The illusory profits of some stock traders

Someone once said, 'My friend trades in shares in the stock market, but he seems to be always financially tight.'

I offered my explanation, as usual with a bit of background as to what I guessed to be his friend's situation.

Normally, someone is attracted to the stock market when there is money to be made. If you are new, then it is because you have heard of people making good money within days what they would make in months. Even old timers will be attracted because the market is active again. If there is a bull market, there will be treats of lunches and dinners given by those fortunate ones with windfalls and restaurants will be having good business. It is much easier to predict a stock (50% chance of getting it right) than to strike 4-digit lottery which is one in 9,999 chance of getting it right.

To me, what we made is only ours temporarily, unless we get out of the market completely. It is similar to going to the casino. For those who realized their gains on some stocks, they are likely to buy some other stocks. Our BSKL over the last few days showed how a state of euphoria can easily evaporate and change into pessimism and in some cases, even panic. What we had made just before CNY, realized or on paper, we are likely to have lost what we have gained, and possibly more, depending on which counters we were into. But because the prices fell across the board, I don't think anyone could have avoided diminution in value of their shares. As a friend put it, 'We become enforced investors for now!' Forget about financial planners' advice to put only 30% of your money into shares. Sooner or later, we are likely to look for money (even borrow) to average down earlier mistakes in purchases. Because almost all of our money is invested in shares, our mood is dictated by the ups and downs in the stock market.

Let's take a simple example to illustrate:
2011
Jan 1. Initial capital: Rm100,000 invested in various stock counters.
Feb 1. Realized gain Rm20,000 re-invested, and together with higher prices, the total investment is now worth Rm150,000.
Mar 1. After the recent fall in prices, the value of the investments is now worth only Rm80,000.

In other words, if he had sold off all his shares at the time when he sold and made only Rm20,000, he could have Rm170,000 in the bank! But because he re-invested, he is now actually poorer by Rm20,000, not including the costs of treating some friends and relatives because of his earlier 'windfall'!
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