February 14, 2019

Why the Market is Irrational

I want to think about the reality of stock market, is stock market really the best place for investment?

Is stock market predictable? In my experience, stock market cannot be predicted, but you can use data and probabilities as basis whether to invest in a stock or not. Stock market is unpredictable in same sense that some news and events cannot be predicted. 

Is stock market the safest investment? I could tell you that you could lose half of your money in stock market and wait decades (in some cases) before you can recover it. So yes, stock market is not the safest investment on earth. Even the legend investor, Warren Buffett has a story of lost. In June 2018, Buffett’s holding company, Berkshire Hathaway, acquired 250 million shares of stock of Apple; by November 2, 2018, Buffett lost more than $3.5 billion of its value (source: Warren Buffett loses nearly $4 billion in single day on his Apple stake). 

One might think that I’m being too pessimist (negative), but that is not true, there are tales of triumph and gains only if you invest carefully. Take the case of banking industry in the Philippines. In January 11, 2019, news about Hanjin Philippines bankruptcy spread in the internet like a virus causing a downward shift in the stock price of banks with loan exposure to the said company. Metrobank (MBT) for example plunge from P82+ level to P76+ level after the news-scare, now as of this writing MBT is back to 82+ level (note: this is not a stock recommendation). If you examine the scenario, one might think that this is not good time to buy stocks since price might go down further, but if you examine the history, Philippine Banks have been in worse situation than this (Asian Financial Crisis is more worse) and yet they survive; thus in this case, a bankruptcy of one corporate institution will not result to bankruptcy of whole banking system of the Philippines. With that in mind, an intelligent investor has already gauge that declining stock price of banks is temporary and an opportunity to buy more stocks. 

The key here is that investors and traders should always recognize that investing in stock market has risk and that stock market is not a fairytale of gains and always gains.

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