As we are nearing the end of 2021, it’s a very apt time to look back at the key learning lessons gathered from the stock markets. No matter whether you have done exceptionally well in the stock markets over the past 1 year, or whether your portfolio is still currently underwater, it’s a good time to do some reflection on how much you have grown holistically and the key learning lessons.
Let me share with you the 5 key takeaways that we have picked up and feel free to share your views with us at the comment section below.
1. Learn to embrace volatilities in the markets
Most retail investors are so scared of volatilities and they shun volatilities like this poor girl below. But what you don’t know is, you may be landing yourself in a worse off situation by selling at bad prices.
Many of us were expecting a Santa Claus rally in the month of December but were instead hit hard with increased volatilities this month. Though the S&P 500 has been holding up quite well, it was mainly due to the good performance of just a few companies with bigger weightage that is pulling up the index. There are many good stocks which have retraced considerably from the previous highs. Where did Santa Claus go? While there are some historical seasonality patterns in the stock markets, such seasonality patterns are not 100% foolproof. There is no such thing as absolute certainty in the stock markets.
The key is in having a good understanding of how the stock markets work. If you understand stock markets well, you will know that this is just a small decline when you look back in time in the future. When faced with volatilities, do not panic. Instead, move in line with the market trends. If the prices drop, and you still have cash in your account, that could be a time to buy. Never make the mistake of selling out of panic when you see a price decline.
Learn to accept volatilities during times of price decline in the same way you love volatilities when they bring about profits for you. It boils down to your mentality and how you look at volatilities. If you learn to view price declines as opportunities to buy stocks at cheap prices, then volatilities aren’t that bad.
2. Understand what you are invested in
The next lesson to take away from the stock markets is that we should understand the companies we are invested in. This is what gives us conviction to hold on to the shares during times when there is a sell-off. Otherwise, you would have what we call the weak hands and you would sell your shares at a bad price.
There are a number of popular growth stocks which have come down by 20%, 30% or even more in the last 2 months. Or even as a whole in 2021, some of them did not do that well.
You know, the thing is, when prices are going up, you could be once so confident about the company’s growth and company’s future. But once the price declines, you suddenly start to question yourself. And you ask yourself, did you invest in the wrong company?
If you find yourself doing this, that means you do not actually have the conviction in the companies you are invested in. Or it could also be a case whereby your initial conviction was borrowed from someone else, like your friends or from the online forum.
When you do not understand what you are invested in, that is when you are very likely to be blindly led by the stock price movements. This is evident in the recent sell-off for the growth stocks where investors offload the shares because of whatever reasons there is, inflation, tapering, Omicron and so on.
3. Be able to differentiate fundamentals from noises
There’s just so much information out there that we can find on the internet. We need to be able to sieve out what are the things that are linked to the fundamentals of the companies and what are just pure noises in the stock markets.
The narrative that we see online can really just change very quickly over a short period of time. For example, just a couple of months ago, when Apple released their quarterly results, the narrative and sentiments were a mixture with some being positive on Apple’s growth and some analysts being more on the bearish side. Well, but recently after Apple share prices surged by about 20% since November, we are starting to see more and more bullish thesis on the internet. But did the fundamentals really change that much within just a few months?
Then we also have news about China regulators banning IPOs via VIE structure which resulted in frantic sell-off while on the other side, the Chinese regulators rebutted that it was a complete misrepresentation of their intentions.
We need to learn to be a mindful investor to keep off the distractions. If the news or the media are feeding you with too many distractions, then turn off the excess alerts. Before you react to the news, take a step back and analyse the financials and the financial impact of the news on the company.
4. Don’t compare the results of others to yours
Now I know this is something that can be difficult. Some of us are just competitive in nature while for others, you could be comparing your results as a way to develop a benchmark to measure your performance.
But if you have been comparing your portfolio results to that of others, that is a wrong benchmark that you have been using!
Never compare others’ success to yours. The reason is that they could be at a different phase of the investing journey, they could be competent at a different investment instrument or that they have a different investing style from yours. Never compare your Chapter 1 with someone else’s Chapter 20.
If you understand this rationale, then you would no longer feel that envious of others’ performance. Find your own goal post and focus on that, and in fact, we have been mentioning this a lot of times in our videos and sharings that the best benchmark to compare against is the market index that you are mainly invested in.
5. Investing is a marathon, look at the long term performance
Just because you underperform in one period does not necessarily mean that you have already failed your job as an investor. The stock market moves in cycles and every stock would have the time when it’s shining brightly and the time when it temporarily loses favour among the crowd. That’s because the stock market is sentiments-driven. Don’t be disheartened if your portfolio is not performing as well during some periods. What matters the most is the overall long term sustainable performance of your investment portfolio.
In 2021, investors who invested in the China stocks would have experienced a rough time. We have also previously shared our perspective on this event in a number of our YouTube videos as well as our portfolio review video. If you are also invested in the China stocks and feel perturbed by the sell-off, do check out those videos.
That’s the 5 lessons that we have compiled from the eventful stock markets in 2021. Do also spend some time to reflect on what you took away from the stock markets and feel free to share them with us in the comments section below. See you again in 2022!