Saturday, February 03, 2007

On starting young 4 comments

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The current bull market has probably sucked in thousands of new investors, attracted by the lure of quick and easy money. I am particularly struck by anecdotal evidence of many university graduates playing the markets; there are also investors' clubs being set up at these local universities and run enthusiastically by students who dream of making it on the markets. The Business Times has even created a new section called BT Young Investors Forum or something like that. The most famous example, of course, is from the last bull run in 1999-2000, when a certain actress still in university dabbled in the markets and ultimately lost heavily on contra in a certain stock (rumoured to be Chartered Semicon).

Financial literacy is always something that is worth acquiring as early as possible and it is good that such awareness is slowly seeping into our educational system. There is also the much-talked-about "magic of compounding" which suggests that the younger one starts, the better. However, this is not the main thrust of my views here, which are more inclined in the opposition camp. The discussion below is centred mainly on tertiary students dabbling in the stock markets.

It is actually quite difficult to articulate my opposition to these newbies investing young; everybody has to start somewhere, obviously. It is more of an instinctive feel that it is not the right time. My impression of these emerging investors is a group eager to make money and not miss out, striving to get a headstart over their peers in the world of investing and being very enthusiastic in the pursuit of stocks.

All neutral to positive traits; there is nothing wrong about these characteristics. Yet to me, at the age of 21 (or thereabouts), it is very easy for these impressionistic young chaps to get obsessed over the stock market, especially when they start making money in the markets. The way trading is facilitated nowadays, via online systems, forms an uncanny and disturbing comparison to the MMORPGs (Massively Multiplayer Online Role-Playing Games) that we see teenagers playing wide-eyed in LAN arcades nowadays. I myself find my eyes drawn to the real-time price quotes flashing relentlessly on a trading day. I am not sure that at a time when these young students should be acquiring a diverse set of real-world skills, that developing instead an affinity to the stock market is a good idea. The opportunity costs are tremendous, if one accepts that their market interest can crowd out time for academic learning and structured development of their thought processes. Academic pursuit is not everything; however it puts a finishing touch to the formative intellectual process of a young thinking adult. It would be terrible if an obsession with money is developed so early. That is my view.

Incidentally, I would make a distinction between young entrepreneurship and starting young in the markets. They are not the same. The former would entail a fair degree of effort to set up, not to mention succeed, and this develops a healthy appreciation for the value of hard work and in understanding the ins and outs of business dynamics, positioning, administrative work etc. As I've mentioned, the addictiveness of market trading/investing in contrast could subtract more from the budding undergraduate investor than it adds in value to his "real-world savvy". There is a time for everything, and it is not too late to start investing when one starts working.

Venturing into the stock markets while still studying has one other problems: lack of money. By lack of money, I mean that these students would most likely to playing with other people's money (OPM), since they are obviously not earning it themselves. These "other people" would most likely be their parents. For those who have traded/invested for some time, you would know how different it is when your own money is involved, as opposed to OPM. I have written something on managing OPM, where I opined that a lack of ownership is possibly the greatest problem. Knowing your own money is at risk when you enter a trade generates a different level of intensity and involvement in your decision-making process, which you will never experience if downside is completely protected. That is why I believe virtual trading is a complete waste of time. And the same goes for arrangements where the sponsor lets his young investor get all the profits without having to absorb any losses. That is the typical arrangement for these budding young investors of course.

Given that the opportunity costs of focusing too early on the stock markets can be high while the development of a healthy investing mindset and decision-making process is hampered by the fact that the money is not one's own (unless the capital was earned by the young investor himself), I think a better time to start is when one starts working. The learning process can be more efficient then, because one can instantly relate investing and business fundamentals to his job, which stimulates further insights into both areas. For example, if one is a marine engineer, he will be familiar with the shipbuilding and offshore industry and will feel more confident in making his stockpicks in this area, aided by an understanding of the business and hence a sound basis for investing. At the same time, he accumulates further insights about the industry while doing research for and monitoring the marine stocks he has shortlisted and/or invested in, which facilitates greater overall understanding of his job. This is a positive feedback mechanism, a very powerful iterative process which reinforces understanding both ways. And when one attains a good understanding of an industry, he can apply his understanding of industry dynamics laterally to other industries. Work experience is crucial to building one's investing worldview. While Peter Lynch selects consumer stocks by going to the mall and watching buyer patterns, in Singapore where industrial stocks prevail, nothing beats experience on the job.




Anonymous yee sian said...

IMO, while age may be a factor, it shouldn't be a determinant of when you start "educating yourself about the markets". I would believe the intellectual processes of an adult don't just materialize overnight with their paper qualifications.

To some traders(Ed Seykota for example) knowledge of what you're trading is not a pre-requisite to effective trading. while such ideas are contentious, i would think that "education in trading" is so ambiguous, almost any theory we formulate is debatable.

Depending on your approach to trading, I would think that this affinity to the markets may have varying implications. I have no intention of advocating a person who sacrifices his youth to the pursuit of education in stocks. But I think the opportunity costs you mentioned might be greatly reduced, if the time they use for studying the markets was previously time they wasted, stoning away on say, DoTA.

While I have nothing against playing DoTA as a means of socializing, I feel it's a little excessive for them to play just to pass extra time that they may have at home.

In any case, it would be terrible if an obsession with money is developed, no matter not young or old you are. While it is not too late to start trading only after you start work, i believe it is not too early to start either.

I am aware that your post was targeted at students dabbling in the stock market, but I think if they're going to make mistakes by then, it won't really make much of a difference if they step into the working world. they're likely to make the same mistakes. Perhaps this "sensibility" may come to them only after they've made a substantial loss in the markets.

In fact, that may be one of the virtues about trading young, that you bruise your ego early, so that you have a more intellectual approach to the markets when you're older

2/06/2007 7:04 AM  
Blogger DanielXX said...

Hi yee sian,
Wow a long comment :-) If the student makes a mistake, will he learn so much if the money was not his to start with (ie. his parents')? I have nothing against starting early per se, but I believe there is a gulf of difference between healthy interest and unhealthy obession. So long as the student knows where to draw the line, I guess it's fine. The problem, of course, is that the young always say they know where the line is drawn, but their parents do not agree that a line has ever been drawn at all. Have you ever been involved in Students' Council activities during JC? Well I haven't, but I've seen those Student Councillors spend a disproportionate amount of time on their activities. Some of them did badly in their exams. Just an example, although people tend to look back fondly on these memories, somehow.

2/10/2007 4:45 AM  
Anonymous yee sian said...

Pardon my long comments:p

I would believe the person is likely to adopt a similiar approach to trading, no matter where their capital is coming from, for they will usually be held accountable for any losses. Perhaps, these money lenders may even add a sense of rationality to the person if the person gets too complacent in their trading.

I suppose it's often ambiguous to all parties(student, parents, school..) as to whether a line has been drawn/where the line is to be drawn/how to draw the line. Ultimately, i will like to believe its should be kept a personal decision(holding the assumption that all humans are rational, and know what's best for themselves). This sounds almost like the free market. lol, if there's "market failure", then there'll have to be "govt intervention"(be it the school, or the parents). Again, it's a never ending battle><

2/12/2007 6:26 AM  

Day trading is difficult.

1/14/2014 10:31 AM  

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