Make money be happy

Posted by Kuntang on February 06, 2006 at 09:50:54:

SHARES INVESTMENT NOTES

DEFENSIVE TRADING

In general before we execute any work or take up a task, we have to have a reasonable understanding of the subject matters to achieve success. In our case the subject matter is about share or equity investment.

The first question that we have to ask ourselves is, are we well prepared on the subject matter by either having read topics on share investment, understand the risk and rewards involved, what, how and when to buy and sell? Why is it so important to understand the topic? It is because we are not playing a game of hide and seek but a game that involved our hard earned cash and any miscalculated failure will ruin your personal or our family life and also others to certain extend. Think of what Warren Buffet had said “ Risk comes from not knowing what you are doing”.

So for those who got burned in the 1998 crisis, there is still opportunity for you to recover your loss and eventually make money in the stock market, if you start to invest in share investment books and learn about share investment. After all share investment is simple as what Peter Lynch had said, “ Most people can make a lot of money if they will just take the time to remember their sixth-grade arithmetic. Companies that demonstrate growth in sales and profit year after year are likely to be winners and it does not take much arithmetical skill to see who is growing and who is not….”. Another word of encouragement is from Billi P.S Lim’s “Dare To Fail” book, “ To learn from our failure is to achieve success. Never to have failed is never to have won. Unless we experience failure and its bitterness, we will never appreciate the sweetness of victory” This statement is true, however for those who are not serious and not prepared, a word of caution and wisdom from Buffet and also what I use to remind myself is:

Rule No 1: Never lose money. Rule No 2: Never forget rule No 1. What is meant by this statement is if you consistently loose money in stock market, better stop first and read on the subject matter or attend courses/ seminar to improve your skill and strategy to pick the right stocks at the right time. Remind yourself that you will not be the last FOOL to hold the shares. Buying share is actually trying to find another fool to buy from you at a higher price.

I understand we are not a full time player as most of us are employed worker and the preferred strategy is what I called defensive strategy. What I meant by defensive strategy is buy, hold and sell when the price moved by more than 30% or more. There are many books that teach you how to select good stocks but as a guide these are some of them ( not exhaustive ):

1. Look for undervalued stocks. Stocks with price below the value of its working capital. Otherwise look for stock with share price below the intrinsic value. Intrinsic value is supposed to be the true value of the company and is calculated by discounting the expected future free cash flow. Since FCF is not precise, intrinsic value is just an estimate and therefore can be used as a guide only.
2. Look for company with strong fundamentals/ balance sheet like more cash, limited debts or no borrowings, high net current assets, high shareholders fund, high share premium accounts and retained earnings accounts.
3. Look for company with strong earning growth like high return on equity, strong growth in sales and sustainable earnings growth, P/E ratios below their historical average.
4. Look for company with dividend records for the past 5-10 years. If it happened that the price do goes down and you still hold the stocks, at least you receive some amount of dividend.
5. Look for company with consistently strong free cash flow (FCF). FCF is defined as the cash flow actually available for distribution to all investors after the company has made all the investment in fixed assets and working capital necessary to sustain ongoing operations. It is the cash that is free for distribution to investors after all company undertaking have been financed. FCF is a must for my guide for stock selection. The higher the better.
6. Always limit your losses. Set a limit to how much your stock can drop in price, say 10%. You may use candlestick as a guide as to when the stock made a reversal in price trend.
7. Sell the losers and let the winners ride.
8. Avoid buying stocks based on hot tips. This is the devil at work and most of us caught and failed because of it. However there is always exception to the rule, that is when the fact is from reliable source and you have study and seen the fact. Good example is company under restructuring and I know many made millions from this insider information.
9. Do not ever and ever used borrowed money to buy stocks. Purchasing stock is all about holding power and that is why Benjamin Graham, Warren Buffet, Peter Lynch and others are so successful. They hold stocks for at least 5 years and above. In actual fact my investment philosophy is that the amount of money I put in the market if I get it all burnt will not affect my financial position badly, meaning I can afford to loose that amount of money without regret. Financial planning is very important and you must not invest all your saving in the stock market, keep some in ASB.
10. Invest in company with easy to understand businesses. Stick to what you understand and avoid complicated companies. Warren Buffet kept away from fast growing technology stocks because he does not understand technology.
11. Never invest with a complete disregard for the state of the economy. The best stocks in the market will loose you money if you invest at the wrong end of the cycle. This year is the divergence of the 3 year and 12 year bull run ( as explained in the Star recently ) and should be the best year to enter the market. However watch out for any sign of bear market and get out. Never time the market and only fool does.
12. Build up a mini library of information about companies, read any topics on share investment, company announcement, analysts comments and learn how to read and understand company balance sheet, profit and loss accounts, equity statement and cash flows statements and notes to the accounts on the latest release of financial announcement in Bursa website.
13. Most important of all, create the burning desire to learn and be a successful share investor by reading motivational books, success stories of individuals and etc etc.

Counters I may recommend are:

a. Mega First – Its main business, IPP is a cash cow business. Buy at 90cts.
b. HIL ( should have bought at 22cts, buy at 25cts. ) Its major shareholder is making a general offer at 23cts ).
c. Ayam counters, like LTKM, CAB Cakaran, while price is still low and earnings is rising.
d. Juan Kuang ( accumulate at RM1.00 )
e. DCIB ( Datuk Ali kadir & Azman is buying this counter and its price has hit rock bottom, buy at 38-40cts )

Generally I go for counters below RM1.00 because with the limited amount if cash we have, we can buy more shares and make more profit. Of course you can go for counters that are fundamentally strong and on a bullish trend like Bursa, Sports Toto, Post Holdings, Media Prima if you have plenty of cash to spare.

SWING TRADING

Swing trade is the opposite to fundamental long term trading. It is an alternative to the defensive trade that I have discussed above because of few reasons:

a. CEO and CFO sometimes lie and cannot be trusted as in the case of Enron.
b. Accountants who maintain company accounts are loyal to the company they work for and not you.
c. Balance sheet and profit and loss accounts can be falsified.
d. Famous analysts sometimes have hidden agenda.
e. The media may be ill informed about what is really happening.

Swing trade is based on the principle used by one of the richest and most successful traders ever – William D. Gann. It is based on the fact that a market making a new high will experience profit taking and that there is a strong likelihood of the market retesting the old high.

As a swing trader, your job is to identify emotional shifts in the market and quickly trade on the side of the strong hand players. This is a trading edge. Candlesticks help you exploit this edge. However it is better to combine both candlesticks and other indicators. Two books on candlestick are recommended for reading, Japanese candlesticks Trading Techniques by Steve Nison and the other is by Fred K.H Tam “ Inveting in KLSE Stocks and Futures with Japanese candlestick charting Techniques “. I am using Fred Tam’s book. It is easy to read and understand.

Swing trade is suitable for full time trader because it is time consuming to track and analyse the shares before trading the next day. Based on my tested experience, you can make a few hundreds bucks a day. But be careful because a one time loss can wipe off all your gain if you are not fast enough to act.

Why I like swing trade is because we can get fast money, though small in amount as compared to defensive trade. In addition I am preparing myself for early retirement and share investment is the best employer then because I have ample time and we should not use our retirement period as death waiting period…..kah..kah….

Since most of us have not retired yet, we should learn how to invest in stock market for future source of income and time is not yet running out for learning. At this juncture, my view is for us to invest some in defensive trade and use say RM5,000 as swing trade for learning purpose or else apply paper trade before you actually trade with your $$$$$$$$.

My technique in swing trade is simple. First I identify stocks with price below RM1.00 and with reasonable volume, the higher the better, normally the first 20-30 active stock for the day are my choice. Secondly I check their candlestick and its moving averages, see whether it is on the down trend, rising trend or about to reverse. I choose the one that has tested its high and on the down trend/consolidation but on the mist of reversing its trend to bullish. The candlestick and moving average will help you to identify these stocks. Once you have identify the best stock after studying the candlesticks movement, before trading time ( 9.00 am ) call your remiser to que for a buy at either the previous closing price or at a lower price, depending on your level of confidence. Monitor the price movement very closely and sell on the same moment/day if possible to capitalize on the price increased. If you are good in swing trade, you do not have to come up with any cash.

Why I choose stocks with price below RM1.00 is because I reduce my risk and also I can buy more shares with the limited amount of spare cash I have. For example if I have a ready cash of RM10,000.00, I can purchase 20,000 share with unit price of 50ct. An increased in price by just 5cts, I am making a gross profit of RM1,000.00. The RM10,000 cash act as a standby in case the price does not move up after the third day and I have to pay. Normally I will sell immediately at a predetermined price. I seldom use the cash.

A word of caution is always set up your stop loss price and sell if you have to unless you want to pick up. Your chances of making profit is greater if you have the holding power because the stocks may rebounce at a later time or sell if its price hits your stop loss price.

A book entitled “ How You Can Get Rich, Swing Trade “ by Bill Wermine is good to read.

Counters which I may recommend for swing trading on Monday are:

a. Luster industries ( buy at 42cts and sell at 46-48cts )
b. RHB ( buy at 72ct and sell at 75-78cts)
c. Silver Bird ( buy at 67.5cts )

On Friday I bought BIG for 82cts and immediately sell at 88cts. Remember in swing trading your counters have to change every day. For example the above counters may not be applicable for Tuesday trading.

INVESTMENT IN ASB, POWER OF COMPOUNDED INTEREST AND THE RULE OF 72

ASB is for risk adverse person. You still can earn a return higher than any investment available in the market and as a bumiputra, we are envied by the non-bumiputra and we should take up this opportunity. For those who are less discipline in saving, take up a loan. Of course it is better not to take up the loan because certain amount of interest is shared with the bank.

Investing in ASB and by the power of compounded interest can double your capital within 7.2 years. How to get 7.2 years is by applying the rule of 72. Simply divide 72 by the interest rate. If interest rate is 10%, divide 72 by 10%, you will get 7.2 years. If you place RM50,000.00 in ASB in January 2006, by the end of year 2012, your money will be RM100,000.00.

To take care of our retirement age for non pensionable employee, you need not worry if you can be disciplined enough not to draw your EPF before 50 and 55. Draw some when you reach 50 and place it in ASB and the balance when you reach 55. If you put all the EPF is ASB and if your EPF sum is say RM500,000.00, you will have a monthly income of RM4,000.00. Pay any of your borrowings using the interest and dividend of ASB and do not use the principle amount. Let the principle amount do the work for you. It is only for the first 12 months after 55 you have to wait and the rest will by taken care of. The following and the rest of the year until our death do us part, we just sit relax and enjoy our blues music with wine on our side. What say you? Sound simple but not impossible.

Mr Freshies,

Since you are in your mid 40ies and you can spare cash of RM20,000, my advice to you is to go on defensive trading since you have ample of time to wait and yet you are still earning monthly salary.

Also learn about swing trading for you to make fast pocket money and for retirement entertainment. As long as KLSE volume is above 300 million, swing trading can be applied and also can be applied in any market situation. Remember to stop trading and get out from the market when there is sign of bearish trend or reversal of bull run.

One final word of wisdom is you must donate if you have made plenty of profits, say allocate 2% of your annual gain is good enough. Remember what Ziz Ziglar said “ you must have helped enough people to help yourself”

I wish you all the best and good luck in your trading.

May God bless us all.

Cheers
Kuntang