Tag Archives: investing

The shock that finally comes

Investors had a rude shock on Tuesday morning when they found out that Dow Jones fell a whopping 1075.21 points the night before.  That followed by an after-shock tremor of another 1032.89 on Thursday, 8 Feb 2018. In total, the Dow Jones fell 1330.06 points for the week. This was the second week of fall since the peak at close of 26616.71 made on the 26 January 2018. To date, Dow Jones fell about 10% from its peak. As the saying goes when the Dow Jones sneezes, we catch a chill. For the week that passed, the STI fell about 6.5% to end at 3377.24. Although the STI volatility is much smaller, it is good enough to drive people crazy rushing in and out of the exit door. By now, we know that the recent peak of 3,600 has already passed us and we may not reach it back again so soon. As shown in reality, we do not know when the peak really is until it passed us in real time.

Out of my normal self, I was forced to react making buy and sell decisions in double quick-time to avoid being swept down by the avalanche and failing to pick up good stocks at discounts. This was happening as I was in the midst of scaling down some property stocks holdings after all the euphoria about en-bloc sales in the past few months. This will help get rid of some lousy stocks and enhance my liquidity in preparation for the next interest rate cycle. During times of distress, all stocks, whether good or bad, are all in a mixed bag, moving up and down with the market swings. Actually, such times are the real tests that separate excellent fund managers from the good ones, and the good ones from the lousy ones. As we all know, in an upmarket, everyone is an expert, but we only know who is really swimming naked when the tide recedes.

Extreme volatilities are also trying times when no classroom analyses are able to capture. It is just the human nature of greed and fear that swing stock prices up and down in real time. Even though I am a great believer of stocks’ underlying fundamentals, there are really more to just doing analyses to find out stock PE, BV or intrinsic value. To me, knowing some classroom fundamental analyses probably help us in the first 50% of winning the battle, we really need to understand how the market works as well as some understanding human & market behaviour. (That was why I decided to launch two courses instead of only one in the investing.com platform – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. The former being more a classroom analyses and the latter one being practical aspects of investing.   To me, these two parts have to come hand-in-hand to be more complete as a successful investor.) But again that does not mean that fundamentals or any analyses are of no value and can be thrown out of the window. On the contrary, I think understanding FA is extremely important. It helps capture the first 50% of the battle. It is usually during these trying times that we get to experience their importance. Stocks with good fundamentals usually fall together with the rest of the stocks during a market collapse but will get to be picked up first when we sense that the market is returning to calmness. And once the market is in the state of steadiness, these stocks leap further up ahead of the others. To me, value investing is still the most important subject to take away the stress off the crazy market place.

Happy investing!

 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

2x bagger versus averaging up

We all know that the stock market has been making substantial gains lately, and it is not difficult to find some stocks, particularly the blue chips, that we have bought some time ago doubled itself in the share price. In other words, it is a 2x bagger. Well, impressive, isn’t it? We made 100% in capital gains. And it has not included dividends that have been distributed along the way.

Let us take a hypothetical case. Say we bought 1000 shares of a stock costing $10 per share. For the purpose of simplicity, we assume that the stock price increase 10% a year arithmetically. In other words, we bought the stock at $10 per share at the 1th year, but we stopped there and let the price run. By 2nd year, the stock price reached $11, then $12 at the 3rd year and so on. This carries on till the 11th year when the stock reached $20, which would have been a 2x bagger. In all the passing years, we received dividends equivalent to say about 3% of the stock value per year. Given that the share price increases arithmetically, the quantum of the dividend should also increase correspondingly. (In real situations, we do not expect that to happen in lock-step increment, but generally when the stock price increases due to the better fundamental of the company, the management generally moves up the dividend as well to align the dividend yield with the increasing stock price.)

So, based on the calculation, by the 11th year, we would have made a capital gain of 100%. If we add in the dividend, the gain would have been a whopping 149.5%, of course without taking into the time value of money.  Very good situation, indeed.

Now we take the situation a little further. Instead of purchasing 1000 shares of the stock and stop there, the investor continued to buy the stock consistently. There are, of course, infinite possibilities of buying and selling the stock and we cannot possibly include all the possible scenarios in this discussion. But given that the stock price continues to move up due to its underlying fundamentals, a likely situation would be that he has to buy the stock at higher and higher prices in the whole time-frame of 11 years.  Let us just take a situation that he bought the stock according to the increasing stock price of 10% increment every year in line with the average price of 10% increment in the stock price per year. At the end of 11 years, his capital gain would be $55,000 out of a total outlay of $165,000 or 33.3%. Sure, it does not sound as impressive in percentage term as the 1st case when he made 100% gain in capital gain. But in absolute sense, his capital gain of $55,000 would have out-beaten the earlier situation with capital gain of $10,000. By including his dividend of $33,000, his total gain would have been $88,000 compared to only a mere $10,000 in the 1st case.

Why am I making a case study of comparing the two scenarios? Very often, we think of making 2x bagger and 3x baggers that we forgot that making consistent investments may help us more in absolute sense in the long run than just in percentage terms. Especially when we have consistent income coming in, it makes good investment sense to invest consistently, and even to the extent of disregarding the stock price, to create the investing discipline. Timing the market to try our luck and make sudden gains make us very happy, but building our wealth through consistent investing is the key to financial success. What is the purpose of buying a stock and make a 3x bagger but the ‘new’ monies that comes in go to the bank to yield paltry interest.

But that said, it is important to note that overall outlay in the 2nd case ($165,000) is much higher than the 1st ($10,000), but it is still better than leaving the balance of $155,000 doing nothing. Worst of all, to put it in ‘investments’ that do not yield returns or even negative returns. It is also important that it requires a lot of discipline to consistently buy stocks at higher and higher prices. Psychologically, it is not easy to do so. Our mind is conditioned to buy things at discounts than to buy them at a premium, let alone buying them at increasing price each time. A lot of people lost money in investments is more because they bought wrong stocks at ‘discounted prices’ than people who bought the right stocks at ‘premium prices’. Investing requires several traits that work hand-in-hand – (1) do our homework to buy the right stocks, (2) discipline to hold the stock and even increasing the quantity, and (3) the mental fortitude to ride through the adversities.

Happy investing!

Note:

The writer is not a fund manager to invite investors to buy into his fund. He is taking a neutral stand to look at how we should manage our investments.

 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

3 simple steps to start stock investing

Ethan Ho is a guest writer for our blog. He is part of the investing & financial literacy team that helps build the investingnote community. We thank you for his invaluable contribution. 

In a previous article titled ‘5 reasons why stock investing is so difficult to start’, I’ve mentioned the reasons that often become excuses, serving as inhibitions to the journey of stock investing. Many people have asked me how to address these reasons and the answer is simple: confidence.

However, not many people notice that it is their lack of confidence that affects their first step to investing, as opposed to risk appetite.

These are the 3 simple steps to boost your confidence, which will help you make your first investment.

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  1. Acquire financial literacy

Financial knowledge and literacy is essential for anyone to start investing. The fundamentals of stock investing are best found in their original state: books. Learn financial terms, explanations, logic and theories traditionally at your own pace. Grab a coffee and start hitting the books like you’re a student again.

The only drawback? There are many financial books out there that are similar but different. In that case, maybe just textbooks will suffice?

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Alternatively, you can also go for courses conducted by stock educators. Most courses require a fee to attend, but some are free. The SIAS and SGX Academy both provide some basic investing courses for free. You can check them out here www.sias.org.sg or www.sgxacademy.com. Otherwise, there are many organizations and stock educators out in the market that charge a substantial fee for advanced courses.

Also, start reading business and financial news that often highlight the more important things. For example, what affects the distribution per unit (DPU) for Real Estate Investment Trusts (REITs)? How do companies restructure in recession to sustain equity value? How does economic data like purchasing managers’ index (PMI) and non-farm payroll affect markets and stocks? What stocks are most affected by currency and interest rates?

News will highlight the important things that every investor should know. While saving you a fair amount of time, it also lets you familiarize with the myriad of financial terms and jargons, and keeps you updated on market happenings.

       2. Practise through simulation

Regardless of whether you choose to get the basics via the traditional way of reading books or by attending some courses, the overall learning process is incomplete without practice. What better way to practice other than simulation?

Simulation boosts your confidence by allowing you to mimic the actions you would take in reality, without having to bear the costs.

Practising through simulation is also particularly useful to gauge your own investment decisions. If you’ve predicted the stock price to either go up or down, simulate the trade. This way, you can know how accurate your analysis is.

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There are many websites that allow you to simulate trades, like Marketwatch.com and Investopedia.com. Start trading with virtual money based on real stocks. Other than simulation, you can also make projections on a stock, on platforms like InvestingNote. Rather than just fluctuations ups or down, you can estimate a stock’s final price based on your own time frame and target. A notification will be made if it’s a hit or a miss within stipulated time, for you to gage your own judgment. Simulating and estimating trades based on stocks in real-time will definitely speed up the learning process and build confidence.

  1. Learn from experts

The last step for your journey in learning how to invest is to learn from professionals or experienced investors themselves. Start attending free talks, seminars and fairs. Invest Carnival, Invest Fairs and private seminars are often held by ShareInvestor, SGX and brokerage firms like PhillipCapital. Attending such talks and seminars given by experts will give you a better idea of the significant things that are relevant to beginners.

If you’re the keen learner who’s always asking questions, try leveraging on the experts found on social networks like Facebook discussion groups or the social trading network InvestingNote. Being within a social network not only allows you to see what experts are thinking when they post, but also includes you as a part of the stock investing community. Never be afraid to ask questions and interact with the experts and the experienced. Learning is at its best when transformed into a two-way interaction. Information becomes communication and it empowers personal learning. Also, keeping up to date with the latest financial news and trending insights will give you that edge which traditional textbooks won’t.

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It becomes a virtual classroom. It’s almost like you’re having a tutor at your fingertips, except that there isn’t only one but many. By tapping on social networks, it will expand your personal network and interaction with experts and the experienced who are otherwise remotely located.

If you’re lucky, you just might find an expert whose investment style suits you the best and doubles as your mentor. Mentorship is equally as important when it comes to stock investing.

After you’ve taken these 3 important steps, you will gain more confidence to start investing, and build good investing acumen.

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At which step are you currently at now?

 

Written by Ethan Ho

From InvestingNote

The social network exclusively for stock investing, InvestingNote is a free, social network platform designed specifically for crowdsource investment ideas, news and interaction for the stock investing community. Besides having access to stock data, users can upload research reports, utilize technical charts and make stock price targets that will be visible to the entire community. Users can also gain reputation points when they have followers, likes and posts. 

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