Invest in something you know

On 8 February 2008, I wrote a blog post on four investment strategists, namely Benjamin Graham, Warren Buffett, Peter Lynch and Philip A. Fisher. Up till this date, I am a firm believer in value investing though some were suggesting the death of value investing in recent times.

Selecting a stock is based on detailed research work and seeing perceived value in a company. When you see value in that business, then by all means buy the stock at a price entry level, which still makes sense in owning it. As Warren Buffett said that you are buying into a part of the business and not just buying the stock in name. You own a portion of the business when you are a shareholder. You can say you own a part of SMRT when you ride on the MRT line. When you read the Straits Times, you can say you own the company (SPH) that prints the dailies.

When you own a part of the business, would you consider dumping the share just because its share price has declined? If you have faith in the management, operation and business prospect, you will not sell off and get out of the business. Likewise, you may not want to sell the business just because the share price has risen but yet to reach the level of maximum potential.

Get to know the business. If the business does not make sense to you, then do not buy its share. During the Dot.Com bubble in 1995 – 2000, almost all internet companies were being chased up in share prices to ridiculous levels that were not supported by their fundamentals. The bust of these companies was as spectacular as well as the bubble.

Similarly, if you are not familiar with certain investment products, the best advice is not to venture into it. Some recent products traded on the Stock Exchange include Contract for Difference (CFD), American Depositary Receipts (ADR), Extended Settlement Contract (ES) and Synthetic Exchange Traded Fund ETF). You will need more knowledge of their workings before considering trading in these products.

Copyright © 2011, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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