Sunday, 12 April 2020

NEW TO THE STOCK MARKET? WE ANSWER YOUR BURNING QUESTIONS!

In our current MCO daze of busy-ness, boredom, and cabin fever, we reached out to Twitter and asked people to ask us back.


Let us tackle your brilliant queries to take our minds off of endless ZOOM meetings and incessant leaky aircon, both of which will continue until at least 28 April. 

We promise to be light on clichés and any sort of inspirational stuff. This is not Pinterest OK. All facts, no sugar-coating. Well, maybe a little.

We will link constantly to free online resources (especially Investopedia) to make a very important : hey, if you really, really want to learn, it's all out there and (almost all) free lah. Google is your best friend.


STARTING OUT
 
To start in the investing or trading business - never call it a game - you have to find an approach that works for you.

Are you short term or long term oriented? 

Do you like growth stage companies (with added risk) or do you prefer getting steady income dividends?

At the start, figure out your investment goals. (Investopedia)

Then, determine your risk appetite. (SmartAboutMoney)


This handy diagram matches your risk tolerance with the kind of asset classes you should get.




This is for illustrative purposes, but you can see that trading is a high risk business with high probability of losses. It's the only way to attain high returns, which we define as 10% yields annually or higher.

In other words, it's not for everyone. Trading might not be for you, because it requires considerable sacrifices from a monetary standpoint. Be prepared to make repeated mistakes and pay the dreaded 'tuition fees'.

Don't trade for the excitement or the adrenaline rush. This is a sure way to lose money.

We believe in the business of trading as a pursuit of knowledge, simply because we are passionate about it. Monetary rewards are almost a secondary consideration, because when you become truly good at something, the money takes care of itself. 

Learn to trade, but trade to learn also. 
 

A CHANGE OF PERSPECTIVE



We are armchair philosophers, so let us dissect this by offering a different viewpoint on portfolio management and asset allocation. 

We don't look at different sectors for asset diversification. Instead, it comes from how we think about our fund allocation.

Any exposure in growth stocks is a trading position. Even if it lasts 3 years or more. The target here is simple : massive capital gains from an appreciation in the stock price.

Any exposure in dividend stocks is an investment position. This is because the priority here is for a steady income flow from dividends. The capital gains portion is nice, but it should be secondary. 

Assuming dividend payouts remain the same, dividend yields go up when the stock price falls, and vice versa. You have to be mentally OK with this, otherwise you will keep dumping bank stocks when they hit new lows and buy them back when they hit new highs.

These distinctions helps in our personal investment approach.

What you see on this blog is primarily the activity from our trading portfolio. But in a personal capacity, we divide our money like this.

Let's say we have RM1 million in funds to deploy. This is how we'd portion it out. 



Investment : high dividend, steady income flow, reputable names. Relevant sectors : banks, telcos, utilities, real estate investment trusts (REITs). 60% of total funds. This is the 'safe' portion.

Trading : growth companies, short term strategies, IPOs, event driven / situational trades. Intent is to achieve 10-15% returns on a per annum basis from every trade. 30% of total funds. This is the 'high risk high return' portion.

Cash portion : 10% of total funds, to be deployed if an opportunity arises for a new investment or trading position.

Now, as to how many stocks you should look at : we are big believers in a concentrated portfolio, because that's the only way to achieve extraordinary gains. You know who else likes concentrated portfolios? Warren Buffett.

For our Investment portion, we'd stick with four or five names only, to be rotated as necessary for years to come (reduce position in X and increase in Y due to shifts in dividend potential, share price, etc).

For the trading portion, we only take one or two highly concentrated positions at any given time. We do not add 10 growth stocks to stretch out the money.

Our best ideas have to generate the most returns relative to the capital that we have. 

And if you want to through the considerable trouble of active investing in the first place, you need to really make your money work for you. 

Believe in yourself, because your three best ideas will likely make more money than your next ten best ideas, combined.

Note that these are how we personally approach things. It flies in the face of the diversification principle, and we're fine with that. What we're saying is that we have found an approach that works for us. So find one that works for you.



Read our personal experience to learn more about how to survive for nearly a decade in the business. It's not aspirational, but that's what it takes.

When navigating the markets, you will undoubtedly undergo the three Cs - cry, constipation, and crash. Control your emotions. Control your bowels. And never panic.

Overly simplified, the cons are :
- you will lose money at first, probably a lot
- tedious, time consuming
- you may give up after an unbearable loss
- a single bad move can turn a 10% annual gain into a 30% loss

The pros :
- it really gets better with time
- you will learn the value of hard work and knowledge accumulation
- the monetary reward is a fair reflection of your skills
- you will know so much shit; economics, companies, capital markets, etc.
- you will develop a rare and considerable skill set that lasts a lifetime

FUNDAMENTALS V.S. TECHNICALS




Beginners should learn both. End of story.

Technical analysis (TA) definition and overview. (Investopedia)

Fundamental analysis (FA) definition and overview. (Investopedia)


We always despair when FA and TA are described in competitive terms. They are not enemies; they are siblings. They are 50:50 - commit time to just one and you've only learned half of the full story.

We use both to help formulate our understanding of the company and its stock. It helps us synthesise a trading view or idea that we can actually use to make money. Read our TradeOfTheWeek posts where we combine our TA and FA knowledge in glamorous and fabulous ways.

The best part about learning both FA and TA is this : having proper knowledge in both aspects reinforces your conviction in your own ideas. 

If you buy into a stock without understanding the FA aspects, you may not know why the stock is trending downwards. And if you had gone into it without understanding the TA aspects, you would never know where is the best entry price, and where to set your profit target and stop loss points.

Without FA, we wouldn't have been able to make RM40,000 plus profits from a chicken and egg stock.

Without TA, we wouldn't have been able to make RM15,000 in nine minutes from a price breakout opportunity.

Both matter, so don't deprive yourself by picking one over the other, my dear.

CAPITAL REQUIREMENT



There are endless debates about this, but we'll get straight to the point.

To start trading or investing on your own account, you should have a minimum of RM5,000. It's not too small that your double digit percentage gains don't mean much, and not too big that you risk getting wiped out at the first attempt (unless you do something reaaaaallllyyyy silly, like following tips)

Second condition : it must be money you can afford to lose.

You can also try paper trading, but we skipped that part when we started out. Personally we (still do) feel that you have to put up real stakes. Feel the weight of your responsibility towards your money, and feel the pain of a badly thought out trade, if it comes to that. Experience will toughen up your soft underbelly.


ADVANCED SOFTWARE FOR TRADING TO BECOME SUPER DUPER PRO POWER


Tell you a little story.

Once upon a time, when we were just starting out, we had all the nice gadgets. Got a couple of nice wide monitors to use to 'view the global markets'. We paid hundreds of ringgit a month to 'specialised charting software'. It was a setup that was nice to look at - several monitors, really advanced charting system with a thousand indicators, et cetera.

The amount of money we made from having all that? Habuk pun tarak.

We were naive and clueless. 

 Sekadar gambar hiasan


The lesson was simple : we had all the fancy stuff and it didn't matter one bit, because our knowledge base was still low at the time. We simply did not know how to use the tools and what to look at.

So we went the minimalist route. We ditched the screens and stopped paying for software. Nowadays, we still use the free web-based online trading platform to trade. Anything to do with charting, we're OK with using the same platform. We still don't pay for any charting software to this day.

So how to look at multiple screens and charts and all that? We simply opened up multiple trading accounts with different brokers. Now we can look at 10 different screens and charts if we want to. And the cost of all that? Zero. (Editor's Note : well, technically it involves a RM10 fee for the CDS account opening but the brokers all waived it).

Limitations can lead to ingenuity. More screens will not make you a better trader. Get rid of the unnecessary stuff and focus on the important things like reading up on FA and TA, or doing daily stock sweeps, or keeping a trading journal.



But coming back to the original question : how can we keep our eyes on so many stocks without specialised trading software?

The answer is : you have to know what to keep your eyes on. And for us, it's fairly straightforward.

1) Our watchlist - personal list of stocks that we may trade or invest in, if we hadn't already done so (we don't trade anything if it's not in this list)

2) Top volumes - to get a sense of what the market is like

3) Top gainers/losers - to look for potentially overbought or oversold stocks.

These are the things we look at during trading hours. And we can do this on a single screen, or two at most. We don't use any specialised alerts; we just look at the markets to find what we like. 

To keep with the minimalist theme, and the principle of concentrating our money on our very best ideas, our watchlist usually comprise of less than ten names most of the time. Even then we'd only trade one or two at a time, not all of them. Some we watch but never trade, sometimes for months. And if we have a better idea, we bring it into the watchlist and remove the old one.

We recommend that you develop your own watchlist. Filter down the stocks that you really like, perhaps 5 or 6 of them. Learn about their respective TA and FA aspects. Keep watching them for months even if you're not trading a single stock. You will learn a lot from this.

RELATIVE COMPARISON




No, we don't mean comparing which of your trader uncles are more generous with their ang pao handouts.

When screening counters, you can track momentum, which we define as repeated price breakouts.

You can also track news-driven sector movement. For example, during the first weeks of the COVID outbreak, the glove stocks all went through the roof. There was good reason for that, and a couple months later, they can't produce enough gloves to meet global demand. The stocks go up.

And yes, we try to unearth potentially good names every single day (or night) when we do the stock sweep. What's good goes into the watchlist.

Now, let's say you want to filter out stocks in the same sector. This is where relative comparison comes in.

In all sorts of stock analysis, whether it's price-earnings, price-to-book, net asset per share, earnings per share, stock price performance (absolute or percentage basis), net debt, dan lain lain, it's just a bunch of not-very-useful numbers, unless you have something to compare them to.

Hence, this comparison is necessary for you to benchmark the performance of whatever stock you're looking at. 

Does Stock A have a price-earnings ratio of 15 times? Compare it to the sector average. If the sector average is 12 times, some would say Stock A is overvalued (which is reflected in its stock price). Some would say Stock A deserves the valuation, because their earnings are so much better than others in the sector. No wonder the P/E is high, right?

To decipher that and more, you'll need some rudimentary FA skills. But you need to compare something to something else. This is how you screen the right counters.

From a TA standpoint, there's one thing that we do all the time. Direct comparison of price gains among stocks in the same sector. 

Just a few recent examples:




Perhaps one stock clearly outperforms the other over a time period. Maybe you'll want to take a closer look at the leader? PUT IT IN YOUR WATCHLIST.

Or perhaps you like the laggard stock instead, the ugly duckling of the sector which is unjustly ignored? PUT IT IN YOUR WATCHLIST.

So what you're essentially doing here is that you're filtering your choices down.
 
Find an approach that works for you, know what to look at, know where to look at, and understand each stock's characteristics. Get ahold of the TA and FA aspects. Never trade blindly.


<Part II coming soon... maybe>

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