Investing in Stock

Investing in stock: Overview

Four areas in stock investing:

Paradigms
Objectives
Strategies
Execution

Paradigms:

"We interpret everything we experience through these mental maps. We seldom question their accuracy; we're usually even unaware that we have them. We simply assume that the way we see things is the way they really are or the way they should be. And our attitudes and behaviours grow out of those assumptions. The way we see things is the source of the way we think and the way we act." --Stephen R. Covey.

"...All of my clients had bought the same stock. Some had made money, and some had lost it...Over the years I started to notice that the people who lost money in either of these ways were always the same ones. They'd sell too soon or too late, but they always lost money..." --Suze Orman. Her clients acted consistently based on their own paradigms. Those with wining paradigms acted consistently to win. Those with losing paradigms always acted consistently to lose.

These are the right paradigms on the natural law of market, risks and knowledge for effective stock investing.

The natural law of market
Selective stock prices and market movement
Understanding risks
Elimination of risks
Consistent and accurate market timing

Seeing stock investing through these perceptions turns successful stock investing into exact science. In short, we should seek knowledge and information before we invest and we should not base on market timing that is based on chance or probability.

Objectives:

Stock investing objectives are set to meet financial planning objectives, i.e. to acquire and to grow income generating assets(i). From stock investing objectives we establish our broad criteria in stocks selection.

Strategies:

A successful stock investing involves good stocks selection AND good cash management.

stock selection checklists
stock selection criteria of various gurus, i.e. Warren Buffett, Philip A Fisher, Benjamin Graham, Fool.com, Peter Lynch, etc.
between price growth and dividends growth

when to buy
when to sell
a flow of cash in bad time

Executions:

basic online trading process
finding stockbrokers, i.e. a list of stockbrokers
choose and get a bank account
share margin financing

basic trading techniques: order, settlement and contra
IPO
rules and regulations
counting gain & loss
tax issues
credit control

Should He Takes Risk?

I have my thoughts on PFBlog writer's question in "The $1M Goal Revisited: Should I Take Risk? (to achieve $1M by 36 year old)":

The riskiest part of his investment thinking is the time line that he set for himself..."by 36 year old". It is risky because he is trying to control the timing of market (that bring in the return) which is uncontrollable.

It is a 3-4 years target. He can
a. play safe, save and reach his goal in a year or two, OR
b. he can take risk for a higher return: invest in market when it is low, but subject to the timing of economy recovery

For the purpose of investing for profit, we seek safest ways for highest profit. We can wait a year or two or three or five to let the outcome of our plans materialized. The moment we set a time to achieve an investment return goal, we push ourselves to take too much risks or too little risks in order to get the targeted profit within a set time (which is of little of our control), sacrificing the best option for best outcome. We lose out because we focus on irrelevant variable, a very specific short set-time.

In stock investing, we decide our actions and outcomes, but we have little say in the timing.
It is the market timing; it is your selection of good stocks which response to the market timing; it is your selection of currencies which response to market conditions; that’s determine when you get the outcomes of your investment decisions.

If he targets RM1 million through WORK income by 36 years old, it is a reasonable target because it depends on how smart and how hard he work. It is within his control.
But targeting RM1 million through investing by 36 is irrelevant, for you can’t control the timing of your success. It distract you from the real decision you need to make. You should only plan for best result, and let time works things out for you.

More on this at Stock investing and trade winds.

Removing the “by 36” issue, then the “whether to take risk” question is irrelevant.
The question that matter is “how not to take risk (or take only calculated risk) for best investing results?” ;-)

Robbed by your bank?

This is actually the advertisement of e*Trade. It is just plain funny. Enjoy.

Investing abroad, after 18 months

After one and a half years since my first analysis on investing abroad, RM's exchange rate strengthen.

I was right about the forex movement, and in fact it overshot my expectation of RM3.50 - RM3.60. RM was strengthen to RM3.43 yesterday. It was a right call for NOT to invest abroad then.

What about now?

The trend is that US has no way to reduce its current account deficit. Consumption is a habit that hard to get rid of. It's been many years it depended on its capital account surplus to setoff its current account deficit. As long as people still want US assets, i.e. bonds, stocks, properties, etc. there will be inflow of money. US can still print money and buy cheap things from China and any other places. Balance of payment can still be positive despite unbrindle spending habit of this nation...

Things may be changing now. Euro becomes more important and well accepted by other countries as de facto currency to replace US Dollar. EU economy is at the uptrend. How huge the impact of US mortgage problem will drag down the entire US economy is still in question. Once investors leave US, coupled with current account deficit, US dollar will fall further. In fact, the trend of US dollar seems obvious, it is down.

RM is expected to strengthen further against US dollar.

General consensus is that the world is facing a global assets bubble. From Shanghai, Hangseng, to Footsie 100 and Dow, stock PEs are high. In Malaysia, despite the CNY bull run, you may still able to find some good stock value at reasonable P/E.

My call? Keep your investment in Malaysia. Don't invest abroad for the next 6 months...and certainly not to put your money in the funds that invest abroad.

Online stock trading

There is a simple write up about online stock trading here. Check out the seven points.

There is a better write up on the process of online stock trading in Malaysia by HLGeBiz. Though it is written as FAQ for its own online stock trading portal, it is the most complete and concise information we came across on the topic of online trading in Malaysia.

More losers in 2005

TheEdge Financial Daily reported on 3 Jan 2005 that more than half of 46 new Masdaq listings in 2005 ended the year below the offer prices. The top losers were ES Ceramics, ConnectCounty and Ygl with fell prices ranged between 58% and 66% of their IPO prices.

The top gainers are mTouche, Green Packet and TMC Life Sciences. Backed by solid business fundamental their year end prices were up 460%, 270% and 136% respectively.

Beside an uninspiring market sentiment during the year, the main reason for such bad performance was probably due to Masdaq loose listing requirements.

As investors, we can either blame Masdaq or we can take charge of our investment decision...simply spend time to do our research before we invest. We should not put our trust in the hand of regulators. Just don't depend on them.

Read more here, at theEdge Financial Daily.

Year 2005 Stock Market Losers

This is the first of its kind: counting the stock market losers and the people behind the stocks. Peter from Competitive Malaysia listed 5 famous stock market losers backed by (linking to) original write up from various online news agents.

The Law of the Stock Market

1. Market movements
Market moves in a way that is identical to sea waves. There are always turns after consecutive movements toward one direction. There are small waves within bigger waves. Occasionally there will be extended long waves or tripped short waves.

2. Business cycles
The force against business cycle is structural changes. Institutional intervention may influence the timing of the business cycle but only significant structural changes can change the business cycle.

3. News & market trends
Good news has more positive impacts in cyclical up trend than in cyclical downtrend. Bad news has more negative impacts in cyclical down trend than in cyclical uptrend.

4. Irrationality, the investors' collective behaviour
Both sides, up & down, always reach a peak point of impossibility, e.g. "it cannot be that high" but it does, "it cannot be that low" but it does, "the market goes mad", etc. Remember, due to greed and fear factors, market always overshoots in a business cycle induced run or slump.

Stock investing and trade winds

In stock market, investors ride on waves.

Sixteen century’s sailors sailed on trade winds and currents. When the monsoon left, the sailors would stop at the harbour waiting for the trade wind of next season to travel. They did not fight inch by inch forward for it would be a futile effort. In quiet time, the sailors set their sails ready. When the next trade wind came, it brought them to where gold and spices were rich.

The paradigm is applicable in stock market. Stock market moves in waves form. When the market is down and sentiment is weak, we set our sails ready. Finding the right stock at a good price, we wait leisurely for the next wave. We don't fight cent by cent for trading "profit" that would probably lead to losses.

Stock picking and staying power are still two of the keys…

Prices of most good stocks take tides to move up. However, their prices will stay at the new higher ranges when the tides reverse. So, even if trade wind is fickle, good stocks will find harbour to stay when the wind reverse its direction. Off course, there are always exceptions in every general rule. Selecting the right stock with a good business can be like riding on a speed boat against trade wind toward your destination. Even when the general stock market waves move against you, you ride to fortune.

In the experience of Peter Lynch or Warren Buffett, it seems good stocks in US can flow against general market movement. But in Malaysia, good stocks move with the improvement of market sentiment. Such stocks would usually remain at the new higher price range even when the market reversed.

Therefore, Philip A. Fisher was right, it is about finding a fundamental strong stock with good business. Though, be patient, reward will only come when the market sentiment improved. His quote on Shakespeare is simply contagious, "There is a tide in the affairs of men which, taken at the flood, leads on to fortune."

Investing in Stock