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The Lure of the Golden Ticket

08 March 2019

In Roald Dahl’s popular children’s book, Charlie and the Chocolate Factory, young Charlie Bucket dreams about finding one of the five special Golden Tickets hidden amongst millions of chocolate bars. Each child who finds a Golden Ticket gets to tour the legendary and highly secretive Willy Wonka’s Chocolate Factory, becoming an instant celebrity and media sensation.

This story is fiction, but its characters’ feverish attempts to discover those elusive tickets – including by buying thousands of chocolate bars in bulk – echoes the way many people chase after those one-in-several-million opportunities that would bring them instant fame and fortune.

The same attitude exists with investing. Investing is often seen like a quest, with investors scrambling over each other to find the secret stock or investment product that would be their golden ticket to instant riches. Financial media is only too happy to feed this frenzy, churning out articles on what to buy. “Have I got some stock tips for you!” chimes a well-known financial TV personality, laying out all the under-the-radar stocks supposedly owned by famous hedge funds. Bloomberg “experts” rush to suggest where you could invest $1 million right now – in the winners from the China-US trade war, the Russian and Vietnam stock market, New Zealand wines, and food production.

Following these tips would result in a dangerously concentrated portfolio. There is little, if any, consideration of the losses one could suffer. Yet many investors still lap up such advice, because it plays to their poor understanding of how markets work. It also reinforces the fantasy that all they have to do to get rich is discover that treasure map to the pot of gold.

But this sort of investing is not much different from gambling. It is also impossible to assign any kind of sustainable long-term return to such an ad hoc strategy, such that you cannot count on it to meet your long-term financial goals. Anything could happen, and that sort of uncertainty is no foundation to build any kind of financial security.

What’s far more common is that when investors are constantly looking for the “golden ticket”, they end up taking unnecessary risks by committing their entire savings to a handful of stocks, investment products or sectors.

The recent Hyflux bankruptcy highlights what can happen when investors do that, even with a seemingly-safe instrument like bonds. The news reported that investors would likely get back 10 to 25 cents for every dollar invested in Hyflux – which led to many of them signing a petition to seek more money from the company. Many of them had sunk significant portions of their savings into Hyflux.

What happened was truly unfortunate. But we should not miss the important lesson here: which is that we should not put all or even most of our eggs into one basket. It is likely that most of those investors had invested in Hyflux because it was a well-known, up-and-coming local company that had been promoted as the poster-child of Singapore’s desire to be water independent. Of course, many would have been attracted by the 6% coupon on their preference shares, which is significantly higher than that of other blue-chip companies. While that should have alerted them to the higher risk involved, most probably did not think it likely that anything would go wrong… until it did.

This is precisely why diversification is so important for reducing risk and increasing flexibility. The concept of diversification was introduced in 1952 by Nobel Laureate Harry Markowitz and James Tobin, and it remains relevant today.

Trying to find hidden bargains and undiscovered unicorn stocks can be fun, but it is not an investment strategy. If you really want the excitement and potential satisfaction of doing so, make sure it forms only a tiny portion (less than 10%) of your investible assets. Don’t fool around with the core of your life savings. Sound investing starts with identifying risks worth taking (especially vis-a-vis your goals) and minimising the risks that don’t come with an expected reward, such as putting it all on a friend’s tip or after watching the news.

Sure, you could find the golden ticket. After all, somebody wins the Powerball, Toto, or lottery every other week. But what are the odds of that happening to you? Instead, the odds are far higher that you would just fritter away precious time and money.

Don’t confuse gambling with investing. Always remember – the golden ticket is only fiction.

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GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

In this blog, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

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