“Do I love you because you’re beautiful, or are you beautiful because I love you? Am I making believe I see in you, a woman too perfect to be really true? Do I want you because you’re wonderful, or are you wonderful because I want you? Are you the sweet invention of a lover’s dream, or are you really as beautiful as you seem?” – Oscar Hammerstein II, Rodgers & Hammerstein's Cinderella
Ever since I learned about the stock market almost a decade ago, it has been a slow-dance of love between me and the markets. The love analogy is an appealing one, but more is going on here than the cliché would suggest.
Love the market but not the stock
Is it really love? Have you fallen in love with a stock? Held on even when you were treated badly? Because investors or traders spend so much time and effort in analyzing a stock that we make the crucial mistake of falling in love with them.
The reluctance to part with a stock is part of what’s called “Prospect Theory”, which holds that people fear losses more than they value gains. Developed by psychologist Daniel Kahneman, which explains why investors keep laggard stocks around for years, even if they are losing lots of money already.
I understand people who feel the need for loyalty to a company, but the commitment was to the company, not the investment.While in relationships loyalty is an essential trait. In the stock market, it doesn’t always pay-off because even if you held on to it for years, you will eventually have to sell it.
Despite that, I still love the stock market because..
Math works for you
We have studied math for a good portion of our youth and like me, you probably have been waiting to apply what you learned; you invest and math makes your money grow. If you bought Ayala Corp shares on January 1985 @ 1.6539 / share, and sold at end of January 2017 @ 819.50 / share, your growth rate is a whopping 49,549.54 percent. (This is not a buy/sell recommendation but an example).
You are a part-owner of a company you are invested in
If you want to have a Jollibee franchise, it will probably cost you around Php15 to Php30 million. And that is excluding the operational capital, the time, effort and headache that goes with managing operations. Why not buy stocks of Jollibee Food Corp. instead (@200+/ per share?
Make money in the worse times
If you own a business, you may have to cut costs to ensure your firm survives; if you are employed, you may not get a raise/promotion/bonuses; but in the stock market, you can still make money when things are bad through selective stock purchases, and there are even stocks that go up in uncertainty. What other industries or business can provide an opportunity like this?
Companies get listed on the stock exchange to infuse capital into their business for expansion; this translates to more growth which leads to more jobs, increased taxation, and the overall economic activity of our country.
If you are not afraid of falling in love despite the risk of heartbreak, then you shouldn’t be afraid to invest.
The writer is an RFP® - registered financial planner of RFP PH, Licensed Real Estate Broker and Director of CERTA, Inc., a family estate planning and investment advisory firm. To know more, please visit www.certa.ph
Originally Published in Philstar - The Freeman Newspaper last February 14, 2017.