The Taiwan Banker

In March 2020, due to the emergingpandemic, the Taiwan stock market hit a low of 8,523 points. However, two yearsafter unlimited US monetary easing, ample liquidity drove the market more than 10,000points up to 18,619 points. Investment has become a national trend in Taiwan. Inparticular, many young investors have been putting their money in the market.According to statistics from the Taiwan StockExchange, more than 660,000 accounts were newly opened in 2020, doubling the 330,000of 2019. In 2021, 770,000 accounts were opened, increasing the cumulative totalto 12.01 million, over half the total population. In particular, in 20-30 agerange, the proportion of account holders in the total population has increasedto 44%.This year, however, a different picture hasemerged. Governments around the world are facing inflation, the US has entereda cycle of rate hikes, and the Ukraine war has caused Taiwan stocks to drop4,691 points in less than half a year, from 18,619 at the beginning of the yearto 13,928. Many market novices have experienced a harsh lesson.Young investors first need to understandinvestingFor example, during the course of themarket's decline, there were rumors of default delivery events. Recently, someinvestors even bought China Airlines at NT$ 544 despite news of defaultdelivery, making it clear that they did not understand the seriousness of thesituation. This not only leaves a record in securities firms’ joint creditreporting 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 chaseprice gains without understanding the fundamentals of a security. In a bullmarket, 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-lossorders. Warren Buffett once said that the most important thing in investingis not to lose money. In particular, in the bull market over the past twoyears, most Taiwan stocks have gone up. A delay wouldn’t be too serious, or mighteven give the stock time for a correction. As a result, investors aren’tprepared 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 ofleverage. Most people are able to make money in a bull market, and many useleverage to make money faster, but then they also lose money faster in the caseof 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 sufficientfunds on hand will choose to day trade without capital. Most people would regardthis as a gamble, but how else are they going to settle their losses? This isvery dangerous situation.Avoid crowds, find moats, and diversifyTsai said that there are several iron lawsfor investment. The first is to avoid crowds. We often hear from experts thatthe key to buying stocks lies in good offerings at good prices. If you buy at ahigh price, it’s easy to get stuck in an expensive market and end up losingmoney.For example, shipping stocks were the mostpopular last year, but many people who bought them not only failed to makemoney, 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 islow, and buy one or two shares to test their skills, wait until it rises to afew tens of Taiwan dollars, and add a few more. Finally, by the time the price reaches NT$100, the fear of missing out is incredible. Many borrow money to buy more. Uponany reversal of NT$ 20, one becomes reluctant to sell. If the price falls by NT$50, profits will become impossible. In the face of this pressure, the pricecontinues to fall, and buyers are routed. Therefore, the original price of a stockis very important.Second, the target must have a moat. Whatis a company’s industry prospects? Is it an oligopoly or a monopoly? What are itscompetitive advantages? Will it be replaced? Invest with a long-termperspective. Of course, financial stability is absolutely a basic requirement, sothat you can feel at ease holding a stock.Third, portfolio allocation is veryimportant. Tsai said that taking his own financial planning as an example, hewill not need to withdraw his investment funds for at least two years. He alsohas fixed-income funds with monthly payouts, so he can live even without asalary, although stocks make up the majority of his investments.However, investors tend to put all theirmoney 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, butthey 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. Thisstrategy creates too much pressure, which cannot be sustained in the long term.Dollar cost averaging can prevent overpayingAlthough it’s old news, many investmentexperts believe that if Buffett could become the world’s richest man, his investmentmethods must be worth learning. In particular, the market holds many potentialsystemic risks. Long-term holding is a better choice if you want to invest withpeace of mind, so that you can receive interest with no pressure on cash, nomatter the market, and won’t be forced to sell. Experts also remind investorsnot to underestimate the power of compound interest. The Rule of 72 is a goodformula. Dividing 72 by the annual rate of return tells us how long it would takefor the principal to double. Buffett became the world’s richest man with 20%annual returns.Tsai said that it’s difficult to predictshort-term fluctuations in the market, but long-term holdings are not so affectedby price fluctuations. Dollar cost averaging is good for investors who usuallydo not have time to watch the market, or who have difficulty selecting stocks andentry points. It can prevent chasing highs. Because human psychology isvulnerable to short-term market fluctuations, people tend to buy expensivesecurities for fear of missing out. With long-term regular fixed investment,the average cost follows the 10-year trend, investment is disciplined, and thechance of loss is naturally low. Of course, good targets are still important. Inaddition, investors should also measure their own financial resources. Don’tforget the importance of diversification, and don’t overweight any particular investment.Many securities companies have launchedregular investment services so that investors can exercise discipline for along time. For example, SinoPac recently launched “Fundamental Stock,” whichprovides two deposit methods: fixed amount and fixed stock. 100 shares orNT$100 per month can be invested in Taiwan stocks, or 1 share or US$100 permonth can be invested in US stocks, and it provides globally popular investmenttargets.As Buffett once said, “Predicting the raindoesn’t count, building Noah’s Ark does.” For investors who want to enter themarket but don't know the right time, dollar cost averaging is your ark. Nomatter how volatile the market, you can continue to advance, waiting for the effectof compound interest brought by time in the market.