Lessons from Learning to Ride a Bike: Navigating Investment Risks with Confidence and Caution

Feel free to reach out to PSG Wealth adviser Abrie Grobler directly.

It is interesting how in investing, we experience something similar. We hear from our friends or family members about an investment opportunity. We feel sceptical at first, telling them that we are unsure, and as time goes on and we hear about the returns they made, we gain more confidence. Eventually, we are now ‘two-wheeling’ it by investing in something of which we are not entirely sure of. When we then get hurt from the experience, our first reaction is usually avoidance. We have all come across people who said something along the lines of “Investing is not for me; I’ll rather keep my money in a bank account because at least I won’t lose anything.” The sad reality of this mentality is that although your rand amount does not go down, your purchasing power does. The R100 you invested in your savings account earning 4% interest does not go below R100, but with average consumer prices increasing by let’s say 5%, you actually lose 1% in purchasing power.

When it comes to investing, especially when we lose money, we go through a process of determining the lesson we should learn. However, we seldom question whether or not our lesson learned was actually the right one. Morgan Housel writes about the lessons that investors usually learn, and uses the following quote from Jason Zweig: “[After the dot-com crash], the lesson people learned from that was not, ‘I should never speculate on overvalued financial assets.’ The lesson they learned was, ‘I should never speculate on internet stocks.’ And so, the same people who lost 90% or more of their money day trading internet stocks, ended up flipping homes in the mid-2000s and getting wiped out doing that. It is dangerous to learn narrow lessons.” Learning narrow lessons compounds our mistakes. But in order to truly grow as investors, we need to have the ability to think of our situation at the time we made the investment and ask, “With the information I had at my disposal at the time, what would I have done differently? When I decided to invest in an overvalued stock where a lot of speculation was happening, what drove the decision? Was it driven by facts, speculative braai conversations, or just plain emotion?”

Morgan Housel writes the following in another one of his blog posts: “Your willingness to believe something is influenced by how much you want and need it to be true. If you tell me, you have found an effortless way to double my money in a week, I am not going to believe you by default. But if I desperately owed someone money next month that I do not have, I would listen. And if my children were starving and my only hope for their survival was doubling my money next week, I would hang on your every word.” We seldomly make good investing decisions when our emotions are involved, and it tends to cloud our judgment. The market does not know your financial situation or your current emotional state and will unfortunately not react to it – which makes it all the more important to make investing decisions with an unclouded mind. In 2024, we still have examples of pyramid schemes; we still have people misleading investors on potential returns; we still have false promises. Why? Because there will always be people who desperately need them to be true. Before you think of removing your hands from the handlebars and investing in these types of schemes, think about how realistic these proposed returns are. Which asset classes are they investing in that can generate these types of returns? Are they a registered financial services provider (FSP)?

When you truly feel the urge to speculate on an asset, do not remove both hands from the handlebars; rather keep both firmly gripped. Do not withdraw all your pension savings; rather use an amount that won’t place your financial future at risk. Investing is unfortunately not as easy as riding a bike. There are so many variables and things to consider that we sometimes feel overwhelmed. Learning narrow lessons leads to mistakes that can compound over time. Avoiding investing altogether can be detrimental. So next time when we fall and we have scuffs on our knees, we need to ask ourselves, “Was it emotion that drove my decision? Was I properly informed? Did I understand where the returns are coming from?” And after brushing off the dirt and cleaning the scuffs, get back onto the saddle and keep both hands firmly gripped on the handlebars.