Saturday, 7 July 2012

My 18 points guide to Successfully compounding your money in Stocks

  1. Be a good stock picker.  
  2. Think as a business owner.
  3. Always look at value rather than the price.  Do the homework.
  4. Buy and hold is alright for selected stocks.
  5. Compounding is your friend, get this to work the magic for you.
  6. Mr. Market is there to be taken advantage of.  Do not be the sucker instead.  BFS;STS.
  7. Always buy a lot when the price is low.  Doing so locks in a higher potential return and minimise the potential loss.  But then, if you have confidence in your stock picking, you would have picked a winner - it is only how much return it will deliver over time.
  8. Never buy when the stock is overpriced.  Not observing this rule will result in loss in your investing.  This strategy is critical as it protects against loss.
  9. It is alright to buy when the selected stock is at a fair price.
  10. Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the the price is still obviously too high.
  11. Do not time the market for such or any stocks.   Timing can increase returns and similarly harms the returns from your investment. It is impossible to predict the short term volatility of the stock, therefore, it is better to bet on the long-term business prospect of the company which is more predictable. 
  12. By keeping to the above strategy, the returns will be delivered through the growth of the company's business. 
  13. So, when do you sell the stock?  Almost never, as long as the fundamentals remain sound and the future prospects intact.    
  14. The downside risk is protected through only buying when the price is low or fairly priced.  Therefore, when the price is trending downwards and when it is obviously below intrinsic value, do not harm your portfolio by selling to "protect your gains" or "to minimise your loss."  Instead, you should be brave and courageous (this can be very difficult for those not properly wired)  to add more to your portfolio through dollar cost averaging or phasing in your new purchases.  This strategy is very safe for selected high quality stocks as long as you are confident and know your valuation.  It has the same effect of averaging down the cost of your purchase price.  However, unlike selling your shares to do so, buying more below intrinsic value ensures that your money will always be invested to capture the long term returns offered by the business of the selected stock.
  15. Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.  Tactical dynamic asset allocation or rebalancing involves selling at the right price and buying at the right price based on valuation.  Assuming you can get your buying and your selling correct 80% of the time;, to get both of them right for a profitable transaction is only slightly better than chance (80% x 80% = 64%).  Except for the extremes of the market, for most (perhaps, almost all of the time), for such stocks, it is better to stay invested (buy, hold, accumulate more) for the long haul.
  16. Sell urgently when the company business fundamental has deteriorated irreversibly. (Reminder:  Transmile)
  17. You may also wish to sell  should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality.  However, unlike point 14, you can do so leisurely.
  18. In conclusion, a critical key to successful investing is in your stock picking ability To be able to do so, you will need to acquire the following skills:
  • To formulate an investing philosophy and strategy suitable for your investing time horizon, risk tolerance profile and investment objectives.
  • The knowledge to value the business of the company.  
  • The discipline to always focus on value.
  • The willingness to do your homework diligently.
  • A good grasp of behavioural finance to understand your internal and external responses to the price fluctuations of the stock in the stock market.
  • A good rational thinking regarding the risks (dangers) and rewards (opportunities) generated by the price fluctuations of the stock in the stock market.

Is it not true, that the really big fortunes from common stocks have been garnered by those 
  • who made a substantial commitment in the early years of a company in whose future they had great confidence and 
  • who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

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