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Shopping For Stocks

>> Friday, November 6, 2009

A question often asked by my clients looking for the holy grail is "How to pick the right stocks?"

It is still an ongoing debate if fundamental analysis (FA) or technical analysis (TA) is more superior. It is important to learn both, only by applying them together will you "FA TA" (mandarin for prosper). Long term investors believing in value investing will rely more on the FA aspect and short term traders rely more on the TA. My opinion is to use FA to select the companies and TA to plan your entry and exits. Details of either method will not be discussed here.

Instead, I'll touch on "How to avoid picking the wrong stocks."

1. Looking for sales or discounts

Many are familiar with the mindset of shopping when making purchases, i.e. look out for a sales and discounts to determine a good deal. So when making purchases for stocks, many tend to apply the same method. They look for stocks that are "On Sale! It has fallen 50% from its peak, that is a 50% discount!". Make the decisions based on that only to find that its prices were further slashed.

Buying stocks is like employing a worker to generate income for you. Good workers are not cheap and cheap workers are normally not good. Would you pay top dollar for a good worker or low wages for someone who does not work at all?

Change your mindset when selecting stocks. I am not saying to not buy them at a discount. But discount is a relative word, cheaper compared to what? Do not use past performance of its peak as the benchmark, instead determine its intrinsic value to compare against.

2. Going for the HOT stocks

Been to an IT fair, travel fair or Expo sale? Does it seem the rest of the 4.99 million Singaporeans are also there. Everyone is there means it definitely the place to get the best deal, is it not? Do we also apply this mindset to selecting stocks?

Stocks that is featured in the news and every analysts are rushing to cover them, definitely all the experts cannot be wrong, right? Firstly, news has a publishing time lag and analyst require management approval before pushing out reports, so by the time you hear about it, it could already be too late. Secondly, journalists and analysts have an agenda, they are in sales. So they have to over sensationalize information and hence they views can be very subjective. Thirdly, everyone rushing in would have artificially inflated the price too high already.

Beware of hot stocks as they are normally overpriced and will start crashing the moment the hype is over.

3. Based on gossip

Stories of a friend making a lot of money and suggested you go in as well to a certain stock. Sound familiar? If you start getting stock tips at the coffee shop and taxi drivers, i think it is time to get out of the market. Warren Buffett has one simple rule when it comes to investing, "Be greedy when others are fearful and be fearful when others are greedy".

Our education has been based on textbooks, research at the library, mentoring from qualified professionals (teachers from MOE), so why base your financial education on rumors from the man on the street? Investing already carries a certain amount of risk, relying your decision on gossip further increases the risk.

What about financial planners or worse insurance agents selling Investment Link Plans? Are they qualified? How many years have they invested profitably consistently? How are they remunerated? You determine for yourself after answering those questions if their advice falls under gossip. (Refer to my article of selecting an investment adviser)

If you are thinking of investing, you have just learned a valuable lesson which caused 95% of the investors to lose. If you have already invested and lost, I believe you can relate to the above mistakes and do not repeat them.

Back to picking the best stocks. There is no easy answer. It took about 15 years of formal education to teach us the skills we currently have. Do we rely on our teachers to take the exams for us? So, shouldn't we also commit that same level to our financial education to take the exam of selecting the best stocks ourselves. (An investment adviser like a teacher is good, but only to provide guidance to speed up the learning process. You will have to take responsibility on passing or failing the exams eventually.)

Investment is a journey, it is not a shopping experience.




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To promote the education of individuals for the need to have a healthy lifestyle and wealth management through proper financial planning, particularly in investments.

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