A reader asked me the following questions:
“From your past experience in trading in the stock market, what is the tools that really make you a successful trader? Besides emotional control and discipline, what other tools would you think can help beginner like me to improve my skills at a much faster pace? I know it takes time to master this skills.
But what do you think that makes you different from other investor? By reading a lot more than them? I have taken courses and read tons of books, do i need to read a lot more than average person ? company financial statement? news? investment books?”
I am not a good blogger like others as I have no patient to write long post. I will try my best to address these questions though by using some references.
“What is the tools that really make you a successful trader? what other tools would you think can help beginner like me to improve my skills at a much faster pace?”
I think the following 5 core principles make me a survivor in stock market:
- Do my homework
- Finding companies with strong economic moats
- Knowing when to buy
- Holding and monitoring for the long term
- Knowing when to sell.
Actually, you can easily find these kind of rules/principles in books or websites.
Do my homework
This sounds obvious, but perhaps the most common mistake that many investors make is failing to thoroughly investigate the stocks they purchase. Unless you know the business inside and out, you shouldn’t buy the stock.
This means that you need to develop an understanding of accounting so that you can decide for yourself what kind of financial shape a company is in. For one thing, you’re putting your own money at risk, so you should know what you’re buying. More important, investing has many grey areas, so you can’t just take someone else’s word that a company is an attractive investment. You have to be able to decide for yourself because one person’s hot growth stock is another’s disaster waiting to happen. If you invest wrongly, blame yourself, don’t blame market, broker, remisier, etc…
Once you have the understanding of accounting, you need to take time to put them to use. That means sitting down and reading the annual report, checking out industry competitors, and going through past financial statements (or you can use EquitiesTracker). This can be tough to do (especially at the initial stage), especially if you’re pressed for time, but taking the time to thoroughly investigate a company will help you avoid many poor investments. Remember that you don’t really need to have accounting knowledge like chartered accountant. I have met few "experienced, but unable to make money in stock market" accountants.
Just learn sufficient knowledge for analysing profitability, solvency, liquidity, and few more.
Finding companies with strong economic moats
The ultimate objective of analysing a company performance is to identify whether the company has strong economic moats. The key to identifying wide economic moats can be found in the answer to a deceptively simple question: How does a company manage to keep competitors at bay and earn consistently fat profits? If you can answer this, you’ve found the source of the firm’s economic moat.
You can check out those companies with wide economic moats. Most of the time, in any present market crash, they hardly break the previous low in the previous market crash. And, they will go even higher after market crash. Of course, this also involves a big topic about managing your capital during market crash. Probably we can discuss this in future.
Knowing when to buy
As you can see from the analysis files I posted for so many months, I am using few tools to find opportunities to buy:
- Intrinsic Values by using Discounted Cash Flow/Excess Return Model/EY% Valuation – I use margin of safety to identify possible range of bargain price. You can’t just go out and pay whatever the market is asking for the stock because the market might be demanding too high a price. And if the price you pay is too high , your investment returns will likely be disappointing.
- EPS QoQ Growth – I adapted this after learning CAN SLIM.
- Technical Analysis – I mainly use support and resistance, simple volume analysis, trend identification, chart patterns and very simple Japanese candlestick patterns (like Inside Bar, Outside Bar, and Doji).
- I do simple volume analysis, but not up to the level like Volume Spread Analysis. I don’t use Fibonacci, Elliott Wave, Japanese Candlestick patterns (like Dark Cloud Cover and others that I can’t remember at all) and some other sophisticated method.
The challenge is you need to identify suitability of methods for every company. For instance, some companies can use DCF, but some can’t.
Sticking to a set of rules is tough for many people because they’re worried that if they don’t buy today, they might miss the boat forever on the stock. That’s certainly a possibility – but it’s also a possibility that the company will hit a financial speed bump and send the shares tumbling. The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another. As for the
few that just keep going straight up year after year – well, let’s just say that not making money is a lot less painful than losing money you already have.
Holding and monitoring for the long term
Often, I tend to correct people that instead of “buy and hold”, we should “buy and monitor”. If not careful, “buy and hold” may turns to “buy and forget”. “Buy and monitor” means after you buy a share, you should monitor performance of the company constantly.
People often ask "How long do you hold your stocks? " Honestly, does it really matter? Just remember the main reason we still holding a stock is because no sell alert or signal (FA or TA, up to individual). If the sell signal appear after 20 years, then I will hold the stock for 20 years. If the company is still performing outstanding, keep on accumulating (of course, remember to diversify, but not over diversify though like what I did in the early days).
Knowing when to sell
Ideally, we’d all hold our investments forever, but the reality is that few companies are worth holding for decades at a stretch-and few investors are savvy enough to buy only those companies. Knowing when it’s appropriate to bail out of a stock is at least as important as knowing when to buy one, yet we often sell our winners too early and hang on to our losers for too long.
Again, the key is to constantly monitor the companies you own, rather than the stocks you own. It’s far better to spend some time keeping up on the news surrounding your companies and the industries in which they function than it is to look at the stock price 20 times a day.
“Besides emotional control and discipline…”
If you notice, I purposely removed “Besides emotional control and discipline” from the question. The reason is I would like discuss this separately. I will use Psychology here as people often refer emotional control to Psychology, even if I disagree.
You may see some investment gurus out there stress that you need to understand the limitations created by your subconscious mind, and you need to understand how to access your subconscious mind to unlock your potential. Some of them amazingly even write one book just for psychology. In my opinion, if you want to become a spy, sportsman, mentalist and magician, then this is important. But to be a success investor, come on, you don’t really need to learn how to access your subconscious mind to unlock your potential. My father-in-law and grandfather who were low-paid labour’s and studied until primary school, also can make millions in stock market. These old folks have no bloody idea about psychology. They just do homework and execute their investment strategy constantly.
Few years ago, I read a book (forgotten the title) or may be I learnt from Tony Robbins. The author/Tony opined that psychology seems to become a barrier to success when the subconscious mind is not satisfied that the person know what he/she is doing on the conscious level. I agree with this.
In simple words, I believe that if investors adopt a sensible investment strategy, they will commence investing with a high consistent return. If they can achieve that, then their subconscious mind will be aware of their competency, and will remain happily in the background.
Instead of tying up the subconscious mind in some sort of psychology logical strait jack, I think the investor should listen to it! If the investor can successfully commence his/her strategy with high and consistent return, then the subconscious mind will not place obstacles in the investor’s path.
Until now, I still face fear to enter market; sometime still tend to be greedy; fear/panic about market crash. I listen and respect these emotions. This is human nature. These emotions are meant to protect you from harm, and also, make you breakthrough. For instance,
- Fear can alert you to double check your analysis and decision;
- Greed – the whole purpose of investing is making money, no greed, then don’t invest;
- Hope – Who doesn’t hope stock price going up…..
Then, why need to control them? The possible reason is not to become a extremist. For instance,
- Too fear until you don’t buy a single share for few years;
- Too greedy until you borrow money from loan shark;
- Still hope the company will bounce back if the company is losing competitive edge.
This is just like one server engineer fixing a bank server. The server engineer definitely faces fear, stress, and tiredness when he has to work overnight to fix a mission critical server. But because he has the necessary knowledge and resources, he will follow proper procedure to fix the server, and bring up the server accordingly. Same goes to lawyer, doctor, soldier, teacher and of course investor. What makes investor’s psychology so special? Just remember not to be extremist. You can see a lot of disastrous news from newspaper where some professionals turn to extremist and hurt society and family as they can’t manage their emotions.
In my opinion, discipline is the most important. In school or working environment, you should discipline to reach office/school on time; discipline to follow office/school rules; discipline to implement best/good practices to achieve goals; etc…. In investment, for me, I just have to be discipline to follow my 5 core principles. People who don’t have discipline in life definitely will not have discipline in investing.
“what do you think that makes you different from other investor? By reading a lot more than them? I have taken courses and read tons of books, do i need to read a lot more than average person ? company financial statement? news? investment books?”
Simple, just keep discipline to do homework! This is lifelong learning. In my opinion, if you do your homework consistently and diligently, you are already above a lot of people. You are on the right track.
Investing is actually a profession, like doctor, lawyer, engineer, etc… We studied for few years in college/University, made some mistakes along the way, keep on upgrade our skills, step up to the next level, then make more money (hopefully). Same goes to investing.
Think of the time you spend on research as a cooling-off period. It’s always tempting when you hear about a great investment idea to think you have to act now, before the stock starts moving-but discretion is almost always the better part of valour. After all, your research process might very well uncover facts that make the investment seem less attractive. But if it is a winner and if you’re truly a long-term investor, missing out on the first couple of points of upside won’t make a big difference in the overall performance of your portfolio, especially since the cooling-off period will probably lead you to avoid some investments that would have turned out poorly.
Whoever read this sentence, I want to thank you for being patient in reading this post. You can leave comments in my blog or facebook page. Again, I am not active in forum.