Wednesday, March 30, 2011

The Price Went Up! .. Crap, Now What do I do...

Hey there

Before I get into it, it has been almost 2 weeks since I started the site and 5 days since I started advertising and spamming people and the site has received 560 views already. Thank you all so much for coming back, dropping comments and emails. If this is your first time, I hope you find my posts helpful and will keep coming back.

So, many a times when the share price of a company in which I invested in goes up, I ask myself, now what do I do? If there is one thing harder than deciding what company to buy, I think it is deciding when to sell. It is hard to decide when to sell if your position is in the green but it is even harder to sell if you are in the red.

Let us set aside all other factors that may affect your decision e.g. news, market conditions, charts, broker recommendations, whatever your friends say, etc. and focus only on the price.

So say, company ABC, you mange to buy it at $1.00 in a few months it goes up to $1.25, amazing! It is a 25% capital gain in a few months. Now should I hold? What if the price starts to drop and I lose all my gains? (Trust me that happen a lot). And if I sell to cash in my gains, what if it keeps going up? Should I increase my exposure because I think I’m in the right position and hence, amplifying my gains?

Another example, XYZ was bought at $1.00 after a few months; it goes down to $0.75. Now what do you do? You’ve already made a 25% loss. Should you sell to cut your losses? Or wait until it rebounds to sell it at a profit? What if it never comes back up and keeps going down? Or should you buy more shares to average down you costs?

These can be very hard decisions to make, you do not want to take too much of a loss but at the same time you do not want to miss an opportunity to make a profit. On the flip side, you want to make a profit but you do not want to cut your gains short. Putting those sentences together, you get what I think is one of the most basic rules of investing:
Cut your losers early and let your winners run.

Some people prefer averaging down instead of cutting their losses. How is this done?
For example, you buy 1000 shares in XYZ for 1 dollar each. After a few months, the price drops to 50 cents, so instead of selling at a loss of 50 cents a share, you decide to buy another 1000 shares at 50 cents. As a result, your net costs for all 2000 shares are 75 cents each. That way, you would have made a profit once the share price goes above 75 cents as opposed to 1 dollar. This is a very good technique just as long as you don’t run out of capital. If you have all the money in the world, by all means average down all you want. But what happens once you run out of money to buy shares at a lower price? You’ll hope that the price of the shares will go above your cost, but if it does not, you’ll be in big trouble. What if the company goes bankrupt?

I personally prefer to have a trailing stop loss.
A stop loss is when you put in an instruction so that your broker sells a certain amount of shares (volume) from a certain company at a certain price (trigger).
A trailing stop loss is when you move your stop loss trigger up as the price of the share goes up. So once the price starts dropping, you’ll sell the shares automatically.

Look at the below chart as an example.


Above is a chart of Navitas, NVT once again taken from bull charts.
This is a very good example of how a trailing stop loss works. So once, you’ve identified a company and when to buy, you set a stop loss below the highest price at a percentage that you’re comfortable with. In this case, they are the numbers written under the red boxes. As the highest price moves up, so does that number. And when it finally reached a top of $5.56 and dropped back to $4.90 which is the final stop loss, you would have sold it all and made a gain from about $2.50 to $4.90 and avoided the price drop which followed.

So what is your exit strategy? Do you have one? What are your thoughts like when a share price drops and what are they when it goes up? When do you sell and when do you hold? Please leave comments or send me an email. I would love to read what you think or about what your techniques are, we’re all learning after all.

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Thank you!

Monday, March 28, 2011

To Buy? or Not to Buy

Hey there,

When we talk about value investing, the first thing that comes to my mind is Warren Buffet, following his name shortly is Benjamin Graham. Warren Buffet is known as the best value investor of all time, being the 3rd richest man on earth, accumulating all his wealth from the stock market. Benjamin Graham, is thought to be one of the 1st person who pioneered value investing. He is also the teacher of Warren Buffet and author of the Intelligent Investor (yes it is where I got my name from).

I’ve talked about the differences of investors and traders in my older post but how do some value investors decide on which stocks to buy?

I guess they all have their own way to analyse a company depending on their balance sheets, cash flows, profits to earning ratio and other financial indicators. They also use past performances to gauge how the company could potentially do in the future. At the end of the day, all their calculations will give them one vital number, which is the intrinsic value. This number is the price in which they believe the share is worth. If the price of the share is below this price for whatever reason, they look at it as a discount and buy the share. If the share price is above this value, they’ll think that the share is overpriced and will avoid it.

To learn more about value investing, and the formulas used to calculate the intrinsic value, the book Buffettology written by Mary Buffet and David Clark is a very good book. They teach you step by step on how to calculate the fair value of a share and what to look out for.

I have a checklist that I use if I want to invest in a company (note, not trade) and they are basically stuff that I learnt from reading different books.



I also have a useful spreadsheet that can be used to calculate the intrinsic value of a share. If you have any questions about any of the terms in the checklist, feel free to drop me an email and I’ll answer it the best way I can. Same thing if you want the spreadsheet, shoot me an email and I’ll send it to you. theunintelligentinvestor@gmail.com

Today’s post is short because I figured that the checklist is fairly self explanatory. If you have any questions at all, or think the checklist can be improved in any way, please leave me a comment or send me an email. It is a learning experience for us all.

Once again, thank you for all your comments and emails I’m more than happy to receive more. If you think what I’ve been posting has been helpful, let me know, if you think they have been crap, let me know as well and I’ll try to improve them. Finally, if you like what you read, do like me on facebook or follow me on twitter. Thank you so much for reading!

And finally good luck to everybody taking part in the trading places competition, I look forward to kicking your ass. lol, jokes, I'm a noob.


Sunday, March 27, 2011

The Unintelligent Investor’s Definition of the Week: Short selling.

Short Sell

Oxford Dictionary’s definition: Sell stock or other securities or commodities which one does not own at the time, in the hope of buying at a lower price before the delivery time

The Unintelligent Investor’s explanation:

To short sell or short a stock, you are selling a stock that you do not own hoping that it will drop in value in the future so that you can buy it at a lower price to make a profit. How do you sell a stock that you don’t own? The broker will lend them to you.

The share markets can move in 3 ways, upwards, downwards, or sideways. To make money when the stock is going upwards, you take a long position (buy low, then sell high). To make money when the stock is moving downwards, you take a short position (sell high, buy back low) and there are various ways to make money when it is moving sideways.


If you do not yet understand what it means, I hope this example will help.

Let’s say you own a fruit store, because of natural disasters, the prices of bananas sky rockets. There is this customer that loves his bananas so and really wants to buy but you don’t have bananas to sell. Now you don’t want to miss this opportunity to sell bananas to this guy at a high price because you know that once supply is back to normal, the prices will drop again.

So you call your fellow fruit seller whose shop isn’t doing as well as yours, say the Unintelligent Investor. He agrees to lend you the bananas as long as you return them within 3 months and pay a small fee (brokerage). You sell the bananas to this guy at a high price, wait a few months and when the supply goes back to normal, the prices drop and you buy the bananas from your supplier and return whatever you borrowed back to the Unintelligent Investor. Laughing to the bank as you do it.

Now let’s apply that to the share markets. Say a company’s share price goes up very high but you think that the prices will drop because of factors that you have identified. So you decide to short sell 1000 shares at 10 dollars each. That will give you 10 000 dollars in cash. Your predictions were correct and the prices dropped to 3 dollars. So you buy back 1000 shares from the market at 3 dollars each, paying 3000 dollars. Hence, you have just made a profit of 7000 dollars from a company that is falling in value. The ideal situation will be if the company went bankrupt, because you then do not have to pay anything to buy the shares back and you would have made the full 10 000 dollars

However, if you were wrong and the price continue to go up, say to 15 dollars, you’ll be forced to buy back 1000 shares at 15 dollars which will cost you 15 000. Hence, your loss will be 5 000 dollars.

Below are 2 graphs that show you the different pay off diagram of going long and going short


Remember that by no means am I encouraging you guys to start short selling. Shorting a stock brings different sets of risk, for example, your gains are limited because the lowest the stock can go to is 0 where as your losses are potentially infinite because there is no telling how high a stock can go. Before we consider short selling, we have much to learn.

This segment is purely to explain certain investment jargons so that when people talk about it or if we read about it, we will know what it is about.

Thanks for reading. I hope my explanation was helpful, drop me a comment or email if it was, or if I didn’t explain it well enough, definitely let me know so that I can explain it better. Like me on facebook or follow me on twitter if you like what you’ve read so far. Thanks!

Friday, March 25, 2011

12 000 Dollar Mistake

Hey there

I was looking through a few companies tonight and found something that really disappointed me a lot.

Take a look at these two charts, which are taken from a software called Bull Charts, check out their website. www.bullsystems.com

Chart for AUT


Chart for MML


What would you have done in this situation if you bought into these companies when they are within the Darvas boxes? As you can see, both of them dropped below the stop losses. So what would your thought process be by then?

Let me tell you my story and I'll start with AUT.

If you look at the first chart, at the start of May AUT established its 1st Darvas box with 2 more coming. I bought $3 000 worth of shares when it broke the $0.715 resistance line. Manage to get them at around $0.80, it was all looking good when the 3rd box was established. Then if you look closely there are 3 days where the prices were just a flat line. What had happened was that AUT announced a capital raising. I was away and did not remove my stop losses which at that time was set at $0.78. After a few days it dropped below that and my shares were automatically sold. I had not only made a loss of $115 including brokerage but I also missed the opportunity to participate in the capital raising. Trust me I was kicking myself and banging my head on the walls for making that mistake then. Ask my housemates if you do not believe me.

Look at what happened next.


FUCK MY LIFE.

As of 24/3/2011, the price was $2.95 even if I didn’t participate in the capital raising, I lost an opportunity to make about $8050.00

Now let us look at MML. If you just look at mid March, it established its 1st Darvas box. I bought 1190 shares at $4.18 and then when it established the 2nd box, I bought an additional 420 shares at 4.67 which brought me to a cost of 6935.60. It then started to drop and it was all sold at exactly $4.00. This gave me a loss of $535.60 including brokerage.

Look at what it is today.


$6.90 F.M.L. I lost an opportunity to make an additional $4173.40.

This brings me to a total of approximately $12 223 in lost revenue.

So yeah those are probably the biggest mistakes I’ve made so far. I guess I only actually only lost about 600 dollars but I could have made about 12 000 dollars more had I not make those mistakes.

So what do you think about my decisions, were they wise at that time? I know the one with AUT was purely my fault for not being on top of my shares when I’m away but what about the decision with MML? Even if you think I was a complete idiot for cutting my loss at that time let me know, we are all still learning after all.

Thanks for reading, please leave comments by clicking on the comment button below or send me an email by clicking on the contact button at the right side of the screen. Also I had just set up a facebook page and twitter page. So if you like what you’ve been reading so far, please do like my page. Thank you!

Thursday, March 24, 2011

Investor? or Trader?

When I first got interested in the share markets, I used the terms invest and trade interchangeably and I think this is a common error that many people make. There are people that do not know these two words have very different meanings. I think, it is rather important to know the distinction between the two.

Warren Buffet is primarily an investor
George Soros on the other hand is primarily a trader

How are they different?
An investor by definition is one who commits capital in order to gain a financial return.
A trader by definition is one who trades (buying and selling) for profit.

I think an easy way to think about it is through these examples.
If you buy a property as an investment, you will hopefully rent it out to cover the mortgage costs and hold on to it hoping that value increases, hence, increasing the value of your assets and net worth.
If you are a trader, you’ll buy a property, renovate it hoping that it will increase the value of the property and then sell it to cash the profit

Another way that I look at it is, whether you pick a stock depending on fundamentals or technical indicators.

People who look at fundamentals tend to be investors. Fundamental analysis I guess is the study of external factors that affect the supply and demand of a particular market. They pay attention to various factors that will affect the company’s performance e.g. weather, government, p-e ratios, balance sheets, etc. A fair value for a company is then calculated based on various assumptions and algorithms and a decision is then made to buy or not to buy if the fair value is above the current asking price.

Technical analysis on the other hand, works quite differently and they tend to be traders. Technical analysis is based on the belief that, at any given point in time, market prices reflect all known factors affecting a particular market i.e. the price of a stock is a net result of everything affecting it. So they believe that a careful analysis of daily price action is an effective way to, well, predict which way the trend is moving. They are the ones who use different charting techniques and indicators. They also tend to have very strict rules or algorithms that they follow, that tells them when and how much to buy, as well as when to sell.

I think both techniques have their own pros and cons, and it comes down to the individual investing or trading. If you are better at a certain technique then by all means stick to it, in fact I will love to read about what your technique or formula is, so shoot me an email!

So are you an investor or a trader? Which one do you prefer? Which one is better?
What do you think? Let me know!

Once again, thanks for your time, do leave comments or send me an email or if you are really lazy, just click on one of the responses to the mini poll I have on the top right corner of the blog. I would love to read about what you think even if you think my post was complete bull.... It is a learning experience for us all.

Monday, March 21, 2011

ETF, exchange traded whatt???

Hey there

I was walking towards a shopping centre a few days ago and I came across an ad that was encouraging people to invest in a managed fund. That ad said things like investing in this fund its good for our future and encourages us to think about our financials during retirement. That got to think, is it a good idea to invest in a managed fund? or should I instead think about investing in an ETF

Exchange Traded Funds (ETFs) what are they?
Well, they are most certainly very popular in the USA and are starting to get huge amount of recognition here in Australia.

If you are not familiar with the term ETF, well as the name suggests, they are funds that are traded in the stock exchange. ETFs gives you the power to invest in a group of companies (like funds set up by investment banks), hence diversifying your portfolio and you only need to pay the cost of brokerage. Furthermore, they are traded on the stock exchange, hence, you have the freedom to buy or sell units just like buying or selling shares from other companies.

ETFs generally try and track performances of a specified index e.g. S&P ASX 200, S&P ASX 20, S&P ASX Energy, etc. So basically, when you put your money into an ETF, the managers of the ETF, uses the pool of funds provided by all investors and invests in companies listed in a certain index. As a result, when the index moves up, so does the ETF tracking it.

For more information about ETFs, check out the Australian Stock Exchange’s website
www.asx.com.au
For the list of ETFs available in Australia, check their product listing at
http://www.asx.com.au/products/managed-funds-product-list.htm#ExchangeTradedFunds

When I talk to people from a non-financial background about stock investment or trading, they often have this idea that it is very dangerous, or it is like gambling, or people lose all of their money in it and end up killing themselves. It seems like there is this fear that is attached to putting money into stocks. They very much prefer to invest their money in something else, like, real estate because its a "physical" asset or, fixed deposits, government bonds or managed funds. However, these investment vehicles carries their own risks as well and much like investing in the stock market, if you do not know what you’re doing, you can get into a lot of trouble. That is why I think its is paramount to educate ourselves constantly



S&P ASX 200

(S&P ASX 200 from ComSec)


Looking at the S&P ASX 200 chart, it starts on June 1992 at 1666 points and ends on March 2011 with 4643 points. That is an annual compounding interest of approximately 5.94%. So if you had invested $ 1 000 in all 200 companies in the ASX 200 for 17.75 years from June 1992 to March 2011, you would have about $ 2784.93. Also remember that we are still recovering from a global financial crisis, one of the worst one we've experienced. Does that mean that there is more potential for a higher return if we tracked the index? The average cash rate for that same amount of time is about 5%, the lowest being 3% and highest 7.5%. So best case scenario is if you manage to lock in a fix deposit when the cash rate is 7.5% that would be amazing but how often does that happen?

So if I didn't make the wise decision to invest in a fixed deposit when the cash rate is high, should I then turn to investing in all S&P ASX 200 companies? To do that, I'll have to either have a lot of capital to invest in all 200 or just by buy the ETF tracking it.


We can see that the ETF that tracks the S&P ASX 200 (STW) only came into existence at the end of 2004 but it tracks index very closely.

So are ETFs the way to go if I'm looking for diversification? Should I consider investing in ETFs if I cannot tolerate much risk? Can ETFs be a good alternative to managed funds or fixed deposits?

What do you think? Let me know!

Thank you for your time, please leave comments or send me an email if you like my post, even if you hate it and think what I typed is absolutely bulls*it, let me know as well. I’m more than happy to listen to your thoughts and suggestions.

It is after all, a learning experience for us all.

Friday, March 18, 2011

First Post

Hey there

As a first post I thought I’d give some background information on who I am. I’m Jeffrey Sia a medical student in Newcastle, Australia. Being Asian I was only offered 3 choices as carriers from my parents, the 3 being, doctor, lawyer or accountant. Seeing as both my parents are doctors, I didn’t really think about doing anything else.

However, I never really found medicine as interesting as finance. So I decided to gather up some money and throw them into the share markets in Australia. I’ve been doing it for a few years now and results have been good considering I learnt all I know about the markets from reading books and magazines.

This blog is set up basically so that I can type out and reflect upon my investment decisions, good or bad and hopefully they will be a good read. I will be taking part in the trading places competition by JP Morgan which will start in a week. So I will update my trades and portfolio balance hopefully with each post and we all can comment on how I'm going.

So news that are hot at the moment is Uranium and Japanese earthquake. After weeks of painful trading conditions, the markets are finally in the greens today. So when we talk about uranium, PDN comes to mind. So now the question is to buy or not to buy? And what is going to happen to the nuclear power industry?

Leave comments or email me at theunintelligentinvestor@gmail.com