Happy Chinese New Year!
If you have recommencing work today, 开工大吉！ And for those who are still on new year break, enjoy and travel safe.
Chinese New Year is always a great time to reap in those Ang Pows (sorry for those who are married), but what fun would it be to be able to collect some additional “ang pow” from the stock market!
While that sounds wonderful, one needs to be cautious because harvesting “ang pows” in the stock market is similar to searching for gold in a field full of landmines. One wrong move and the year wouldn’t start out on such a prosperous note. Therefore, here are 3 steps you need to follow if you want to collect them safely:
1. Get The Fundamentals Right
Studying the fundamentals of the company refers to studying the strength and profit generation ability of the company. You see, for a stock’s share price to go up in the future, the business behind the stock needs to be performing, that is to be able to generate more profits over time. Its fairly simple and logical. If a business generates more profits, they are able to reward shareholders with better dividends every year. Hence the shares will become more valuable over time.
But one problem is, with so many different stocks in the market, how do you know which one will generate more profits in the long run?
Simple, dig out obvious companies.
Meaning to check out listed companies that are already serving us in our day to day lives such as Nestle, Facebook, Disney, Tenaga Nasional Berhad etc. The reason is because these companies that we stick to are quite likely to have a very strong economic advantage. Otherwise why would we continue using their products and services?
Next, check their track record in terms of ability to generate sales and profits. For a second layer of protection, also check for their dividend track record. A company that has a strong track record of making huge profits and paying them out as dividends to shareholders tend to see their share value go up over time. Here is what you should expect to see in a fundamentally strong company:
2. Look for knee-jerk reactions
Knee-jerk reactions refers to a sudden and drastic drop in share price. This usually happens when there is a bad news that pops up regarding the company which causes the share price to gap down. The reason the gap down occurs is due to fear in the market. When investors panic, they tend to over-react more than thinking rationally about the situation. These overreaction creates potential opportunity for us to grab shares at what we call a “Flash Sale” price. These are typically very easy to find as the media loves reporting bad news since it generates the most interests and engagement with their audience. Here are what knee-jerk reactions look like:
But hang on, just because it’s a knee-jerk reaction, it does not mean you should invest immediately.
Investigate the cause of the sudden drop in price.
This can be done simply by ‘Google’-ing the news related to the stock. Our aim in this investigation is to determine if this bad news surrounding the stock is a long term or short term damage to their fundamentals.
A long term damage is when the business is expected to face a significant damage to their ability to generate profits and this damage will most likely last for many many years. A perfect example would be Nokia. When smartphones were introduced, Nokia has lost it once dominant ability to sell their mobile phones profitably until this very day.
A short term damage on the other hand, only lasts for less than a year and the impact is relatively small for the business. These includes one time losses or a bad quarter. Most investors confuse between a long term and a short term damage and most of the time, dump their shares in panic on a short term damage. This creates a wonderful opportunity to pick up shares at flash sale prices. Many would fear buying the dip, but whenever the storm goes away, the confidence of investors would return and share prices will eventually go back up, giving investors a wonderful return within a very short period of time.
3. Build a Portfolio
Lastly, remember to limit your exposure to a single stock. No matter how much research or analysis is done on a stock, we can only sieve out stocks with high potential to give us a good return but there is still no guarantee that it will a profitable venture. A potential “Ang Pow” can always end up being a land mine. Build an investment strategy that allows you to make mistakes. Always remember that the maximum loss for a stock is 100% of the capital you put in but the potential return in literally unlimited. Therefore, if you have a portfolio of 5 different stocks, 2 can do badly the other 3 with unlimited returns will cover those losses and at the same time, give us a very good return on the entire portfolio.
Final note, also do give the stocks some time to recover. Panic and fear tend to stay around for a while. While waiting, don’t pay attention to the market but instead, focus on visiting friends and families to collect more “ang pows” which can be used to invest later on.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.