Investing in the Stock Market

I am a Money Magnet! We are Money Magnets!


It looks like there's no stopping the bull market from charging onwards.  The PSEi continues to go up and make new all-time highs!  If you trade in the stock market or hold an equity-based portfolio, you might find this article by Ron Nathan very helpful.  It's an old article but still very insightful.  Enjoy reading it after the jump.




TIPS ON HOW TO BECOME A BETTER INVESTOR (Excerpts)
by: Ron Nathan (Mr. BearBull)

...the rest of this article and the next one will completely change your investment psychology and you will be a far better investor in the future. What follows is based on 52 years' experience in London and Manila. You can profit from my observations and mistakes. It will be particularly useful for beginners whose knowledge of investing is limited. Good luck, and if you find it useful, cut out the articles and paste them on your bedroom or office wall, in between your pin-ups of Beyonce and Anna Kournikova.

1. Do not trade against the trend 

You will be shocked to learn that almost 90 percent of investors in the Philippines, US, UK and Japan lost money in the stock market. This is because they ignore the first commandment and jump in only after the market has already had a big rise. ...

You only BUY when the market has fallen and the technical indicators say that it is about to turn up. There are many indicators and I will deal with some of them next week so do not ask me what they are now. Conversely, you SELL when that index has had a big rise and the indicators show that momentum is slowing down or is about to decline. ...


Players do not use their head, they trade on their emotions, and this is nearly always wrong. I will tell you where to get the necessary fundamental and technical data, but in the meantime, you can use a 20-day moving average of the index or any stock, which you hold.


2. Cut your losses quickly 


.. (follow) the principle of POP COLA.
Prolong Our Profits Cut Our Losses Aggressively 


Incredible as it may seem, although they took great care in their entry points, 63 percent of their transactions resulted in small losses. About 30 percent made small gains while the remaining seven percent scored huge gains, doubling, tripling, quadrupling or even becoming 10-baggers, because of the leverage.  (Side note: In short, you'll have lots of losing transactions in small amounts and actually have only a few winning transactions but bringing in huge profits.)  

So, when you get it right, let your profits run until momentum stops rising. But when you get it wrong, SELL three percent below your buying price. ... Sometimes, this will be a mistake but it protects you against disaster. After all, you don't complain about paying fire insurance because your house didn't burn down. You can afford to cut small losses. It is the big ones that ruin you. 



3. Do not average down 


Under normal circumstances, I am against the death penalty, but not for those who break this commandment. They should be barbecued slowly over a fire while concentrated hydrochloric acid is dropped upon them. All the people I know who went bankrupt averaged down. 



(He narrated the stories of two clients who went bankrupt because of averaging down)


If you follow the second commandment, such disasters cannot happen to you, so you will never be faced with the decision of whether to average down.

4. Do not overtrade 

If you are trading everyday, the only person making money is your broker. The expense involved is too high. You have to pay two commissions, usually 0.5 percent plus value-added tax, and a 0.5-percent sales tax. In addition, there is the difference between the bid and offer price, usually about two percent. So you have to make four percent just to break even. This is fine, so long as you BUY just as the stock is turning up, but if you deal constantly, the expense will ultimately cripple you.

That small percentage is enough to make all the incredibly costly casinos in Las Vegas profitable. They can afford to give free rooms, free food and drinks, and free shows to high rollers because they know that a percentage advantage of 3.6 percent is enough to guarantee the house a sure profit over the long run. Trade only when the technical indicators tell you to. For the remainder of the time, do nothing. Patience is a virtue. 


5. Do not trade on tips 


6. Do not chase prices 


When I recently recommended Pilipino Telephone Corp. (stock symbol: PLTL) for long term, subscribers bought at around P1.88 and a week later readers bought at P2.04. But those who did not read the article until the evening piled in next day, paying up to P2.55. This was sheer lunacy and I told subscribers to SELL and wait for a correction. The SEC has now stated that Smart Communications does not have to make a tender offer after all, as they bought the shares at P0.2059, so it would have been an appalling waste of time and money. I repeat that there is nothing to go for in the short-term, but if you can take a one-year view, the shares should go up to at least P3.

When shares take off, they usually fall back.


7. Be wary of inactive stocks 


The documentary stamp, which made trading in shares well below their par value prohibitive, has been removed. As a result, trading has increased tenfold and, numerically, third-liners comfortably exceed leaders. But in value, out of 122 stocks that traded last Friday, only 10 traded P10 million and accounted for over 90 percent of turnover. 

I have a computer program that tells me when a stock increases in price by five percent, and its volume is 50 percent above its 50-day moving average. This alerts me to inactive stocks that suddenly become more active. Often, the spread between bid and offer is too great or the number of shares available is too small to be of any interest. But occasionally, it throws up something interesting.



8. Buy low priced stocks 

By this, I don't mean stocks quoted at a fraction of a centavo. I mean decent stocks standing around, or above, their par value of P1.00. Obviously, it is easier to double your money on a low-priced stock than on a high-priced bank or insurance company.



The last commandment is

9. LEARN TECHNICAL ANALYSIS



THE ABOVE commandment is slightly misleading because if you desire to become a really competent investor, you must also learn global economics and fundamental analysis.

By global, I do not mean that you have to study every country, but you must at least know what is happening in the United States.

Wherever the American stock market is heading, the rest of the world will follow. After the 9/11 attack, the US market got battered for a few months and every other stock market followed the downtrend. When the US market finally got back on its feet, every other market recovered. 



When Wall Street sneezes, the rest of the world catches pneumonia.

Basic knowledge

For the local market, the business section should give you all the necessary information. But if you want more details, go to the websites of the National Economic and Development Authority or the Philippine Stock Exchange. You can also enroll in courses at universities and colleges.

Next, you should have a basic knowledge in fundamental analysis.

This means that you need to know all about companies. You must know how to read a balance sheet, calculate the earnings per share and from this, the price/earnings ratio.

You need to understand what a yield means, how many times a dividend is covered, and what preferred and convertible stocks are.

You should know book value and understand such concepts as debt and cash flow.

You can take a course in accounting or business management, and there are plenty of books, local and imported, in all the major bookstores. 

Do not ask me to recommend one because I studied accountancy in 1951 and have not read any books since then. 

By now, you are probably too discouraged to read on, but don't despair because help is on the way.

If you want to buy a simple but excellent technical analysis book, try TECHNICAL ANALYSIS OF THE FUTURES MARKET by John Murphy, available possibly at local bookstores or at amazon.com. 

It was written years ago but is still considered to be a classic. Every aspect is explained simply and it can be used for trading stocks, commodities, currencies or futures.

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