Saturday, January 28, 2012

What have I learnt over the past three years?

My official journey into the investing world started about three years ago. As I have always repeated, I bought my first stock in the now de-listed Singapore Petroleum Company with most of the monies borrowed from my mother and brother. The company eventually got bought over and I made a small fortune. In those three years, I have grown that one-stock portfolio into something slightly bigger, whose market value is worth SGD 44,000 built upon SGD 30,000 of cash injections. Apart from capital appreciation, I have also learnt many valuable lessons, of which I will share.

1. Have a decent paying job. One of my regrets during my university life was not being proactive participating in events as well as not earning some money to tide through things. Thus when I came out, I was in an unenviable financial position of having to eventually pay off my student loan (I still am paying) and not enjoying the lifestyle of an adult. As a consolation, this is a position shared by most of my peers. 
It is important to have a decent paying job because it has an impact on future income as well as your emotional health. What constitutes a decent varies from education level, my definition of a decent paying job is the amount of money that a non-high flier makes. For me, I joined an SME, but my benchmark was the entry-level civil sector. This is because about 60-70% of my university course mates went to work for the government.

A decent pay is also important because so many other bloggers such as MusicWhiz and WealthBuch have shown that the more you can earn, the more you can save and invest. At SGD 45,000 after working three years, I know its not a significant amount compared to those already in the market but I feel that I am slightly ahead of the curve. To that end, I am trying to explore what options I have to increase my monthly earnings.

2. Do your research before buying. There are many investment styles when buying a stock - fundamental and technical analysis being the dominant strands. What is common between the two styles is that they involve a significant amount of research before the order is made. In the first style, an investor goes through all the financial reports and relevant marker studies. In the second style, there is plenty of interpretation of data.

Just because you did your research, does not guarantee that you will make a profit. Random walk theorists will argue that it is not statistically conclusive that more research leads to market beating returns. However, it will be clear to you what your motivations are for buying the stock. And by devoting sometime to the research process, it clears your mind and lets you "see" better. This is a better course of action that buying due to herd instinct or emotions. Once the stock does not move according to plan, you will also be in a better position to cut loss, which is the next point.

3. Be prepared to cut loss. As I write this, I have stocks whose initial sizes were around SGD 1,000 and are now in the red. As mentioned in an earlier post, I have sold off my stake in Asiatic. We must always be prepared to cut loss when the stock does not move according to the story you had envisioned, even more so when the stock does not move with the broader market. I have seen for myself how friends and relatives around me had the opportunity to cut loss at down 20% (a good threshold) but refuse to do so. Worse still, they average down on the stock only to see shares slump even further. Recently, I read that a blogger got stuck in Berlian Laju as the counter has been suspended pending debt restructuring.

Cutting loss is one of the toughest things to do because we realise the loss. But it is a necessary thing to do to minimize the damage done to your wealth. My own rules are not more than 20% down and not out of sync with the market.

To conclude, what I have shared is not groundbreaking but lessons that are very close to my heart. If you feel there are things that I have missed out, do let me know.

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