‘Is investing in the stock market dangerous?’
Ah. Well. That’s a thorny question, isn’t it?
In my experience, when someone asks me whether the stock market is dangerous, they are usually expecting a binary answer — yes or no.
But investing isn’t necessarily binary. It’s a spectrum. It’s a scale.
If you want an accurate picture, you may actually need to ask yourself more questions in order to find out exactly where you sit on that scale.
- What is your appetite for risk?
- Are you judging risk fairly?
- What is your ultimate destination?
Perhaps I can sum it all up with an elegant phrase: ‘Gnōthi seauton.’
That’s Greek — ‘Know thyself.’
Legend has it that this proverb was inscribed on the ancient Temple of Apollo at Delphi.
It’s simple but profound.
How do you judge risk?
For the sake of argument, let’s put together a hypothetical scenario here:
- Right now, I live in West Auckland
- Let’s just say that I want to travel to Lake Taupo
- According to Google Maps, the journey will take me around three and a half hours by car
- That’s assuming I drive normally and obey the speed limit, which is a maximum of 100km/h
Source: Love Taupo
That’s all well and good. However, let’s just say that I have a different goal in mind. Forget three and a half hours. Let’s get radically ambitious. I want to reach Lake Taupo in two hours.
What do I have to do to achieve that?
Well, I would have to go faster. Floor the accelerator. Fishtail around corners. Disregard the law. Embrace more risk.
In other words, I need to drive like a speed demon.
- The obvious downside: My chances of suffering a horrific crash along the way is much higher. I could be harmed…or someone else could be harmed.
- The potential upside: I get to reach Lake Taupo earlier, maybe shaving an hour and a half off my travel time. I gain a smug sense of invincibility.
- The ultimate calculus: Is it worth it? Well, is it really?
Well, if I’m being rational about it, the answer would have to be no.
I’m a conscientious person by nature. I want to reach my destination safely. I want to keep myself safe, and I want to keep the people around me safe.
It doesn’t make sense for me to take on more risk than I have to.
As boring as it is, I’ll stick to the speed limit, thank you very much.
So, investing in the stock market is a lot like that. You have to weigh up risk-versus-reward. And the way you calculate — or miscalculate — danger will have tremendous bearing on what the final result may be.
The scale of business risk
Here are some objective facts:
- 70% of small businesses will fail within 10 years
- Annually, only 0.75% of public listed companies will fail
The disparity in risk is an interesting one. Consider this:
- The higher failure rate in small businesses doesn’t stop people from being eager to venture into them
- The lower failure rate in bigger companies doesn’t stop people from being reluctant to invest in them
Well, logically speaking, shouldn’t it be the opposite?
But, of course, being human, we often don’t measure risk fairly. There’s always an element of cognitive bias — where we miscalculate based on flawed assumptions.
Or, to put it another way, just because we have our hands on the steering wheel, we automatically assume that we’re safer and more skilled than we think we are.
This much is clear: Investing in the stock market, like driving, is not fatal in itself. But it’s our own personal blind spots that may create danger.
The numbers game
If you still feel unsure about this, consider what happens to people who embrace the extreme: They try and time the market every single day.
Yes, I’m talking about day-trading. It’s about buying on the rumour, selling on the news. Trying to track the ebb and flow of the market daily.
In 2020, an economic study in Brazil uncovered some stunning statistics. Over a two-year period, here is what they found:
- 97% of day traders lost money
- Only 1.1% earned more than the Brazilian minimum wage
- Only 0.5% earned more than the salary of a bank teller
Source: The Economist
It’s shocking, isn’t it?
And here’s what’s more shocking. These folks are losing money even despite the fact the market has seen more upside than downside. More sunny days than rainy days. More bulls than bears.
Clearly, it’s not the fault of the market that day traders keep failing.
It’s all about bad judgement. Too much greed. Too little common sense.
When you gamble, you risk getting burned big-time.
How should you invest?
Here at Vistafolio, we believe in searching for value and investing for the long-term.
It’s not about being shallow. It’s about being deep. Because time in the market BEATS timing the market.
Of course, past performance is never a guarantee of the future. And as human beings, it’s natural to be fearful. To be pessimistic. But if you can look past all that, you might just gain a worthy reward.
So, when exactly do you buy? How do you buy?
This requires careful consideration.
For our Eligible and Wholesale clients, we run what may be the only active night-trading desk in New Zealand. Every week, we aim to buy into exceptional companies in the USA, the UK, Australia, and more. Our focus is on sectors that offer the perfect balance of growth and income.
Our mission? To capture pockets of outstanding opportunity where we can.
We’re not losing sight of the brighter horizon ahead, and neither should you.
Analyst, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)
John is the Chief Investment Officer at Wealth Morning. His responsibilities include trading, client service, and compliance. He is an experienced investor and portfolio manager, trading both on his own account and assisting with high net-worth clients. In addition to contributing financial and geopolitical articles to this site, John is a bestselling author in his own right. His international thrillers have appeared on the USA Today and Amazon bestseller lists.