Why I Feel Rushing Into Stock Trade is Financial Suicide

Business World Online

I was thinking about how I impulsively handled money by allowing a "friend" to buy in credit after she paid back initially. The issue was that I wanted only my returns than "play it safe". The same can happen with stocks. The stock market is high-risk trading in which one must have extreme caution. The tip given during a financial seminar at the University of San Carlos-Main (USC-Main) during my Masters in Business Administration days was to invest only excess money. It's said to invest only in the money you're prepared to lose and that makes investing sound like gambling. In my case, I prefer it said, "Invest only the money you don't need right now." Money that's set aside for needs isn't where stocks should be. In short, it's plain suicide to put all your money into stocks because it's not as liquid as it sounds. Sometimes, it may take longer to receive the money such as a two-day procedure. You need money to buy groceries, pay tuition, and all your necessities so having no cash at hand and all in stocks isn't just advisable.

I was told someone borrowed a million pesos, invested it all in stocks, made a big loss, and attempted suicide. I never knew the person personally though. I felt that the idea of rushing into stocks was something I was tempted to do. I remembered almost getting Cash to Go by turning unused credits into cash. However, the idea can be bad (for some) if one's an impulsive spender. I find myself with the tendency to be an impulsive spender. Doing some investments can be a good move to curb those tendencies. I remembered buying Retail Treasury Bond (RTB) and Long Term Negotiable Certificate of Deposit (LTNCD) for lower risks. RTB is government securities that might not earn as high as stocks but are still good nonetheless. LTNCD is pretty much having a bit higher returns at a lower risk. I have the tendency to have a high-risk appetite--often too high for my own good.

What I did next was to purchase AXA Chinese Tycoon which invests in stocks owned by wealthy Chinese-Filipino companies like Jollibee. That would be a good way to do peso cost averaging. Peso cost averaging is investing the same amount of money. I pay PHP 3,000.02 every month for that AXA investment. Some of that money goes to premium charge which goes for insurance. Meanwhile, some of that money is dependent on the unit price multiplied by the current number of units. This is called the total fund value. The value can change over time such as it can be X today and Y tomorrow. I'm not going to spill out the total fund value either since it's confidential. Pretty much, I refuse to withdraw what I can withdraw to let that money grow. 

I think about it that a better way to deal with stocks might be to set aside a fixed amount of money. GInvest can be a good way to flex those muscles whether they were inexperienced or atrophied. I was thinking that giving up PHP 3,000.02 per month in AXA Chinese Tycoon is another new start. Sometimes, somebody may consider keeping it small. For example, PHP 5,000.00 might be a good start. It would be to invest that PHP 5,000.00 when you don't need it now. Lump-summing can be good but it can also be bad. I think it's one thing to invest a huge amount of money in RTB and LTNCD when the savings account got high. However, stocks might be best subjected to cost averaging. 

Why I think some people invest in stocks (or better yet, rush into them) is hoping to become rich overnight. Please, the stock market is not a casino! I guess that's why the person I heard about borrowed a million pesos and invested it all in stocks. 

Learning from the Stock Market Crash of 1929

One needs to study why the Stock Market Crash of 1929 happened. This was one of the causes according to Investopedia:

Overproduction and Oversupply in Markets

People were not buying stocks on fundamentals; they were buying in anticipation of rising share prices. Rising share prices brought more people into the markets, convinced that it was easy money. In mid-1929, the economy stumbled due to excess production in many industries, creating an oversupply. Essentially, companies could acquire money cheaply due to high share prices and invest in their own production with the requisite optimism.

This overproduction eventually led to oversupply in many areas of the market, such as farm crops, steel, and iron. Companies were forced to dump their products at a loss, and share prices began to falter.

It was a great serious mistake when people bought stocks without fundamentals. Can you imagine if too many people bought the stocks of Jollibee? I could imagine if Jollibee had to produce too much of its Yumburger or Chickenjoy until the quality decreases. Just imagine if Mang Inasal's delicious barbecue chicken starts to lose its value because too many people are buying Jollibee stocks. 

Before the crash, we can read that it was a period of great progress also:

In the first half of the 1920s, companies experienced a great deal of success in exporting to Europe, which was rebuilding from World War I. Unemployment was low, and automobiles spread across the country, creating jobs and efficiencies for the economy. Until the peak in 1929, stock prices went up by nearly 10 times. In the 1920s, investing in the stock market became somewhat of a national pastime for those who could afford it and even those who could not—the latter borrowed from stockbrokers to finance their investments.

The economic growth created an environment in which speculating in stocks became almost a hobby, with the general population wanting a piece of the market. Many were buying stocks on margin—the practice of buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or a broker—in ratios as high as 1:3, meaning they were putting down $1 of capital for every $3 of stock they purchased. This also meant that a loss of one-third of the value in the stock would wipe them out.

In short, the lack of regulation was also fueled by one thing--people rushing into the stock market. People were trying to become rich overnight and they borrowed money. Unfortunately, the stock market wasn't able to handle it. Worse, the Great Depression was occurring from 1929 to 1939. People trying to become rich overnight ended up losing more in a short amount of time. Trying to get rich quick is why people like Charles Ponzi and the late Bernard Madoff get their advantage. It was also why the Legacy Group of Companies was able to carry out what it did. It's because of people who try to get rich quick. After the incident, people may have abandoned the stock market because they didn't get rich quick. What might've followed is the gambling addiction since people can get rich quick. However, the chances of getting rich gambling are very low since it relies on random wins. 

Just reading about the stock market crash--do I want to have my own financial crash? Some people unfortunately still haven't learned from the stock market crash of 1929. A reckless purchase of stocks is just plain insane and should be discouraged. People shouldn't even borrow money they can't afford to pay. Banks and stock markets should be careful about who enters into debt and trade. These all can affect the economy in many ways. It should be better to find safer ways such as cost averaging if one's not sure or to do some research. Don't expect to get rich quick because stocks don't guarantee to get rich quick overnight. 

References 

"What Caused the Stock Market Crash of 1929?" by Leslie Kramer, Reviewed by Julius Mansa, Fact-checked by Yarilet Perez (December 31, 2021)

https://www.investopedia.com/ask/answers/042115/what-caused-stock-market-crash-1929-preceded-great-depression.asp#toc-overproduction-and-oversupply-in-markets