Wednesday, January 6, 2010

How much is enough to start investing?

Warren Buffett started to invest when he has accumulated US$115, at the age of 11. He bought 3 shares of Cities Service Preferred.

Well, when should one start investing and how much must one have to start investing?
To me, you just need S$500 and you can start investing. That's the problem with Singapore Stock Exchange. You can only buy in multiples of 1000 shares in more than 90% of the companys listed. The second reason is the high commission rate that we are paying the brokers in Singapore. So, how can we start like buffett who only used US$115 to buy 3 shares? It's impossible unless you are buying US stocks, to own part of the company.

Scenario 1:
Jason has S$500 and he does not know what to buy. If he were to buy a Singapore company, he can only look for those whose price is below S$0.45, as he needs to pay for the high commission that the broker is charging, minimum S$25. This can only happen when there is a crisis like the one in the beginning of 2009. At that time, Metro Holdings was only at S$0.34. Well, if he were to buy 1000 Metro shares then, he would have spent $370, leaving $130, sitting there doing nothing. Today, Metro has rose to S$0.80. If he were to sell now, he will receive S$770, earning a profit of $400. In total, he would have S$900, making 80% returns on $500 invested.

Scenario 2:
Jason has S$500 and he decided to buy shares of a US company, Garnett. It was only US$2 at the same time when Metro was S$0.34. S$500 is only US$$357. Hence, he can only buy US$327 worth of stock. Well, at least he can use all US$326 to buy 163 Gannett share. Today , the share price shoots up to US$16.30. If he were to sell all the 163 shares he has, he would get US$2626, which can be converted to S$$3650. In total, he would have make a return of 630% returns on S$500 invested.

Scenario 3:
Jason has S$500 and he has found that Nutrisystem does not have any debt. He has done homework on the company and feels that he can buy the company at a discount. The price was US$14 at the same time as the above 2 scenarios. Hence, he bought 23 shares of Nutrisystem. Just before the new year, Nutrisystem was above US$32. Jason felt that at US$32, it's P/E ratio was way too high compared to earnings of only US$1. He sold all 23 share and received, US$736, converted to S$$1023. With this amount, he actually makes a return of 105%.

Compare the 3 scenarios and decide for yourself, the path of your investment.

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