Monday, September 12, 2011

INV101 Buy business not stocks

Mr Market is behaving like post-Lehman crisis again. He has taken so many people for roller coaster rides for the past 2 months. Until now, there is no telling sign when this is going to stop. People who have been buying stocks, hoping to make quick bucks after selling them in the short term, were not able to make much profit. The reason behind it? The hefty commission that he/she had to pay. For simplicity sake, I will just put the total commission, for both buying and selling, to be a 1% of the purchase and sale price.

Retail investors a.k.a. the small investors like us lose out because we invest in small amounts. Let me illustrate my point with an example. 

Contra with Genting Singapore (GentingSP). (Price ranges $1.46 - $1.93 from 20 July 2011 till today)
In July 2011, a novice investor just learned how to contra in stock market. On 20 July, he decided to contra Genting Singapore, one of the top 10 active stocks in Singapore every day. He picked up 10000 shares of GentingSP at $1.78 and sold three working days later at $1.81. In order not to fork out $18,000 for the 10000 shares, he must sell within 3 days. On paper, he has made $300 at 3 cents apiece. His commission? About $180. He has made a net profit of $120. So this profit has made him more confident. On 26 July he bought another 10000 shares of GentingSP at $1.81 and sold them at $1.90 three days later. This time round his net profit is $714.50 (Commission: $185.50). He does this for the next two months.

I have created a table below as an illustration.

Net Profit/Loss






















Grand Total

You can see that the total net profit for 2 months is only $424 while the commission is 4 times as much. All the profit that the investor had made has gone into the broker's pocket. 

As investors, we must remember this, 
It does not matter if you make a profit or make a loss, the commission is deducted anyway.

Many people will say that, "I can buy low and sell high." But do they know when is the low, or when is the high? Are they able to control their fear and greed?

That is why when we invest in stocks, we should see it as buying into the business of the company. If you think Genting Singapore is a good investment but the price of $1.62 cents is too high, then wait for it to drop to below $1.50. Patience is the master key to investment. Imagine you have bought 10000 shares at $1.45 and now Mr market has valued it at $1.62. Your shares have already increased 11.7% in value. 

Look for companies that have good businesses. Breadtalk, Cerebos, SPH, and Popular are some of the good stocks to look at. Save money to buy when these stocks have reached your BUY price.

The stocks that I own now, including their appreciation in price and dividends, has given me a good 15% returns every year. If I can do it, so can you. It just takes some time and effort to do the research on your own. 

Happy investing and cheers.

Disclaimer: This post is just an illustration. Readers are advised to invest wisely in their own discretion. This post should not be taken as an indication to buy or sell any stocks and shares in the stock market.

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