A Must Read Guide for Newbie Investors

Today I received an email that sounds like this, ‘Dear Sir, I am a newbie investor. Frankly, I am scared to buy stock, I'm afraid of losses. Moreover, I read on the internet that stock investors will almost certainly suffer losses in their first year because lack of experience. Is there any way that I could immediately gain profit in stock without losing first?' Well, since this is probably a common question of new or potential investors in the stock market, then I made the article to answer it comprehensively.

So here we go. A new investor, who are inexperienced and have not known very well about stock analysis, is likely to suffer losses in his first year in the capital market. Some other investors are even still suffered losses in the second year, third year, and so on, usually if they are never learn to analyze the stocks (they rely heavily on ‘stock recommendations’). These 'investors' would be beginners forever, because after a long time they still do not know how to pick stocks or control their emotions in making decisions to buy, hold, or sell.

However, there is no guarantee that experienced investors, who has read a lot of books about investing and stock analysis, who has experienced long enough both in the event of market euphoria and crashes, will definitely make profits. As you surely already know, Warren Buffett can still suffer a loss. Including one of the prominent investors in the country, Mr. Lo Kheng Hong (LKH), although he has about 25 years of investment experience, he is currently stuck badly in the shares of Bakrie Group.

But if you read the annual letter written by Warren Buffett, then you will get a good information about 'Experienced Investors vs. Newbie'. In one of his Annual Letter, Buffett once said that in each year, he always start the job from the beginning. If in the last year he gained 20%, then in this year he would not necessarily gained that much. If in ten years in a row he gained an average of 20% per annum, then still, in the next year he would not necessarily gained that much too.

The point is, in the stock investment, as you often see in the advertisements of mutual funds, there is no assurance or guarantee that the good (or bad) performance in the past will be repeated in the future. Just because you've experienced for five years as an equity investor, for example, then it does not mean that your investment performance will definitely better than the newbies, or worse than other investors that has experience of ten years.

Here’s the valid evidence about the above statements. In his long investment career, Buffett had losses in 2001 and 2008, or after he experienced for 45 years (since he run his partnership for the first time in 1956). While in the early days of his career, ie in 1960s, he kept gaining. Another interesting fact is, in the period between 1965 and 2008, the performance of Berkshire Hathaway only lost six times compared to the performance of S&P 500. But in the years of 2009, 2010, 2012, and 2013, Berkshire’s net assets growth always lower than the increase of S&P 500.

Similarly, Mr. Lo Hong Kheng. Since he began his investment career in 1989, there were not many success stories to tell, in fact he had extremely losses in the event of monetary crisis in 1998. LKH’ milestone as a big investor started in 2002 when he bought United Tractors (UNTR) at the price of Rp400 per share, and sold it at 5,000’s a few years later. After that, he earned great success in other stocks like Multibreeder Adirama (MBAI), Charoen Pokphand Indonesia (CPIN), Lippo Cikarang (LPCK), Gajah Tunggal (GJTL), and so on. But still, his outstanding track record of experience does not guarantee that LKH will always make profits. In the last two or three years, LKH’ investment performance were bad, mainly because of his decision to buy the shares of Bakrie Group. Okay, someday his decisions to buy BUMI et al could be turned out to extremely huge profit (who knows?), but for today he still suffer losses.

So once again, there are no correlations between experience with the ability of an investor to make a profit. When a beginner suffers losses then it was not because he has no experience, but because he’s not (yet) able to analyze or to control his emotions. Hence I said that if an 'investor' does not understand how to read financial statements, etc., then no matter he had an experience of a century, he remains an newbie. An investor could be said to be experienced if he has been able to analyze the fundamentals of stocks and controlling his emotions in decision-making. And if he has reached that level after a few months only, then he already has the qualifications like the other investors who have experience of decades.

But when an investor have enough experience ('experience' herein as defined above, where an investor can analyze the stocks and control his emotions in decision-making), still there is no guarantee that he will make profit. A simple example: In the year of 2008 when the Jakarta Composite Index (JCI) dropped by more than a half, is there any investors that still could make profits, whether he is experienced or not?

But if the experience can not guarantee anything, and how we can continue to make profit? Well, unfortunately, I have to say that there is no way we can continue to make profit every time we buy stocks. You and I, like it or not, will certainly suffer losses from certain shares, at certain times. Even if you are very good at picking stocks so you never mistaken in choosing undervalued stocks or the ones that offer significant growth prospects, but the value of your portfolio will still down when the JCI dropped. The key here is not how we can continue to make profit, but you must realize that stock investment is a work that continuously, whether in state of bull or bear market, which you will eventually have been in the stock market for years (or decades).

And after some time, you can be said to be a successful investor if your overall performance (over the years) is better than the market, no matter if you have experienced losses in certain stocks or years. Warren Buffett and Lo Kheng Hong can not be said as failed investors just because their investment performance are less satisfactory in recent years, because their overall performance is still much better than the market average (and the fact they both are still very rich, are not they?).

The biggest mistake of an investor is if he decided to quit the market just because he lost. For example, there are many new investors that entered the Indonesian stock market in 2007, so they were suffering great losses in the following year as the global crisis occurred. In such desperate condition, many of them that stopped forever from investing activities in the stock, and could only regret when the JCI is now already at 5,000.

So here you have to believe that if the market goes up or down, including if you gain profits or suffer losses, it’s all a matter of course! Just like in a soccer game: Win or lose is just a matter of course. What is important if we play it right, vigorously, and uphold the sportsmanships. Just because we lost one game, then it's not the end of everything because there will always be the another game, where we can win!

And I myself have a fellow investor friend who has experienced since 1991, which said this: 'I've been suffered losses when the market crashes in 1992, 1998 and 2008, yet I'm rich! I know that someday I will arrive at another crisis period, although I do not know when the market will fall again like 2008, or perhaps it was my own portfolio that crashed when the market is just fine. But most importantly, I also know that the longer I am in the stock markets, the richer I’ll become. Warren Buffett could be that rich not just because he was a genius in the business of investment, but also because he has been investing for more than a half of a century!'

Well! Hopefully this article can be an encouragement for those of you who feel as novice investors in the stock market, as now you know that investors who have decades of experience in the capital markets may still suffer losses. The important thing here is that you have to keep learning, whether it be from the literature or from your own experience (which will continue to increase over time). If I may be honest, I actually wrote this article to remind myself to keep learning about investing. The capital market is a university where no one could pass and get a college degree, only dropped out.

On the other hand, if your investment performance are currently not good enough (by your own standard), then remember once again that you are not going to be an investor for today only, but also for all the times that come, where there will always be other opportunities to make profits. You know? Bayern Munich lost in the 2012 Champions League Final held at the Allianz Arena, aka in their own home, although they had the score 1-0 before the dramatic goal of Didier Drogba in the last ten minutes of the game changed everything, and even worse: It was the second defeat of Bayern in the Champions League Final in adjacent time after two years before they also lost to Inter.

But in the following year, ie 2013, Bayern finally wins the Champions League!