In March 2020, due to the emerging pandemic, the Taiwan stock market hit a low of 8,523 points. However, two years after unlimited US monetary easing, ample liquidity drove the market more than 10,000 points up to 18,619 points. Investment has become a national trend in Taiwan. In particular, many young investors have been putting their money in the market.

According to statistics from the Taiwan Stock Exchange, more than 660,000 accounts were newly opened in 2020, doubling the 330,000 of 2019. In 2021, 770,000 accounts were opened, increasing the cumulative total to 12.01 million, over half the total population. In particular, in 20-30 age range, the proportion of account holders in the total population has increased to 44%.

This year, however, a different picture has emerged. Governments around the world are facing inflation, the US has entered a cycle of rate hikes, and the Ukraine war has caused Taiwan stocks to drop 4,691 points in less than half a year, from 18,619 at the beginning of the year to 13,928. Many market novices have experienced a harsh lesson.

Young investors first need to understand investing

For example, during the course of the market's decline, there were rumors of default delivery events. Recently, some investors even bought China Airlines at NT$ 544 despite news of default delivery, making it clear that they did not understand the seriousness of the situation. This not only leaves a record in securities firms’ joint credit reporting systems, but can also affect future investor credit ratings.

Wang-sheng Tsai, Vice President of SinoPac, said that young investors typically make a few mistakes. The first is to chase price gains without understanding the fundamentals of a security. In a bull market, because stocks rise together, you can make a mistake, but in a bear market, it is easy to lose money, so it’s very important do your homework.

The second is to neglect stop-loss orders. Warren Buffett once said that the most important thing in investing is not to lose money. In particular, in the bull market over the past two years, most Taiwan stocks have gone up. A delay wouldn’t be too serious, or might even give the stock time for a correction. As a result, investors aren’t prepared for the bear market and may suffer heavy losses.

The second is toneglect stop-loss orders.Warren Buffett once said that the most important thing in investing is not to lose money. In particular, in the bull market over the past two years, most Taiwan stocks have gone up. A delay wouldn’t be too serious, or might even give the stock time for a correction. As a result, investors aren’t prepared for the bear market and may suffer heavy losses.

Finally, the third is heavy use of leverage. Most people are able to make money in a bull market, and many use leverage to make money faster, but then they also lose money faster in the case of sharp declines. The phone will ring for stop losses. If you don’t have the money, or continue to make orders, you may end up out on a limb. Some who don’t have sufficient funds on hand will choose to day trade without capital. Most people would regard this as a gamble, but how else are they going to settle their losses? This is very dangerous situation.

Avoid crowds, find moats, and diversify

Tsai said that there are several iron laws for investment. The first is to avoid crowds. We often hear from experts that the key to buying stocks lies in good offerings at good prices. If you buy at a high price, it’s easy to get stuck in an expensive market and end up losing money.

For example, shipping stocks were the most popular last year, but many people who bought them not only failed to make money, but were even routed. Why do the hottest investments fail to make money? This has to do with human nature. Many investors are skeptical when the stock is low, and buy one or two shares to test their skills, wait until it rises to a few tens of Taiwan dollars, and add a few more.

Finally, by the time the price reaches NT$ 100, the fear of missing out is incredible. Many borrow money to buy more. Upon any reversal of NT$ 20, one becomes reluctant to sell. If the price falls by NT$ 50, profits will become impossible. In the face of this pressure, the price continues to fall, and buyers are routed. Therefore, the original price of a stock is very important.

Second, the target must have a moat. What is a company’s industry prospects? Is it an oligopoly or a monopoly? What are its competitive advantages? Will it be replaced? Invest with a long-term perspective. Of course, financial stability is absolutely a basic requirement, so that you can feel at ease holding a stock.

Third, portfolio allocation is very important. Tsai said that taking his own financial planning as an example, he will not need to withdraw his investment funds for at least two years. He also has fixed-income funds with monthly payouts, so he can live even without a salary, although stocks make up the majority of his investments.

However, investors tend to put all their money in stocks. For example, a year ago, the hottest stock in the market was TSMC. Many of his friends borrowed money, and even bet their houses to buy TSMC, but they all got stuck with an expensive stock. Why do retail investors lose money? Many like to go all in, but one mistake could wipe them out completely. This strategy creates too much pressure, which cannot be sustained in the long term.

Dollar cost averaging can prevent overpaying

Although it’s old news, many investment experts believe that if Buffett could become the world’s richest man, his investment methods must be worth learning. In particular, the market holds many potential systemic risks. Long-term holding is a better choice if you want to invest with peace of mind, so that you can receive interest with no pressure on cash, no matter the market, and won’t be forced to sell. Experts also remind investors not to underestimate the power of compound interest. The Rule of 72 is a good formula. Dividing 72 by the annual rate of return tells us how long it would take for the principal to double. Buffett became the world’s richest man with 20% annual returns.

Tsai said that it’s difficult to predict short-term fluctuations in the market, but long-term holdings are not so affected by price fluctuations. Dollar cost averaging is good for investors who usually do not have time to watch the market, or who have difficulty selecting stocks and entry points. It can prevent chasing highs. Because human psychology is vulnerable to short-term market fluctuations, people tend to buy expensive securities for fear of missing out. With long-term regular fixed investment, the average cost follows the 10-year trend, investment is disciplined, and the chance of loss is naturally low. Of course, good targets are still important. In addition, investors should also measure their own financial resources. Don’t forget the importance of diversification, and don’t overweight any particular investment.

Many securities companies have launched regular investment services so that investors can exercise discipline for a long time. For example, SinoPac recently launched “Fundamental Stock,” which provides two deposit methods: fixed amount and fixed stock. 100 shares or NT$100 per month can be invested in Taiwan stocks, or 1 share or US$100 per month can be invested in US stocks, and it provides globally popular investment targets.

As Buffett once said, “Predicting the rain doesn’t count, building Noah’s Ark does.” For investors who want to enter the market but don't know the right time, dollar cost averaging is your ark. No matter how volatile the market, you can continue to advance, waiting for the effect of compound interest brought by time in the market.