Issue No.52


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Basic Investment Tips

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561

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Investment Tips

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This year has been unkind to many investors who were used reaping fortunes out of the stockmarket. It may be easier to be disciplined when the market is rising, but it definitely is hard sticking to the few trading rules that you vowed to follow earlier during market dips. Things are always easier said than done. Talk to anyone who had their fingers burnt and they will agree with you.

The key to successful investing is to follow a disciplined approach. No doubt the word "discipline" always springs to minds of investment professionals. Practically everyone knows that one has to be disciplined when it comes to investing or saving your money. Yet, time and again, investors who have lost their money in direct investments wish they had been more disciplined in their trading.

For example, professional traders always recommend that investors should not be afraid to cut losses to minimize losses when things go sour. But for some investors, that advise may not be so easy to accept in reality.

One dread about investing is regret. Often people come to you with all kinds of hot tips. How many times have you said "I regret not buying a stock recommended by my remisier two days ago and now that the price has risen more than 40%" or "I hate myself not taking profit earlier now that the price has just dropped back to its original level".

Such is the life of an investor - trying to cope with the ever-changing investment world. Investors normally experience lots of ups and downs throughout life regretting one investment or another.

Picture this! You received a very good tip and bought stock XYZ at RM7.00 targeting a 50 sen profit at RM7.50. Your cut loss point is at RM6.00. The market dipped and stock XYZ indeed dropped to RM6.00. You thought of cutting loss but your dealer friend told you that it is just a temporary dip.

Your mind gets distorted and you become confused. In addition, you realize that cutting loss at RM6.00 may be too painful as you have bought quite a few lots. In the end, you do not cut loss. The price falls to as low as RM5.00. You are upset and fearing more loss, you take no further chances - cut at RM5.00. Your net loss ended at RM2.00. To add more salt to your wound, your friend was right and the price shot back up to RM7.00 and finished the day high at RM7.50 (which was your original target). You end up drunk and dazed, wishing you had not followed your original plan of cutting loss.

Cut your losses short? Sounds great but how do you actually do it? Do you get out of a position as soon as it show a loss or do you give in certain allowance and if yes, by how much? At some point, almost all trading positions show a loss, how do you identify whether it is a real loss.

In the above example, the stock eventually went back to profitable territory despite a short-term market setback. If the opposite occurred, you decided not to do anything given the view that it is just a temporary dip only to learn later that the stock plunged to the dayís low at RM4.50! What should I have done? Very simply, pearls of trading wisdom are more easily recited than implemented.

Take the classic advice: "Do not trade on hopes or fears" - do not let your emotions overcome our investment decision. But, investors are human, they are affected by psychological factors such as greed, fears, hopes no matter how professional and experienced they are.

Denial, anger, bargaining, depression, etc is part of the mental process that an investor normally goes through when losing money in the market - when the losing position starts to get personal.

"Crowd" is the common factor that contributes to emotional decision-making. As you become a member of the psychological crowd, you experience varying psychological influences. Your behavior or patterns of trading could change radically not reflecting your inner characteristics.

There are some basic rules that investors should follow when investing in any market and in trying to protect their hard-earned money. Resist buying a stock that has already gone up a lot or where a trend has already developed. Convince yourself to forget "hot" stocks. Remember, there are plenty of opportunities out there.

Be prepared for the ups and downs of markets particularly if you are investing in stocks. When investing in the stockmarket, remember that short-term volatility is common and that stocks always perform over the long-term. History will tell - in the 10 years since the October '87 crash, Dow Jones has risen by more than 300%.

If you worry too much about the ups and downs of the markets, go the "dollar-cost averaging" route - invest the same amount of money regularly. That way, you do not have to worry too much about market sentiment and doing detailed market research. Unfortunately, no method will guarantee that you will not lose money.

Diversify, diversify, and diversify. Do not concentrate on a single stock but rather on an entire portfolio. Havenít you heard "do not put all eggs in one basket". No investment is 100% safe including the money that you put in banks. That is why you need to diversify to reduce risk. For those who are very active in the market or intend to be active and hope to be successful in their investments, some tips which may be useful in minimizing losses:-

  • Be self-disciplined, study the market. Update yourself daily with latest developments
  • Do not think short-term only. Short-term wealth is unlikely to secure your financial security. Have separate plans for medium and long-term investments.
  • Be persistent. Do not quit just because you have lost a few rounds earlier. Learn from the losses and identify what went wrong. It is because you were swayed by friends or rumors? If so, next time stay away from them when making decisions.
  • Make sure you have enough capital base when trading. You will be nervous and most likely to make silly mistakes if you have only RM1 trying to bet on a RM3 stock.
  • Self-control - try to overcome the two evils - greed and fear. Just because it does not come easy it does not mean that these problems cannot be overcomed. Identifying the cause and learn from past experiences.
  • Try not to invest in something that you do not understand. An unfounded "hot tip" from your friend is unlikely to grow your wealth over the long-term.
  • Know your investment limit - how much money can you afford to lose?

Lastly, you may opt for an alternative way to invest - professionally managed funds such as unit trusts either local or international has its advantages particularly for small investors. The trick is to know which fund manager and what asset class(s) you want to have exposure to in order to protect yourself. The degree of exposure depends on your attitude towards risk and return. If you are new to the world of investments, talk to independent financial advisors.

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Reproduced with permission from Normandy Services Sdn Bhd, Tel:603-4695560 Fax:603-2945561