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How to Become Rich From Stock (Not) Overnight

Some time ago, I received an email that sounds like this, 'Dear Sir, I just started to invest in stocks. Do you have any opinion about how much the ideal amount of initial capital? Because, frankly, I am just a small investor with fund of about US$ 1,000. I have heard that serious investors typically invest in hundreds of thousands, even up to millions. Will I be able to compete with those big guys?'

Since the inception of this website, I received a lot of similar questions from readers. In essence, there is such a stigma among investors that the stock market is a place for big investors only. So if you’re just a small-time investor with an initial capital of only two grand, ten grand, twenty grand, or even fifty grand, do not expect that you will be successful in stock. You will be successful if your capital is at least at the level of hundreds of thousands of US Dollar. Although the stigma is clearly wrong, but this matter could turned down every start-up investors who feel that they’re just a small fish among snappers.

Okay, to discuss this, I'm going to invite you to look at my experience of life when I was a child. In 1995, when I was still sitting in the fourth grade of elementary school, I help my father to build a small house in my hometown. I was given a task to move bricks from the car to a designated place. At the time, I was only able to carrying three bricks at once. While a builder guy who also transport the bricks, he was able to carry eight bricks at once. Also, his movements were much faster. Within a half of an hour, I could move about 100 bricks only, while the builder (which was in his 20's) is able to move 500 bricks in the same time, or even faster.

Feel defeated by the builder, in the next delivery (of the brick) I decided to work more quickly, by way of carrying five bricks in a single haul. The result? Shortly after I successfully holding five bricks at once, I suddenly felt that my hands are not strong enough. All the bricks were then detached from the handle, then fell to the ground and destroyed! Instead of speeding up the work to move the brick, I even messed it up. After briefly scolded by dad, I back to work by carrying three bricks in every movement.

At the moment, I did not take a lesson from the incident (Sir, by the time I was just a kid). But the message from the incident is something like this: If you are asked to transport bricks, then start with carrying one brick only. If it feels light, then you may add it into two bricks, so that the work will be faster. If two bricks still feels light, then you can add another one, and so on until you reach your strength limit. If you were only able to lift three bricks at most, then do not force yourself to lift more than that. You may have a good intention, to make the work completed faster. But if you force yourself to carry four or five bricks at once, while you are only able to carry three, then you will drop the bricks, and it will ruin the work as a whole.

Well, the same logic applies in the stock market: When you invest in the stock market, at first glance it would seem that using a fund of US$ 1 million is just the same with if you using a fund of US$ 1,000 only. After all, what is important is to pick the right stocks, yes? But in practice is clearly different. What distinguishes here is the psychological ability (in earlier example of bricks, the difference between me as a kid with the builder as an adult is the physical ability to carrying the bricks).

If you entering the capital market by instantly holding a fund of US$ 1 million, then you may not be able to withstand the psychological pressures resulting from the big cash. And if you eventually fail in controlling your psychological conditions when buying stock using these funds, then you will drop the bricks (read: suffering losses). Conversely, if you start your investment in stocks with an initial capital of US$ 1,000, then the psychological burden would be much lighter. You will be more relaxed in managing your funds without any psychological pressures, so you'll have more chances to make substantial profit.

That's why, if there is a question, what is the ideal amount of fund if I was going to invest in the stock market for the first time? Then my answer is, use a small money first. So if you think that the amount of US$ 100,000 is a small money, then you may start your investment with such fund. But if you think that US$ 10,000 is already too big, then do not use that much money, but less than that, say US$ 50,000. If it was still too big, you can reduce to be US$ 25,000, and so on. Like I said, use the money that you think is small!

Then if you had your (small) investment went smoothly, you can begin to add more fund to your account. If you started your investment with initial capital of US$ 10,000, then you can add it to be US$ 20,000, 30,000, and so on (not including your capital gain). Do it slowly while continuing to test your mental strength, until you cannot handle it anymore. For example, if you already deposited US$ 100,000 into your account, and you think that the money is large enough, then that's when you have to stop adding the capital, then let your funds grow by itself.

After you stop adding new funds, the increase in your capital will be completely dependent on your ability to grow. I mean, if after one or two years your capital grew from US$ 100,000 into US$ 500,000, and the fund is not reduced back, then it means that you are strong enough to keep the assets valued at US$ 500,000 (‘strong’ here is in psychological view, not physical). In other words, you deserve it. However, if after one or two years, your capital only increased to be US$ 150,000, then maybe that’s your ‘strength’ limit. You may still need more time to grow your capital further. And what if after one or two years, instead of increasing, your capital shrank to US$ 70,000, while the stock market is okay? Well, maybe it means that since the beginning, you've been holding too much bricks.

The growth of 'strength' takes time. It is not possible when a nine years old boy was able to lift three bricks, two or three days later he is suddenly able to lift five bricks at once. It might take at least a year before he is eventually able to lift five bricks. And now, after I’ve become an adult, I believe that I was strong enough to lift ten bricks at once. But the increase of the strength takes many years. And I believe that, just like the growth of physical strength takes time, the growth of psychological capability also takes time. You certainly would not provide an allowance of US$ 1,000 to your six year old child, would you? But if your child is in university, then you may have to provide more than that.

Then why there are many cases of small investors who failed? Well, actually the problem is not located them in their small funds, but usually because they are not satisfied with the gain obtained. For example, an investor have US$ 1,000 of fund, and he put it all into a single stock. After a month or two, the stock rose 10%. So what is the profit? Only US$ 100, of course. Even for these small investors, US$ 100 still looks tiny, especially if he had to wait for some time. This is in contrast to large investors, where if he put US$ 1 million into a stock, and a moment later it rise as much as 3%, then the man would obtain US$ 30,000, just in a few hours!

Because of that, most of small investors prefer paying attention to certain stocks that can skyrocketed in a short time, in the hope that they could 'being rich overnight'. And indeed, in the Indonesian Stock Market, there are always stocks that could rise as much as 10 or even 20% in a single trading day. The problem is, those ‘magic’ stocks can also dropped 10 or 20% in a day. In this case a small investor is no longer be an investor, but became a speculator. Some of them might be successful enough to substantially increase their capital in a matter of days or weeks, but in most cases, they end up by not getting anything except losses.

While big boys, who holding tens of millions of US Dollar, they are usually not so interested in stocks that promise huge gains in an instant. They are also not interested in words like 'to get rich quickly' on the stock market, because they're already rich! Also, these investors are typically in a more mature psychological condition (than small investors), so they are more prudent in managing their portfolio and as a result, they were successful in creating continuous gain.

So back to the above question: ‘I am a small investor. Can I compete with the big ones?' Then it may mean that the question was, ‘Can I, as a small investor, to invest as good as big investors?' My answer is, your success in the stock market is not determined by how much the initial capital you have, but is determined by the way you manage your portfolio. No matter how small or big you are, what is important is not to speculate. Even a billionaire investor, if he buy stocks without analysis and just following the rumors, then he will not gain anything.

Then if there is another question, how to make my fund to grow from US$ 10,000 to be 100,000, or if necessary, 1 million? Well, we will discuss this another time. But clearly, and you may ask this to any investor who has successfully become a millionaire or even billionaire from the stock market, you can scored a gain of tens or even hundred folds from your initial fund. However, you can not do it overnight!

Original article was written at January 23, 2012

1 comment:

Anonymous said...

Mr Teguh please make a review about blue bird which will have an ipo this year.