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Posts Tagged ‘Stocks’

This is a stock market weekend newsflash valid as of 13th October 2008.  Well, at least the research was done over the weekend anyways!

 

As most would know by now, the stock markets are going crazy!  The entire financial market is filled with panic and fear.  While everyone around you loose their heads and whines about their paper loses, keep your cool. It is times like these where bargains exists!

 

Under normal sane market conditions, the stocks would be priced rationally. When emotions like fear take charge, rational thinking goes right out of the window. It also means crazy prices will appear!  Compounded by the fact that the US markets will be closed for their weekends, it is quite usual to feel more gloom on Mondays in Singapore due to lack of direction of how stocks should price themselves.

 

This is a short entry hence I will not go into the details of how I derived at my calculations save the following ideal buying prices for me:

  • Singpost at $0.75
  • Mobile One at $1.84

 

I have factored a 30% discount from fair value as buffer and also studied some of the companies’ fundamental financials.  This is key to valuating any stock.  No hearsay involved. If you are seriously keen on how I derived the pricing to confirm your studies, drop me a comment on this blog.

 

Some of the stock price is already very near my target buy price, so I will be watching the market closely. I may be labelled as crazy, but let history be the judge of me! Have fun picking bargains!

 

Ps. If you happen to read the Straits Times over last weekend on their recommended bargain stocks and their supposed buy price, you may wonder how they picked this basket of stocks.  I did some checks on them and found them lacking in fundamentals and appalled at some of the recommendations (eg. SPH).  ou be the judge of that…just don’t loose your shirts (or dresses) along the way.

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Money, Money, Money!

Money, Money, Money!

How is it possible that I can be so confident (some say silly) to afford giving away interest rates of 4% per annum to my parents when I pool funds together for investing in stocks?  Are there some uber secret techniques that I am using?  Or am I just plain crazy?  If it is true, then show me how to make MONEY, MONEY, MONEY!

Most folks do not realize the true returns and sources of revenues that a good stock is able to generate for you that does not require you breaking a sweat!  Here is the breakdown:

1. Capital Returns – Also refers to gain in share price.  This annual return is anywhere between 2% to 12% of purchase price in the Singapore markets.  Normally, the average benchmark for capital returns should be the same as the annual economy growth of Singapore.

2. Dividends – The average blue chip dividend should beat the average 2% fixed deposit interest rates of banks.  Else, most folks would rather put their money in banks than invest in companies.  Hence the annual return is approximately 2% to 7% of purchase price in Singapore.

3. Rental revenues– Most people did not know that they can rent out the shares they own.  However, the problem with this scheme offered by the Central Depository of Singapore (CDP) is that you need to hold at least 50,000 shares to participate.  However, the returns are very decent should anyone wants to borrow your shares.  It is currently priced at 4% of the prevailing price of your stock. So assuming that you manage to rent out your shares for only 3 months in an entire year, you could get about about 1% income.

So in a nutshell, if you stock is performing badly due to the market circumstance (and no fault of its own), you should be able to get at least 4% returns annually.  In a best case scenario where you could also rent out your stocks, you are possibly looking at returns of up to 20% per annum!

So if you pay out 4% interests to your parents in an average performing investment market, and assuming you are making 10% returns, you can effectively increase your returns by almost 6% using other people’s money!  This gives you a net return of 16% (if you include your own portion).

In the event that things do turn for the worse, and you do not make capital returns, the dividends and rental incomes can cushion the fall.  Hence this mindset of investing can allow you to take risks with good potential returns, but with controlled downside.

Hence, it is beginning to sound very true that money makes even more money!  Hence I do recommend kick-starting your efforts to raise capital to begin investment!

For those who are born after the ABBA hit song – “Money, Money, Money”, here is the video clip to inspire you…less the gambling Monaco part.

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When an investor uses fancy technical charts to buy and sell financial instruments (or stocks) frequently within the same trading day, it is commonly understood as Day Trading. I would broaden that scope to include frequent trading within a short period of time.

 

Accident

I come from a school of thought that follows Warren Buffett – there’s no quick and easy money. Day trading is like a driver engaging in frequent over-taking attempts on a crowded highway at high speeds. Yes you can definitely reach your destination faster, provided nothing goes wrong. But something always go wrong. Eventually the odds will be stacked against you and it is likely fatal. I personally do not recommend day trading for beginners.

 

Dark Side

However, having said that, day trading can be very seductive, powerful, enticing and exhilarating to the unsuspecting investors. Lucky for us, Darth Vader was not a stock broker or the famous scene on Cloud City from Star Wars will play out very differently:

 

Vader: Luke! Join me and I will complete your training with my technical analysis charts! With our combined strength, we can take over the stock markets by reaping indecent profits from quick and frequent trades!

Luke: I’ll never join you!

Vader: If you only knew the power of the dark side of day trading!

Luke: Yoda told me you will ruin my financial returns and fortunes!

Vader: Luke! I am your broker!

Luke: No…no…it’s not true! That’s impossible. I know each time I trade, I would incur a fee of approximately 2% of the total transacted value. Trade 10 times in a month, and I would lose 20% in transaction fees! Look, it already cost me a hand!

Vader: Search your feeling and you know it’s true…Luke! We can beat the stock market and rule the financial world…It is your destiny. Join me and we will rule as broker and investor!

At this point, much to the credit of Luke, he resisted the temptation to join his broker and escaped.

 

While I understand that you can reach your financial goals through day trading, buying and selling often, but the risks of failing far outweighs the potential gains. So choose wisely and stay invested for a long period of time without fattening the wallets of your favourite trading house. Instead, make yourself rich the slow and steady way.

 

ps. For those not familiar to the scene from Star Wars above, see the video below…

 

 

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Chicken RiceThere is no stock market ticker to tell you how much you should value your chicken rice.  Yet you can always sense when it is over-priced or under-priced.  Assume that there is a stall owner who happens to sell the world’s best chicken rice that you love to eat.  It’s tasty, delicious and everything you could ever ask for. 

Then suddenly, the nice owner realises that he could change his prices just to see how you would react.

  1. Price drops to 10 cents – You go hysterical!  You secretly plan to stock up a gazillion plates of your favourite dish.  The owner sees this and senses something amiss with you salivating in front of his stall.  He changes the price.
  2. Price rises to 6 million dollars– You go hysterical (in a bad way) again!  Your face turns black in anger and wonders how many folks can really afford it.  As you sulk, the owner realises that pricing his chicken rice to the same as his favourite TV show (6 million dollar man) is not going get him any customers.  He then changes the price again.
  3. Price returns to 3 dollars – You suppress all forms of ego to buy and consumer your dish.  You will continue to eat there even if the price fluctutes a little from time to time, depending on the situation. 

After all this, do you really know the actual value (not price) of chicken rice?  The reality is that you don’t.  Price changes, but the true value (or intrinsic value) remains rather constant.  Hence, there is always some general idea or feeling to tell if things are over priced, or under-priced, in relation to the actual value of the product.  The absolute value has too many variable affecting it and would be futile to try and find it.  By this, if the price is too far from the value, you should be able to detect it easily.

So what does this have to do with stock skills?  The main point is, we should never try and use all the prescribed methods/tools recommended by experts to determine the absolute true value of any stock prior to purchase.  Rather, these tools and methods should be used to tell us the general valuation range of a stock.  Then we can compare the current prices of stocks to tell if a stock is under-priced or over priced at any given point of time.

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