Sunday, 19 August 2018

Which of These Investing Scenarios You Don't Wish to Encounter?

Assuming you have conducted due diligence assessing the investment merit of a company. All things seem good - growing revenue, earnings, low debt, strong fundamentals, management hold large stakes etc. So it passes your investment screen.

The Following scenarios might occur.

Share Price Shot up After Your Analysis
Before you have bought it. 

I am sure many have experienced this before. You have done your homework, you were confident in the company's prospect, outlook is good, market is there to seize. 

Then you got pre-occupied with other life matters. You got busy. And maybe two weeks later, share price shot up due to huge order win, or some analyst' initiation report, or a privatisation offer. And the worst thing is these events were all partially expected in your analysis. 

But you have not boarded the boat!

So now you are in a dilemma and not sure whether at the current price 25% higher, you should still enter. 

Sold Too Early
Let's say you have bought the stock. You held on to it and share price increased 40%. You are happy with the profit, and based on your homework you estimated that this is the fair value. So you went ahead to sell the share and pocket the 40% profit happily.

But shortly after you sold the share price continued rising another 50%. So instead of riding the share all the way, you have missed out on an almost-one-bagger stock. 

Sucky feeling. 

Catch a Falling Knife
Or another case is that the share price has been in an uptrend past two years, regularly breaking new 52 week high. So you cant actually bring yourself to buy it due to the perceived expensive share, and fear that its trend might reverse.

So due to whatever reasons, the share price has came down 15% from its recent high. Naturally you would think this is much better entry price relative to earlier period, so you press the buy button and there you have a stake in this company. 

But share price keeps dropping after that. In the short term, this sort of price movement and momentum tends to follow through so there is still much room for further drop. 

Essentially, you have caught a falling knife. 

How Should You Deal with These Mistakes?
Well no investors are perfect. Everyone makes mistakes and these are common frustration that each of us encounter. 

In terms of worst error, I would say catching a falling knife deal the worst damage. Price shot up before you bought can be frustrating, but at least you don't lose anything and things are status quo. Selling too early, is the least of three evil, as you would have pocketed at least a substantial gain. 

If one caught a falling knife, you can decide to cut loss if it has touched your stop loss price. This is the best way to preserve capital and prevent the loss from snowballing into damage beyond repair, which would be disastrous. But if you were very confident about its business based on your in depth research, you can hold and wait for break-even. 

Average down? It's a tricky move and I would not recommend it. 

Price shot up before you bought it? My general advice is do not chase but wait for pull back. You may check the share historical movement using technical analysis for example uptrend channel, strong support level, or previous pull back percentage, and buy at the relevant price level. 

Anyway, do not be too frustrated about it rocketing price before you bought it. There are many companies in the market and stock exchange is always open. Missed this opportunity? Look for the next one then. 

What about selling too early? Firstly, look at the positive side and celebrate your 40% returns, instead of feeling upset about the 'missed' profit. After all, you have already pocketed handsome gains. Leave some money on the table for next investors. Secondly, perhaps not to be too sticky about target price and leave some wriggle room to observe further how high it can go. You can implement a trailing stop loss in this case to capture maximum gain possible and take profit before full trend reversal kicks in.

But the more important matter is to accept these mistakes as part and parcel of your investing journey. Consistently refine your investing strategy, system and rules, and with more experience in the market, you should find yourself encountering these scenarios less and less over time.

So if you would like to learn more about investing rules that reduce the probability of these scenarios happening, it will be covered in my upcoming talk on 25 Aug. I will aksi share with you solid investing knowledge distilled from experience, dotted with personal stories, and practical tips on selecting strong stocks, REITs, bonds etc. No fluff, no sales talk, one content-packed session.

Do sign up for the free seminar here

Sunday, 12 August 2018

Sunday Times Article - 53 Tips for Better Financial Health

I read with interest this article on Sunday Times today on the 53 important points about personal finance.

There are few points which I think are absolutely critical to one's financial well-being, especially for beginner anyone or working adults just started on his investment/financial journey.

11 - The 50/20/30 Budget. A budgeting guideline that suggest spending 50% of income on living expenses and essentials; 20% for financial goals like savings and investments; 30% for discretionary spending.

I feel that 20% for financial goals is actually too low. If one is serious about growing wealth, one should place protection and investment as top priority. Why not inverse the percentage allocation to 50% wealth building, 30% living expenses and essentials, 20% discretionary spending?

Of course this is just a guideline, and no guideline will suit every individual's lifestyle, life circumstances etc. So its really up to individual to make necessary adjustments to his lifestyle and spending patterns to channel a bigger portion of income to wealth building. Just make up one's mind and have that resolve to pull it through. Initially it will be difficult, but it will get easier as time passes.

21-Too much cash in savings? The article mentioned about 6 to 12 mths of emergency cash.

How much is enough? I would think 6 mths is sufficient. Some sources would suggest 3 mths. End of the day, consider how likely are you to be jobless or income-less for 6 months or more? The possibility is rather low. And I would suggest 6 mths of expenses instead of 6 mths of income, which is equivalent to half your annual income that is too high.

In my line of work I have seen some really large savings stashed in Fixed Deposit or high interest rate account earning next to nothing that cant even match inflation. Some are in 6 digits worth, or even sufficient to sustain the person's lifestyle for up to a jaw-dropping 7 years. Perhaps this gives the person a peace of mind, but such mental comfort comes with high opportunity cost of missed investment returns.

So whatever amount above what your reasonable expected maximum time frame of not earning an income, put them to investment to earn better returns.

22-Hospitalisation and Surgical Insurance. This is the basic insurance that is an absolute must regardless of age, gender, family illness history, due to hospitalisation and surgical cost in Spore being sky high.

If affordability is not an issue, go for private hospital coverage simply because of the shorter waiting time and option to go with one's preferred surgeon/doctor that has been treating you and have a better grasp of you illness history, thus higher chance of more effective treatment.

Do consider those plans with Letter of Guarantee so one can seek treatment immediately with a peace of mind and one less worry about forking out the treatment costs in cash later, before seeking reimbursement.

While coverage from first dollar (ie include deductible and co-insurance) is often cited as the reason for ever-increasing premium, it is deemed un-necessary and government has already plugged the gap by removing riders that cover from first dollar expense.

23-Commitment. While the article states that buying life insurance is a long-term commitment and pre-mature terminations will likely result in loss, the same applies to investing too. Investment, very often, needs long term commitment to see returns. Commitment in investing is not bounded by contract, but often by one's mental fortitude and determination to stay the course. Hence it is much trickier as it large depends on individual.

36-Rule of 72. Divide 72 by the expected return would give you the number of years required to double your money. Investors can use this as a rough gauge to estimate how long it takes to see his investment double.

Do use as conservative a return rate as possible when using this formula. Reason is that earning good annual returns over extended period is extremely difficult. As it stands, beating STI ETF return of ~6%-7% per annum is already hard enough. And investors often over-estimate their ability to earn a profit. Hence to reduce negative surprise, do use a conservative figure.

Also, the key word here is 'expected return'. It doesn't mean that returns every year will always be at, for example 5%. There will be up and down years. So bear in mind the expected returns take time to attain, and its an average annual rate over more than few years probably.

41-Don't Try to Time The Market. I wrote about this in previous article. My definition of timing the market is 'buying/selling based on gut feel about near future price movement derived from quick glance at price chart and forming an opinion about near term price pattern, with the goal of buying at lowest and selling at highest.'

Develop your investment rules and system. Should it work for you, stick with it.

Saturday, 4 August 2018

You Could be Unknowingly Timing The Market with These Actions

Most, if not all, of the investors I encountered agree that it is extremely difficult to time the market successfully, meaning trying to buy at absolute bottom and sell at absolute high to earn maximum profits.

But I see many investors deciding their buying and selling that are supposedly based on sound rules and experience, but are actually timing the market unknowingly.

I believe the underlying reason for such behaviour is due to emotional biases in investing. One is the anchoring bias, and the other is the tendency to project future price movement based on recent patterns. For the latter I can't find an official name for it. I suspect it could be Status Quo bias.

Anchoring and 'Status Quo' Bias
Investopedia define Anchoring Bias as 'the use of irrelevant information, such as the purchase price of a security, as a reference for evaluating or estimating an unknown value of a financial instrument.'

'Status Quo' bias, applied to investing, should be the action expecting a share price to further move along the same trajectory in the period right before the mental decision is set.

How do they play out in real life?
Let's take Singapore's arguably favourite share - DBS as an example.

In the case of anchoring bias, an investor could have bought DBS at below $20 early 2017, held  and sold it at $25 early 2018. In his mind $25 is the anchor price above which he would never consider to buy at all. In his mind he is probably thinking that i sold it at $25, it would be foolish to buy now at $27 as it is so much more expensive now. This decision to withhold from buying is purely derived from mentally dropping a pin at $25 price, regardless of improvement in DBS business fundamentals and increased earnings.

For 'Status Quo' bias, let's use another Sg favourite share - Singtel. Its share price has been dropping from around $3.80 to low $3. It recently found a low at $3 and rebounded a little. An investor who had long been attracted by the stability of this company and its enticing yield of > 5% wanted to buy. But he mentally projected that Singtel would continue falling to sub $3 soon simply based on the relentless fall in share price past 9 months.

Both cases illustrate the way our cognitive brain functions. Given human DNA to look for pattern and reasons in short term share price movement that can be random, these investors base their investment decisions upon mental shortcuts played up by the brain that are often fickle. Just where/how do people conjure up reasons to substantiate above actions are intriguing, but they without fail still legitimise these buying behaviours.

Sounds familiar? These may be some subconscious market timing that many many investors engage it unknowingly.

These Are Not Market Timing
If one buy/sell using Technical Analysis, premised upon a set of well-defined rules developed from deep understanding of technical indicators and own market experience, and these rules don't change on the whims, he is not market timing.

If one buy/sell based on careful considerations of company's past results, qualitative factors such as its competitive edge over competitors, and in turn forming an opinion about its prospect and an expected pricing outcome in a rough timeline, he is not market timing.

If one aims to profit from trend reversal and set up his trade plans based on thorough study of volume, price charts, coupled with independent opinions on funds flow and corporate actions, with corresponding loss-mitigating trade actions in case his opinions are wrong, he is not market timing.

But if he/she is buying/selling based on gut feel and quick 5 seconds glance at price chart, motivated by the underlying desire to buy at lowest sell at highest, he/she is market timing, no matter how 'legitimate' his reasons are.

When such actions are undertaken regularly on a long term basis, his/her investment actions plans are not based on rules, system and logic, but rather, hunch and luck. Chances are long term returns would not be satisfactory.

So do spend some time to think about if you are actually investing or timing the market.

That aside, would you like to gain insight into current Spore stock market status and its outlook for the rest of year? And take advantage of the recent property cooling measures to refine your portfolio for better profits? Attend my free seminar to learn more.

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Which of These Investing Scenarios You Don't Wish to Encounter?

Assuming you have conducted due diligence assessing the investment merit of a company. All things seem good - growing revenue, earnings,...