Sunday, 30 August 2015

Top 5 points that show that you anyhow invest

Most retail investors have a problem of anyhow investing, I admit, long time ago I fell into the same trap, buying companies on the whim like

'I think GLP is a good stock, it does logistics and stuff.'

'Uhh keppel land sounds good because it trades at 1x book and its expanding to China'

'HPHT gives 7% yield? Omgomgomg'

'Hyflux is good because Singapore needs water'

Until I realized (extremely slowly), like wth am I doing, why am i dumping cash into stocks that 'feel good' because i come up like 3 line arguements?

But what does anyhow investing actually mean? Here's a few good warning indicators

1. You spend more time thinking of whether to buy shirts/dinner than your stock
Its amazing, I can find people willing to dump money into a stock in a blink of an eye on flimsy reasons but take forever to decide where to eat, or come up with more intensive/quality arguments on what shirt to buy.

2. You buy a stock without knowing how the company makes money
Can anyone really explain what is noble doing? Here is an actual conversation below

Friend: I think I should buy noble
Me: Why?
Friend: Because it looks cheap
Me: Do you even know what it does?
Friend: Yeah commodities and stuff, and its cheap!!!

Btw, noble does commodity trading in 'hard commodities' and thats the best I can go, totally no idea how it makes money.

3. You buy a stock because it has been done 5 days in a row
Its the same as the gambler putting his money on black because the ball was on red 5 times previously.

4. You can't quantify the reasons that you buy a stock
#1 mistake, throwing random arguments like I should buy smrt because everyone takes the mrt, or I should buy FJ Benjamin because they have strong brands like banana republic 

Don't get me wrong, those are good reasons to look at a stock (ok actually banana republic is a dying brand but whatever).

But do you know what the points you mean for earnings? If more and more people take the mrt, a new banana republic store is opening , do you think it will help the company grow 10%? 15%? 100000%?

5. You base your selling decisions on whatever you are feeling about the market right now



Please don't do this

What you should have in mind before you buy a stock is a target selling price and a whole list of reasons why you should sell it.

A good way to stop yourself from anyhow investing is to take a deep breath, and write down the reasons (that should fill up a page!) why you want to dump $5,000 moolah into your chosen one.

They should at least include these few points

1. How does the company make money?
Like seriously, you'd be amazed at the number of people just dump things into a stock just because its 'cheap'. Do you know what are the main drivers of revenue and the split between each segment?

2. Whats the growth plans for this company?
This should make up the main part of your decision, are they opening new stores? Gaining market share? How is it going to impact the bottom line? Do you think earnings are going to increase by 10%, 20% next year? If so why?

3. Whats your buying target price?
Even shoppers know what price they feel comfortable with buying their clothes. For stocks, you have to have a set target price in your mind and the reasons for buying at this price

Example: 'My target price for comfortdelgro is $2.70 which is 19x P/E which is x% cheaper/more expensive than the historical p/e. I believe this is a good entry price for a stock that gives x% growth

4. Whats your selling price and why?
Not sure why most people don't have a selling price. But when you buy, you should always have a scenario to sell, this stops you from a) checking the market daily to see when to sell b) being a ganjiong spider and selling when the market tanks

Example: 'My target selling price for comfortdelgro is $4 which is 25x P/E which is x% more expensive than the historical p/e. Or.... I should sell comfortdelgro because the fundamentals of the company changed so much that my reason for buying it is not invalid.

And that covers the main points of investing, without even touching upon the financials of the company. If you don't even know what you are buying, why you are buying, why you are selling, then its time to admit that you aren't really investing.


2 comments:

  1. If I may offer, if the investor perspective is one of buy-and-hold, then an additional question is "Why would this company still be around 20-40 years from now - i.e. what's in its business to allow it to remain long term viable?"

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  2. "Now the stock looks cheap." When I find myself saying that then the next question to ask is - "Why is it suddenly so cheap?" A stock price would not plummet for no rhyme or reason.
    Another mistake is people tend to invest like driving by looking at the rear-view mirror. The challenge often is, how to anticipate the pot hole down the road that you are driving and manoeuvre the car in time.

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