Saturday, September 18, 2010

Rich Friend, Poor Friend - What Matters In Investing

I had lunch with a junior college friend. Apart from being better looking than him and more articulate in English, he is considered more "superior" in most personal traits than I am. Apart from being coming from a better family background than me, he is very humble and not quick to anger. It is the latter two qualities that I feel, I should work on as I often find myself lacking a good head on my shoulders.

Lunch topic revolved around stocks and when I had to be back to the office. He asked me what I thought about Etika and as usual, I was very positive on the stock and told him that there are risks nonetheless.

What prompted this post was that his attitude towards investing is similar to mine. He articulated it while nibbling on some fries, saying that a good proportion of this stocks are high yielding and of good quality - DBS Group and Suntec Reit to name a few.

The balance of his money, he uses to chase a few speculative stocks. He made a handsome profit on Sound Global - he bought in at $0.40 and sold it close to a dollar. However, he also bought China Animal Healthcare after I alerted him of its prospects but has since considered disposing given its stagnant price movement.

But the rich are always different. He puts in at least $10,000 when he longs a stock, a sharp contrast to the paltry $500 that I put in for some counters. His edge is that he can grow his money more meaningfully than me, because the brokerage costs eats up a big proportion of percentage gains, when you buy less than say $5,000.

This brings to the point how much money should you begin with. In my opinion, if you are confident that you will be healthy and employed, with all emergency funding covered, $5,000 per stock is the minimum efficient scale. $56 being the round trip brokerage as well as other costs, this works out to slightly more than 1% hair cut, compared to 10% if you buy only $500 worth of stock.

With diversification of 10 stocks, a good portfolio to start with should be $50,000.

Of course, if you do not have so much money to begin with, you best bet is to try to be like me - go for long shots and hope that you land multi-baggers.


  1. Of course. Account size that matters. The magic number - as larger as possible.

    But when small, focus big. When big, act small.

    So far, you have been doing well in your portfolio.

  2. haha... those really are words of wisdom... thanks alot..

  3. Why don't you try CFD?
    You get leverage of up to 10x, with commission of 0.2% (min $25) and financial charges of around 3% (calculated as SIBOR +2.5%). Just gotta pick your provider cafeully as commission and financial charges varies greatly.
    One major drawback is that not every counter is available for CFD.

  4. hey thanks for the offer, but i try to stay clear of leveraged products firstly because I am very risked averse. I do not even contra stocks. Also, the holding period is not too long, coupled with the higher charges, its is slightly more likely to make a loss using a CFD regardless of strategy.

  5. For those who really think that they can trade well go to forex, futures, options and CFDs.

  6. I think CFD does not expire and u get paid dividends like normal stock, so i don't quite understand your concern that holding period is not too long.
    About the charges, the commission is definitely lower, at 0.2%. The only other charges is financing, at about 3% p.a of total purchase value, calculated daily.

  7. Forgive me anony if I am ignorant with the mechanics of CFDs. IMO, it is somewhere between contra and structured warrants.

    Like all leveraged instruments, gains and losses from CFDs are magnified. It is good if we are holding on to a profit, but what if the stock is making a loss?

    As you correctly pointed out, there are daily financing costs. IMO, as a result of these costs, you are even less likely to cut the losers, resulting in very likely margin calls.

    And my own experience tells me that while cutting the losers is the "correct" tactic, our own aversion to realizing loss - proven by behaviourial psychologists - we do not do it.

    Side note, I do see value in structured warrants in a portfolio, especially puts, but then again, most securities houses and retailers haved used them for punting rather than insurance purposes.

  8. Hi,

    I believe when your portfolio is small, one should not aim to diversify too much.

    Like what cw8888 says, account size matters. E.g. I can tell people I bought in 70 lots of AIMS REIT, but how many can follow on what I did?

    You are doing much better than me in returns. Congrats and keep it up! :)

  9. Well, it depends on personal risk tolerance for the use of leveraged products.

    In the case of CFD, I just want to point out that it can be used wisely to lower your average brokerage cost if your capital is small.

  10. hey guys. thanks for the comments.

    JW, thanks a bunch but i think you are not so shabby too,

    Anony, i too would like to thank you for the input. Like i mentioned, i do not think that CFDs are bad, but maybe it has to depend on the investor himself.