Before 2008, I was not active when trading on the Singapore stock exchange. Many times, I bought shares or applied for initial public offerings (IPO) but did not monitor these stocks as closely as now. Career and financial capacity precluded me from actively engaged in stock trading.
This has changed. More than three years of watching and trading in the stock market provided me with some useful lessons. These lessons, both good and bad were reflected in my blog posts over the period.
I consider myself a value investor despite many commentators saying value investment is dead and not appropriate in this volatile stock market environment. I do not trade on margin and do not trade on contra. I buy and hold over a suitable period of time.
In value investment, I pick stocks with good financials and history. This is the first step. Next, you review the macroeconomic environment and see how this stock will be impacted by the macroeconomic factors. Take the example of Singapore Airlines. When the global financial crisis hit in 2008/09, business travel, leisure travel and cargo transport slumped and earnings of SIA took a hit resulting in share price plummeting. If you stick with SIA because of good financials and a strong management team, the share rose when better economic times arrived in 2010/11.
Even with a good stock in sight, the third aspect of decision is when to buy and when to sell to maximise capital gains. Precise timing entry into and exit from the stock market is the most elusive of all stock investment decisions. For this, I relied on the level of the Straits Time Index (STI) to give me a feel of the general direction of the stock market. You must have an opinion on the stock market level. Logically, one should buy when most investors are bearish and one should sell when bullish sentiment sets in. Take the example of Sembcorp Industries. Its share was trading at $3.43 in September 2011 when the STI was around 2,700 points level and it was at $4.54 on 20 January 2012 when the STI was at 2,849 points. This share made a capital gain of $1.11 per share in just four months.
Emotion gets into the way of investing. Emotion can prevent one from selling a share. If the share is rising, one may not want to sell, thinking that it can still go up further. If the price is falling, one may not want to sell thinking that it will turnaround. To reduce emotion to some extent, one can set a target selling price on owning a stock. When this price is reached, sell the share. On the other side when share price is tumbling and when the pre-determined floor price is reached, sell the share to cut further losses. In this way, you can free up your funds to invest another time.
And lastly, investors must monitor their investment portfolio. Check the share prices of stocks owned and be aware how the shares are performing. There are many full-time traders whose work is to watch the market. One cannot beat them as they have price movement knowledge advantage over us who have a career not related with share investment. To overcome this, invest in value stocks and keep your number of stocks to a reasonable number that you can manage (say up to ten). It is far better to focus on few good stocks and increase the quantity of shares owned than owning many stocks with money spread thinly across these stocks.
Copyright © 2012, 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.