Blue chips? Potato chips? or... ?

Also my article posted in www.talkandshare.com


Erm, this may be a little late cos was a little busy last few days, but still can use this for future reference... :)

Before i proceed, it is better if you have read this posting first...
http://www.talkandshare.com/index.php/ Technical-Analysis/378-Volatility-Vs- Severe-acute-distribution-Crash......- P.html
i think it is important to know wat kind of market movement it was before you proceed further.... Lets say, you have identitified it to be a volatile market... now wat?

Many of you will be asking wat counters should we buy next when the KLCI moves back up... One of the best method would be to use TA... if tat happens to be not at your finger tips yet.... well, you could still buy with the risk reward ratio method.... or also called, calculated risk... hehe....

why i say it is important to identitify the market sentiment first? well, this is so tat you can make sure you have the rewards favouring you... in the posting on volatile market, i mentioned tat the market movement will be down then back up.... so when it makes a dip down, you will expect it to move back up in a volatile market... so, here is the part tat u can use to pick your stocks....
when we say the market dips, we generally means the KLCI dips... a point to take note about the KLCI is tat, it does not represent the whole market, it does not represent every single counter out there... KLCI is calculated ­base­d on some calculations of the index ­link­ed counters.... so, wat is the significant here?

Well, when the KLCI dips, wat we can say is tat it shows most of the index ­link­ed counters would have diped... so, if the KLCI is moving back up or is showing recovery... it also literally means those index counters are also following... and since they have made a dip and is moving back up (correction), you can also say tat they are on a bargain price, so your risk will be reduced and the rewards will be increased... so, this is when the risk reward ratio will be favoring you...

Btw, since a lot of these index ­link­ed counters also happens to be blue chips, tat is why after the market dips in the volatile market, the blue chips will be the ones tat is climbing first... :)
but of course there are other reasons such as FA, investors will also pick them up at bargain prices... :P

So, to use this risk reward ratio properly, you should make sure of a few things:
1) make sure it is a volatile market and NOT a crashing market or recession...
2) the market is moving back up or recovering...
3) try to identitify index ­link­ed counters tat was battered due to the panic selldown and not due to its internal fundamental problems...
4) if money is on your side, you may look into blue chips tat are index ­link­ed and was hit by panic sell.... :)

So, Blue Chips anyone? :)

Regards & good luck!

Volatility Vs Severe acute distribution (Crash)

Haha.... another one of my article previously posted at the site: www.talkandshare.com


Since recently, the US DJI seems to be freaking a lot of people, i would like to take this opportunity to discuss a little bit about this topic...

First of all, whether the US is going into a recession, honestly... i dont know.... is it going to crash? again, i dont know.... so, wat do i know? nothing much... :P hehe.... but if i were to look at DJI charts, i can only say:
1) it is really very technically bound.... so if you want to know the DJI movement, study Technical analysis and apply on the chart....
2) it has not breached the trend at the time being... so if you think it is now a crash, i dont think so... :)

now, back to our topic... why do i put such emphasis on differentiating between volatile market and a crashing market? well, the biggest difference is tat, in a volatile market, you will see big waves of DOWN and UP... but a crashing market, there will be big DOWN and small ups, followed by more DOWNS... by looking at this, we can see a great difference in the method of play isnt it? since in Malaysia, we can only earn when stock price goes up... so, in volatile market, you can get stocks in "bargain" price because it will go back up in the waves...
But, in crashing market, it is a falling knife... so you get hurt when you try to catch it in between... because, price are going down... so the "bargain" today may be "expensive" tommorrow, and the day after next, and the week after next... tat is why the concept of "never try to catch a falling knife" exists....
and tat is why it is important to know wat kind of market it really is... as these two seems quite alike but the outcome (prognosis) is by far different....

So, how bout our KLCI... i believe the sudden drop is due to US... and since US is only volatile and never broke the trend, i would say it would and is moving back up... so our KLCI, with the fear removed, will correct itself back to its prior trend... which is range trading until it finds his new direction.... (for furter explainations on correction, read my post "market correction" in Market talk column)

Hope this helps in your trading plans....


Regards & good luck!

Market Correction?

Posted this article in a great site: www.talkandshare.com
so i decided to paste a copy here as well... :P


Market correction coming? Or it has been here for some time?

But wat is market correction? Does it always have to mean a bull market droping?

how about a bear market moving up?

hmm... to me, market correction means the market moving back to how it should be moving, or a sudden abnormal market movement moving back to the previous trend (correction).

if you look at the KLCI chart, many say tat the movement from 20th august - 28th september is a bull run...

First of all, i'm not saying it is right or wrong, i'm just giving my opinion... to me, it is just a correction rather than a bull run... a correction from the sudden drop 31st July to 16th august back to the trend our CI is supposed to be moving before tat... meaning its intrinsic trend...

But, is correction normal? well, i think everything has its intrinsic value... when things go beyond tat, a healthy correction will bring things back to its intrinsic value... this is supposed to be healthy...

so, wat does this mean? it means tat, my take will be, the market (KLCI) will be moving back to its range trading (correction), and the next movement will determine if the bull or the bear will lead...

Regards & good luck...

Most Traders Loose Money?

There is a believe that 80% of investors earn money but 80% of traders loose money… How true is this? Hmm… Logically, I think this is sad but may be quite true. Why do I say that? Well, I believe the answer lies in the time frame…

I think one of the major differences between investing and trading is the time frame. After all, sooner or later even investors need to sell their shares for the profit. The difference is the holding time. The shorter the time frame, the more accuracy is needed in the entry and exit. This is why, investors who are supposed to hold their stocks for a long time, can use time to dilute their accuracy of entry. This probably explains why the chances for investors to make money is so much higher.

As for traders, the time of holding is a lot more shorter. So, accuracy is far more important. However, lets not forget that trading also has different time frames, from intraday to trend following. So the accuracy needed will also differ. So, it is the accuracy of entry and exit that will determine the success rate of trading. Since we mentioned that the success rate of traders is so low, that means the accuracy of most traders are extremely low… Hmm… Why is it so?

For traders to time their entry and exit, a method called Technical Analysis (TA) is used. However, this method is not as easy as we would hope it to be. Not only that there is no single method that can be used to time the entry and exit perfectly for every counter, this is complicated more when the market changes. This makes it crucial for traders who use TA to keep on learning and adjust to the market. Which is why, I believe it is always important not only to know how to use the indicators, but it is even more important to understand how the indicators were made. Only by knowing how it is made, we are able to adjust them to fit the market. The market is a highly fluid condition, so if we are not able to adjust, our so called super accurately winning strategy of indicators may turn you into the biggest loser that walk the earth… Hehe… Just trying to make my point more dramatic… But seriously, never ever stop learning and adjusting. In market, the concept of “Survival Of The Fittest” is very real.

So, if you want to make it into the winning 20%, make sure your accuracy is high enough by remembering to learn and adjust… Happy learning…

The Magic Hand

Recently, this term of “Magic Hands” is heard really often… I wonder why is it so often heard these days? “Magic Hand” or “Operator” has been there since the beginning of stock market and has been continuing since then. So, why now? Is it because it is like some fashion that has been popularized by some model? Hmm…. Maybe, or I guess might be because of a few reasons; 1) Timing 2) Easy to accept.

Timing:
Why do I say it is timing? One, it is believed that the upcoming and ongoing elections have its effect… It is believed that the government is behind and supporting the KLCI.
Two, recent price movements of KLCI. It is believed that the massive price movements recently is due to the supposed to come corrections are supported by the “Magic Hand” or the government. How true is this? I don’t know… But I will give my views later.

Easy to accept:
Why do I say it is easy to accept? It is because we have been in a community where we believe that the stock market is like a gambling place and it is controlled by the “Big Boys”, so small potatoes like most of the people only go to gamble their luck. With this mentality in mind, of course people will subscribe to the believe that the “Magic Hand” controls all the movement of the market.

My views:
Now, I will give you my opinion, but of course just my comment. I’m not saying I am definitely right. But maybe just for reference. As I have said, I fully believe that the so called “Magic Hand” or “Operator’ exists, but they have been here all these while, so there is nothing new about it and we need not get too paranoid with it. Very often these days when the KLCI goes up, we hear people saying the “Magic Hand” is doing its work, the KLCI goes down a bit, we hear people saying “Magic Hand” tired. But I believe the right thing and the right perception should be the same as before, the KLCI is up because buyers are buying and it goes down because the sellers are overwhelming the buyers. Isn't this the correct approach towards the stock market? An even more interesting phenomenon is that whenever the KLCI shoots up at the end of the day’s trading session, people will say it is the work of the “Magic Hand”. Well, maybe it is, but it is also very common for heavy buying at the end of the day. This can be read in “Trading For A living” by Dr. Alexander Elder.

The question now is, why are we so fascinated by this “Magic Hand”? Maybe it is because by believing that the movement of price is all controlled and fully manipulated, we need not learn anymore, because no matter how we learn, the price is beyond our understanding because they are controlled by something else. But HELLO! Since the work of operators are here all these while, and if you really put the effort into learning Technical Analysis (TA) properly, you would understand that the work of these so called “Magic Hand” is all written in the charts as any abnormal price movements will be plotted down as charts. Of course you can argue by saying that they will manipulate the charts to trick those TA believers. This is true, which is why we have a thing called cut loss in TA as a countermeasure.

We need to set our mentalities right to survive in the stock market. One, please wake up! Almost 95% of us are not stock operators and we would not get any information into how they work and how they plan to work. Thus we should not go into speculating. And we need not care about how they manipulate the price. Since we are here to make money, why don’t we concentrate on how to use their activity to make money? In order to do this, there is no such thing as a short cut. You will have to LEARN and READ. As I have mentioned, people take shortcuts by believing in “Magic Hand” because they would like to believe there is nothing they can do to predict their actions. So please, think again. TA may not be able to predict their actions, but they are are most accurate method to track their action that is readily available to the public (Who Are Willing To Learn).

It is always true that government tries their best to prevent their people from being too superstitious and believing only in the supernatural because this will stop the people from exploring into other means like science. Which means the country will not be developing. There is nothing wrong to ponder about their existence, but lets not get too carried away.

I know this piece of posting will offend a lot of people, but please… All I want is to give a wake up call to the readers. And it is to the benefit of the readers, not mine. So please do take some time to ponder over this. We are not operators, and we cannot see things through their perspective. All we can is to try to move along with their actions and effects through a method called Technical Analysis. Please do pick up a good TA book and read it To Understand. Please don’t just read to finish, get into the basis of how the method is derived. Please…. I do not want to see my dear friends to succumb into the mystic world and forget that they are living in a real world of science and art any analysis…

Investor & Trader Similarity (Stock picking)

Ever since these two terms come into existence, there are arguments of which is the better among the two. Not only that, the list of differences among the two goes on and on. From time frame to stock picks to method of play, differences after differences were listed out. Pros and cons of the two schools of thought were being raised. But for now, let us put all the differences aside and let us look into the basis and find the similarities, shall we?

I’m sure some of you will be thinking,” Wow…. Wait a minute…. Investors and traders… Similarities?” Actually there are a few, not to mention that both are to make money through stocks… Agreed? Haha… This is one similarity already… How about that for a good start?

Ok… Now we move on to some more serious ones…. Let us look at stock pick.Basically we say that investors and traders choose their stocks using different methods right? We say investors use Fundamental Analysis (FA) but traders uses Technical Analysis (TA), right? I’m sure you will agree if I say TA is made up of methods and tools to assess the interest or demand of the crowd towards a particular stock, by using MACD, EMA, RSI, etc. There is no doubt about that. This is what people call as the “Trader’s Style”, to buy a stock that is in demand. Now, investors actually also do the same thing, only the method they use is different. They use FA instead of TA. Why do I say that? Let us look into the basis of FA. FA is composed of areas like earnings, P/E ratio, ROE, NTA, etc. Actually, what are these methods measuring? It is to assess if the company is fundamentally strong. Correct? Now, why do investors choose fundamentally strong company? Have you ever wondered what are the real reasons behind that? Well, some say that they want to make sure the company is strong and is earning money. Well, that may be the reason, but actually investors uses FA to value a company’s performance in order that they will be able to select a company which will have price appreciation in the future because the demand for their stocks will increase. They believe that a fundamentally strong company will continue to become stronger and as time goes, the demand will always be on the hike. So, the price will go up together with the demand in the long run. Which means FA is the same as TA, they are used to decide if the stock will be in demand. And both investors and traders choose stocks that will be in demand... The only difference is the time frame… FA looks a lot further into the future.

So actually, there is a similarity when it comes to stock picking among investors and traders, both pick a company with the believe that the price of the counter will go up after their entry due to the increase in demand. There are a few other similarities that will be posted in the future… In the mean time, let us embrace both our investing and trading brothers and sisters in understanding and peace... hehe...

Testing… Testing..

I picked this interesting test done by Dr. Shapiro in the book “Trading For A Living”written by Dr. Alexander Elder. Do try this out for it is very important concept to grasp in stocks, so please be honest. First, try not to think too much and use your instinct or feeling to answer, then try again after thinking properly and carefully… See if your answers are the same before proceeding to the explanations, hehe… this can be quite fun:

Part 1:
If I give you two choices: 1) A 75% chance to win RM1000 with a 25% chance of getting nothing. Or 2) A 100% chance to get RM700. Which would you go for?

Part 2:
If you are given two choices: 1) A sure 100% loss of RM700 Or 2) 75% chance of losing RM1000 but a 25% chance of loosing nothing and keep all your RM1000?


Explanations:
For part 1, four out of five subjects will take the second choice. The majority makes the emotional decision and settles for a smaller gain.

For part 2, three out of four will take the second choice, condemning themselves to lose more in their effort to avoid risk, they actually maximize their losses…

Emotional traders want certain gains and turn down profitable risks that involve uncertainty. However, they will go into risky gambles to avoid taking certain losses. It is our human nature to take profits quickly and postpone taking losses. Irrational behavior increases when people feel under pressure.

If you were to look into your account, you will realize that the major burns that you have is a few large losses that was there because of your inability to cut loss. Or it might be the continuous small loss made because you were under pressure to cover back the loss you made. All these only proves once again how important money management and cutting loss is in trading…

Cut Loss & Affordability (Mentality)

Before you proceed to study Technical Analysis and become a trader, please be reminded to get your mentalities right. To me, the first thing that you need do before you even think of becoming a trader is to calculate how much money you can afford to loose. Pathetic don’t you think? People go into stocks to earn money, but this stupid guy tells me to think about how much I can loose first?

Wait… Let me explain…. First of all, technical analysis (TA) is not a miracle method that can give you 100% accuracy. No matter how much you have read, how many charts you have studied, how great indicators are, technical analysis is just not correct all the time…. Especially when you are just starting to try this technique. You may hear your friends or some super guru on TA tell you about this miracle setting or indicator that will help you pick out winners… But once you try things out… You may find that it is just not that simple… So many things can go wrong… Misinterpretations, misleading and contradicting indicators, unexpected change in crowd behaviour… etc… So, how can you make sure that you are correct 100%? Whether you like it or not, TA is actually using the chart to predict the behavior of the crowd based on history… But whipsaws do happen… a simple bad news may cause mass panic which leads to panic selling…

The key to be a successful trader is to survive all this mistakes long enough in order to find the correct way to get it right… Which is why the rule of thumb for trading is to “keep loss small and let profit run”.

But how small is small? When to cut loss? This will be discussed further in future postings… But to make it simple, when you enter a trade, there has to be a buy signal that you use. It doesn’t matter if it is trend, MACD, Moving average, breakout… etc. But you must know why you entered in the first place… So, you must be prepared to cut loss once you find that the reason is no longer there… For example, if you entered because of uptrend, you must be prepared to cut loss once you realized you made a mistake when the price violates the trend.

However, another important point to remember about cutting loss is affordability. As we know, the financial status of everyone is different and this can affect the cut loss level to a certain extent. Some people like to say that your cut loss level should not be more than 2% of your capital. I would like to say that your cut loss level should be kept to the amount that you can afford if you were to make 5 consecutive losses, or 2 % of your capital, whichever lower.

With this affordability in mind, you will use them when choosing counters. I think we should not enter a trade when the cut loss level is above your affordability. It is safer to pass those trades. So, please remember this two points, Cut Loss & Affordability when you choose to trade.

Happy trading…

Be independent, but do not go against the crowd

How do you make decisions regarding your trade? According to Dr. Alexander Elder in his book “Trading for a living”, a successful trader must think independently. He needs to be strong enough to analyze the market alone and carry out his trading decisions. Sounds simple huh… Maybe not for everyone. Most people are sucked into the crowd and start to behave alike. The crowd behaves in a predictable manner because their actions at many times are repetitive and primitive. So, if you are able to think independently and make wise decisions, you will be able to take money away from crowd members.

However, there is one very important and crucial point to remember. Although I said that we should be independent in our decision making and we should not go against the crowd. As I have mentioned in my previous posts, the price of stocks are determined by their supply and demand. These two factors are directly determined by the crowd. If the crowd suddenly increases their demand for a particular stock, the supply will be short and the price will rise. The demand may be unjustified or may seem ridiculous to you, but you should not be going against it. The crowd may be stupid, but they are the most powerful force that will determine your gain or loss. They are the one that will determine the trend, so you can either tag along, or you stand aside.. Do not attempt to go against it. For example, you do not buy on a downtrend and you try not to sell in the middle of an uptrend. The more you are able to manipulate the behaviour of the crowd, the more successful you will be in the stock market.

So be independent without going against the crowd.

News and Effects

Good news! Good news! Good news about a particular counter is out everywhere.. newspapers, television.... You name it.... Maybe a large dividend, large project, huge profit... Anything.... Now, the basic instinct that we have is that when good news is out, the counter will sure have demand... When there is demand, the price will rise... So we jump in and grab the share by hook or by crook.. Whatever price also we are willing to pay as long as we get it fast. Then we can always sell at a higher price. This can be called, “Buy on news”. Is this concept true? Well, I would say the chance is 50%. Why do I say so? Let us investigate further....

Never forget that there is a group of people called speculators out there that will turn this logic upside down. They will cause the effect of “Sell on news”. They will snatch up the shares of a particular company before the news even came out. They will somehow get the information far earlier than anyone and they will start buying the shares at the lower price… Once the news is out, they will sell because by then the price would have risen and they take away the profit. Because speculators normally would grab a huge number of shares, so when they sell, they will cause the price to drop significantly.. And by then, everyone would panic and start their panic selling mode.. So the price will dip….

Case study: Stocks like Tebrau and UEMWRLD was rising tremendously before the announcement of the Nusajaya project.. By right, when the news actually came out, the shares should rise, but they took the other way instead….

So, “To buy, or not to buy?” Hehe… This is a tough question… That is why I don’t normally go for speculative stocks… But to know if there is already speculation in, you can tell by looking for clues. If the price of the stocks suddenly rises tremendously with super high volume for no particular reason, both from fundamental or technical point of view, it is a clue that something is fishy. Especially when there are rumours around about the company getting a huge project, etc… Be extra careful.. For those who have a huge taste and tolerance for risks and want to try out these stocks, you need to be very familiar with technical analysis… Make sure you enter early, place your stop loss plan… and FOLLOW it.. Try not to fall into the “last man on the block” syndrome.. That means, don’t be the last to enter or leave the building. Meaning don’t be the one to pay the highest but sell at the lowest price for the stock… Hehe…. These kind of stocks is like air filled balloons, they jet up when the air is released, but once all the air comes out, it makes a fast vertical fall…

Good luck and happy hunting…

The right edge

When talking about technical analysis, one major component is reading graphs... From various indicators, we try to determine the market trend and movement. We have indicators as volume, moving average, RSI,.......... sound complicated enough? Hehe.... Wait till you read the real difficult part...

As we look at the graph, we look at previous price and performance. To identitify the trend from previous performance is hard enough, but that is not the most difficult part. The worst part is the right edge of the graph. The more to the right, the harder it gets... To complicate the problem further, most indicators tend to give contradicting results when you needed them the most.... Sigh....

The past is solid and fixed, but the future is fluid and volatile. And we have to make decisions on the future instead of the past. So, in order to do it right, we need to be flexible and make your decisions based on probabilities.... However probabilities is not as simple as simple calculations... The probabilities to make mistakes is actually quite high... So, you can either wait for confirmation to increase the probabilities to get it right. But then again, even if you wait for confirmation to come, you can never tell if it is going to make a sudden turn in the trend...

This is the reason why before you decide to make any trade, the first thing that you need to do is to have a stop loss plan. Just in case your decision turns out to be wrong, you need to keep the loss as small as possible... So the most important mentality is "Keep the loss small and let the profit run". You need to keep the loss as small as possible in order for you to survive long enough to win... And in this way, you can increase the odds of you winning... So remember, NEVER EVER enter a trade without a stop loss plan....

Price have memories?

In my previous posting I mentioned that techical analysis is based on the believe that history repeats itself. Which means price have memories... It will remember the highest price, lowest price, volume and etc...

Does price really have memory? Logically, price is not a living being, so how can it have memory? But it does behave in a certain pattern... That is why you can predict (roughly) the support, resistance, trend or range... How is this possible? To understand this, we must first understand how is price determined and what influences it? In my previous posting http://survivingstockmarket.blogspot.com/2007/03/does-company-performance-affect-price.html , I mentioned that price is directly determined by the balance between the demand and supply... And these demands are made by human beings, who are alive and have memories and emotions. If price is to have memories, it will be the memories of these people...

As mentioned, technical analysis will sum up everything about the market into graphs to be interpreted. One basic concept about price is that everyone has an idea of how much the company is worth... So based on this perception, they will determine what is the most expensive price and what is the most bargain price... So, everytime the price for a particular stock is pushed up by demand, it will reach a particular price where most people think that it is the most expensive or the highest price offerable for the stock.. So, they will start selling and this is when supply overwhelms the demand and the price starts to drop. As the price drops, it will reach a price where most people thinks that it is the bargain price... So the demand will increase. When the demand overwhelms the supply, the price moves back up. And the cycle repeats itself...

So, whenever the price reaches the highest point, it will come down again and this point is called the resistance. When the price reaches the point when people starts to snatch it up again, the price will go back up, this is called the support.

Now, do you think the price have memories or people have memories?

Please take note... This is an oversimplified version... Further details will be posted in the future.. This posting is just the most basic concept... Do come back often to catch the details.. hehe...

Fundamental analysis Vs Technical analysis

We often come across these two terminology when we talk about stock picking. What are they? How do we use them to pick stocks?

Fundamental analysis looks into helps you select a fundamentally strong company. You can pick a company that is financially healthy using fundamental analysis. How to do that? You can find a posting on it here... http://survivingstockmarket.blogspot.com/2007/03/stock-picking-based-on-fundamental.html

How about techincal analysis? Techical analysis is based on the belive that:
1) Price or history repeats itself, which means they are using past trends to predict the future.
2) The price is the summary of the psychology and effects of public information on the crowd.

Basically, technical analysis tells you about the demand of the public towards a particular company regardless of the fundamentals of the company. There will be more postings on technical analysis in the future.....


In summary, like what Ben always say, "Fundamental analysis tells you which company to pick and technical analysis tells you when to buy."

Stock Picking Based on Fundamental Analysis

When doing fundamental analysis, we are actually analyzing about the company itself, its fundamental or intrinsic values. When doing stock selection using fundamental analysis, it is like you are choosing which company you want to own with your hard earned money…So you need to choose a company that will give you the maximum amount of profit return for your money invested…

Looks simple isn’t it? But how do we know if the company is worth your investment? You can do it from so many different ways… And it is so subjective that everyone tells you a different pick with their own solid reasons… However, there are some more simple and concrete methods or financial ratios that you can try to use as reference… You can use Price Earning Ratio (P/E), Net Tangible Assets (NTA), Dividend Yield (DY), Debt Equity Ratio (D/E), Return on Equity (ROE) and Earnings Per Share Growth Rate (EPSGR).

I will try my best to explain what are they based on my understanding… But try to use them as reference or basic understanding only… Most of these information can be obtained from the company’s financial statement, or you can derive them using basic calculations…

Earnings per share (EPS) can be obtained from the financial statement of the company. The higher the EPS, that means the more money the company is making… They normally would give the basic EPS or diluted EPS or both… It would be best to use the diluted one if it is available…

A few ratios can be obtained from this EPS, one of it is the Price Earning Ratio (P/E), can be obtained by dividing the current price a share to the EPS. For example, if company A’s share has the price of RM1 and the EPS is RM0.20, the EPS would be 1/0.2 = 5. If looking strictly at the P/E ratio point of view, the higher the P/E ratio, the more overvalue the company is. Thus, the more risky it is to buy the share… However, it is important that you compare the P/E ratio of the company with the companies within the same sector…

Another indicator is the Earnings Per Share Growth Rate (EPSGR) which is calculated by calculating the percentage of increase or decrease of EPS… Which means, to calculate how much earnings the company is making more or less compared to last year… It is recommended that a company has the EPSGR of at least 15% consistently for at least five years…

Return on Equity (ROE) is calculated by (Net profits – Dividends) divided by total shareholder’s fund and converted into percentage… Some financial statements state their ROE readily while some you need to calculate yourself… Recommendation of Warren Buffett is at least 15%.. Which means the higher the better…

Take note: Since EPSGR and ROE are derived from EPS, it is better to have a good and consistent record than to have a sudden surge in them…

Debt Equity Ratio (D/E) can be calculated by taking the total debt of the company divided by their shareholder’s fund… The lower the ratio, the safer it is to invest in the company…

Net Tangible Assets (NTA) measures the net worth of the company… NTA can normally be obtained from their financial reports… So you can use the price to NTA ratio.. Which means you take the market price of the company divided by NTA. The higher the ratio, the more risky the investment is…

Dividend yield is the dividend per share divided by the market price, converted to percent… The higher the percentage, the better it is…

Other than these methods, you can also decide on the worthiness of the company by using SWOT analysis… This however is too subjective and as I say, almost everyone have their own picks…

There are two very important point to take note when using the indicators I mentioned above when choosing stocks:
1) Compare the indicators among those companies within the same sector.
2) Consistency over the years are far more important than one or two years surge, especially when it involves earnings.

Good luck in your stock hunting!!

Winner Vs Loser

How do you differentiate a winner from a loser? You can tell from the mentality that they have....
One very significant and common mentality in a loser is DENIAL.... There are a few things that they deny about... The 3Ds.... And many times, they occur in a sequence.... I think it is important for you to identitify it and learn to overcome it one by one... It is a three step process to have a winner mentality ready....
1) Denial of failure
2) Denial of responsibility
3) Denial of no control

When someone loses money in stocks... They would try their best to hide it... Do you remember asking someone or being asked, "How are your stocks doing?".... Hehe... sound familiar? What answers do you get? Hehe... Typical one would be..."Ok la...", "Break even la...." or " Got loose a bit la....". Let me translate for you what they means... They all basically means almost the same thing... "I AM LOSING MONEY LAH! DUH!"..... They will not admit that they failed... Little did they know that to admit failure is just the first step of upgrading themselves into winners....

Lets say they managed to overcome their first obstacle and they are now willing to admit they they failed... Then, they will start to deny that they are responsible to the loss... They will blame everything that they can think of on earth, in hell or heaven... They blame their remisser, luck, wrong information, set up, and even bad karma.... The only one who did not and never made any mistake is themselves.... How can they ever improve themselves if they have such mentality? We should be responsible to our own actions and decisions... If we make money, it should be out of OUR good judgement, if we loose money, it is due to OUR poor judgement... It is always a good idea to keep a diary or a record of all transactions, and you MUST include the reasons why you buy and sell a particular stock, the gains or loss and what went right or wrong... Study the history... Don't make the same mistake twice...

If the person manages to go through the second test, now they shall have to test the "denial of no control". What does this mean? Denial of no control means the person denies that he is unable to control his greed and desire to gamble.... Someone who is in control will make his trade when he thinks it is the right company and the right time based on solid and sound reasons.... When they know it is not the right time, they will stay and wait for the time to be right... Someone who is not in control however, will put their bet no matter what... They takes unnecessary risks and takes risks with things that they cannot afford to loose (MONEY), for many reasons... Be it greed or excitement.... This is the thoughest test of all because most people will not be willing to admit that they are not in control of themselves... It is like crazy people never admits that they are crazy... But the problem is, they must accept that in order for them to get well...

So, are you able to withstand the test of these 3Ds? It is ok to have them now... Once you identitify them, pull them out from your mind with their roots... Set your mentality right... Then you have the chance to do well in stocks or in life and be the ultimate winner..... "Malaysia Boleh"..... Hehe....

Bulls, bears, hogs and sheeps

Hehe.. came across this phrase recently: "Bulls make money, bears make money but hogs get slaughtered."

Basically, in terms of buying and selling... a bull is someone who is buying - with the believe that prices will go up. A bear is someone who is selling - with the believe that prices will go down... The term bull and bear is derived from the way these animals defend themselves... A bull will use the horn in a upward strike, so it is like pushing the price up... A bear fights by striking things down with their paws, like pushing price down...

How about hogs? Hogs are described as greedy individuals.... They are tempted to buy shares which they cannot afford because of their greed to make quick cash... So if there is fluctuations in the price which happens very often, they get panic and they make bad decisions... That is why they always get slaughtered in the end... But if their bet is right, the shares they buy do go up... They will have the tendency to wait till the price go higher then they sell, but they often end up falling down the clift.... They may have their planned their moves in the begining.. Like hogs planned to go out and search for food... But greed always win and cloud their decisions and plans... In the end... They fall into the trap... That is how people use food to trap hogs.... Hehe...

Sheeps are great followers... They don't have to make decisions... All they need to do is to follow the trend or tips.... But one thing is for sure, the stock market is a very highly competitive place... People don't give away tips.... For they need to stay in the front in order to get the profits.. Real tips are not revealed, and those revealed are lousy tips... So, sheeps who get tips, get slaughtered as well... Those that follow trends always happen to be the last and the most foolish of the block... They always enter the uptrend late and when smart people are making their exit.... So, they alone ride the slide downhill....

So, which one are you? If you are the sheep or the hog, it is still not too late to upgrade yourself into a bull or bear... Hehe... Knowledge, skill and wisdom is the only thing that can transform you.... So, good luck.....

Market efficiency

What is market efficiency? We can measure market efficiency in a few ways… Market efficiency can be measured by how well the market react to news and information as well as ‘fairness’ between buyers and sellers. Hmm… what does this mean?

For example, when a positive news about a company is announced, the price will go up immediately. How fast the price responds to the news will tell you how efficient the market is… Take note: not only the response time is measured, the price should also move in proper direction. That means, when a positive news is out, price should go up, not down..

In an efficient market, ‘fairness’ is also an important measurement… What do I mean? First of all, all companies have their very own intrinsic value… Or how much the company is worth… And this price will be reflected in their market price… That means there is a balance between the supply and demand (how does this affect the price? You can refer to my previous post), there will be no overbought or oversold situations… Which means the companies are selling at their fair value…

Does this sound good to you? Hmm… If you ask me, this might not be such a good news to me…. Why? Let us analyze this: First, which method do you use when buying stocks? Do you use fundamental analysis or technical analysis? An efficient market is a very bad news for those that uses technical analysis (TA)… Because like it or not, TA earns from overbought or oversold conditions… From other’s panic selling or ignorance… So, in an efficient or fair market, how are they gonna earn?

How about those that uses fundamental analysis (FA)? This may sound like good news because an efficient market also puts price of stocks according to their intrinsic value… Which means, those that are masters of analyzing fundamental values of a company will pick up great stocks to invest in… They will be able to earn when the company expands fundamentally which will bring up the price or from their dividends… Sounds like a good news? Maybe not.. In most investments, the earnings can be divided into realized and unrealized gains… Realized gains is the money you get from dividends, unrealized gains is from the price increase which is enhanced many folds from overbought or oversold conditions… However, majority of the earning is from the unrealized gains component, and this can be seriously hampered in an efficient market…

So, the question now is, do you think Malaysia is having an efficient market? It’s a definite no for me… The next question is, do you want an efficient market? That is a definite NO from me too… But how do we survive this inefficient market? The answer is SKILLS… Be it fundamental or technical analysis… Skills is the thing that will decide whether you can make it or not in this inefficient market… So, let us enjoy this inefficient market to the most by improving our SKILLS!!!

Does company performance affect price change?

Everyday we see price of stocks going up and down. When there is good news or high profit reports, the price of the company goes up. But if there is ill news or massive loss, the price goes down. Looking at the pattern, is the share price determined by company performance?

A very important point that you need to understand here is that the share price is not 'directly' determined by the company's earnings and performance... It is directly determined 'directly' by the balance between the demand and supply.

What do I mean? I'm quite sure you would have noticed that news and earnings would affect the company's price.... When there is good news or when the company reports a good annual profit, the price would go up. But if there is ill news or negative earnings, the price will go down... Then, why do I say performance do not directly affect the price? Haha... Noticed that I use the word directly?

The share market price works something like inflation, when demand overwhelmes the supply, the price goes up... And the same goes opposite... More buyers than sellers, then the buyers will offer a higher price in order to get the product (shares). So the price goes up... So that is why I say, the demand is the factor that 'directly' affects the price..

However, company performance do affect demand. When a company do well, there will more demand for their shares, and the price will go up... So, indirectly they do have some effects... Hehe...

So, it is important that you don't freak and go into panic buying or selling when there are news about the company.. The news will only have effect on the price when it is significant enough to cause a change in demand.....

Investor Vs Trader, Which one are you?

A lot of people including me, did not know what is the difference between an investor and a trader. I did not even know the existance of these two terms.. Until.......
My first email to Ben from http://bliswise.blogspot.com/ . And that was the first time I heard of these two terms...

So, what is an investor and what is a trader? An investor is someone who looks for fundamentally strong companies to invest in... But a trader, invest when the graphs and technical analysis tells them that the price of the particular stock will be going up... In other words, fundamental analysis looks into the intrinsic value of the company or how much the company is worth to invest in, hence - Investor. A trader however, looks at the company like a 'product'. Whether they can buy the stocks now and sell it with a higher price later... Which is like measuring the demand for the stock. Confusing? It's ok, there will be some postings in the future that will discuss more on fundamental and technical analysis.

Why is it important to know which one are you? Why is it so important to set the mentality right? It's because both have a very different game plan. How is it different? That will also be posted on future blogs... Hehe... Like that then can keep people coming ma... Hehe.... Anyway, this is just an introduction to the concept of investor vs trader. Something like a point to ponder and look into... Hehe....

Modify your dreams or magnify our skills

Haha... I copied my comments that I had posted in Ben's blog http://bliswise.blogspot.com/2007/03/modify-your-dreams-or-magnify-skill.html ..

Hi Ben, that is a very nice one...I remembered my school teachers and a lot of motivational books would always say aim high... If you aim for the sky, if you don't reach it, you will probably fall to the roof only... But in stock market and many other investment and business out there, if you aim for the sky when you obviously cannot reach, you may end up in the drain instead of the roof... I always believe when you aim, you should be realistic... as you stated, too much failure due to unrealistic aims and goals lead to demoralization... So it is always better to set goals that is achievable... When you reach it, set another higher one... Continuous achievements, though small, can be very good positive reinforcemets... I am still in the search for the right method and and techniques in the stock market.. Although i am facing a lot of failures and set backs... They will not stop me.. For i am gaining experience with each fall... I believe i will be able to use all these experience to enhance my skills... Especially now that i have found very good and experienced leaders here that are willing to guide me.. Thanks guys and gals...

Why companies want to go public?

We say we buy stocks or shares of a public listed company, but do we know why would a company want to go public?

So, why would a company want to go public? Why would they want to go through all the procedures and restrictions once they go public? Well, one of the reasons could be to raise a large amount of money for whatever purpose, for company expansion or some mega-projects. Now, there are a few ways out there for them to raise money, one is to loan form the bank, or to 'get' from the public.

Notice that I use the word ‘get'. It is not a typing mistake... When I say the company ‘get’ the money from the public, it means the company is going public and by offering shares. Of course there are rules and regulations that the company needs to follow.

Now, since the company is gong to get listed, they need to offer their shares to the public for the first time. They will go through a process called “Initial Price Offering (IPO). It is like offering their shares at a discounted price to the public because the price will normally be lower than the market price.

How much can they raise? That will depend on how much shares are offered. Just imagine, if they offer one million units of shares at RM1 a unit, they can actually raise RM1 million. And the best part is, they never need to return that money… That is why I say they practically ‘get’ the money from the public.

So if they can just get money from the public, what does the public get in return? Why would we want to buy their shares? How do we make or loose money then? Haha… Got lots of question? They will be revealed in the coming postings…

To be continued….

Why bother about the basics?

As I have mentioned earlier, this is a learing blog. So the first on the agenda will obviously be about the basics.. I think it is very important that we have a strong foundation first before we do anything..

How high a building can be built will always depend on how strong the foundation are...

So, before we move into Fundamental or Technical analysis, let us look at some basic knowledge about stocks....