this emotion.

They transcend  greed into energy and fear into alertness. In addition, they are also extremely observance their emotion (this is why professional traders or investors will keep a journal with them). For example, a normal investors or traders just wishful hope stock A to go from 1 dollars to 10, when reach 10 then hope it go to 100, the professional traders/investors with technical analysis  one will look for reversal sign and exit the trades (or putting trailing stop) while fundamental one will have a profit target in mind when is overvalue and exit the trades. Then, they will look for the next potential stock/trade (greed to energy!) When come to bearish market, normal investors and traders are so hesitate to buy as they fear of catching falling knife. Professional traders and investors will feel the fear too but they stay alert and monitor their chart (for Technical Analysis)/ calculate the company fundamental via annual report (Fundamental Analysis), then when the time is right they make their entry (transcend fear to alertness!)

So if you still think investment is about greedy and fearful then you might not consider buying good stock like Berkshire Hathaway or Google where their share price can simply x1000% over the horizon of time (you shouldn’t be greedy isn’t it?). On the contrary you might get yourself into falling knife, worst catch a bankruptcy stock if you made an entry when all people are fearful!

3. Buy Low Sell High

How high is high, how low is low? The thing is the higher can go more higher while the lower can go more lower! Who don’t want to buy at low right, the thing is how?

This is why a plan or strategy is so important. Why this investment/trades? When to make an entry? What is your stop loss and profit target? Which analysis/strategy suit this the most/should be used? How much capital should I risk?

4. Investing only for rich people

Nayy…. I graduated just 2 years back, got an entry job and lead a frugal and prudent life, save money then keep portion of it to be my investment capital, just a few thousands then slowly grow into some significant capital. If I wait until I am rich then I just simply waste my precious time when I am still young.

If you can’t invest profitably with few hundred dollars what make you think you can profitable if you have millions.

5. Investing is really risky, and I’m not really a gambler at heart.

Let me tell you one thing, I am really shocked when one of my friend thought that buying a stock is like Forex where you putting your capital into the trades and you will lose all your capital when market turn against you.

The truth is….of course you won’t lose all your capital, even a company bankrupt they have to return partial of your capital according to their net tangible asset/ net assest value per share. So far I haven’t heard any news that people invest in a stock and loss all of their capital in it. Only leverage on your stock investment will risk all your capital.

Nevertheless investing in any financial instrument consist of risk but the risk can be calculated. Also, investing not equal to gambling. If not Warren Buffet should be the god of gamblers instead of an investors. I have not yet heard any of professional gambler made into Forbes.

Even Archie Karas, once known as the best gambler in the word where he turned $50 in December 1992 into more than $40 million by the beginning of 1995, only to lose it all later that year. But then checked on the people who do investing or managed investment fund, you can easily find most of them in Forbes The World’s Billionaires List.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s