Investing 101: Success in the stock market

In the recent months, I had the opportunity to meet a lot of people who have made investments through mutual funds, either via their EPF or cash investments. I have received positive as well as negative remarks on both the market as well as the funds performance…well not to mention a little spice on politics.

So I took the initiative to put together this summary from various materials, some I’ve read, some I’ve done research on and also some good pointers from those ‘sifu’ in the investment field. I hope it would assist in some ways for those interested.

So let’s get this right …. investing is a passive process. It does not involve active buying or selling of products or services. It is simply a process of buying and selling of passive financial instruments such as stocks, bonds, fixed deposit certificates, mutual funds and etc.

Now let’s explore the myths and realities of the stock market. For starters there are 985 listed companies on the KLSE and 494 private unit trust funds to choose from, and the numbers are not stopping there (figures as at Feb 2008). Imagine the amount of data that keeps on changing every minute of the day. So this is the truth, we can’t know it all so let’s not even try. I’m sure you don’t want to go through the overwhelming amount of data just to make that initial investment. Not to worry, we need to focus on three simple tasks.

1. Filter – which stocks/funds to buy?
2. Time in – when should I buy?
3. Time out – when should I sell?

Heard this before? Some people I know have already began practicing this approach to investments, but it’s not actually what it sounds like …. I know of many people who talks about timing and predicting the market. This is not what the three tasks are about.

I hope this information that I’m about to share will make you more confident and create your own success in investing. First of all, let’s get rid of the notion “beat the market”. There are not many people like the stock genius Warren Buffet, or Peter Lynch or Sir John Templeton. In the history of the world financial market, there are only a tiny number of these superstars, out of millions who have tried, many have failed. Just imagine 75% of the smartest fund managers, working 20hours a day, backed by huge research team, powered by advanced computers have never been able to beat the market consistently.

I’m not even suggesting that we try to beat the market, but needless to say, we can make money through investing. It’s one of those surest ways in the long term to add the extra million or two. Here’s a summary of what I’ve learned and applied myself.

1. For an unsophisticated investor like me, my no-brainer approach is to carefully select a few index based mutual funds and forget about them. So if you ask me which stock/fund to buy, I’d say all of them! (pick some good one’s based on track record, your risk appetite and the fund strategy that meet’s your understanding and objectives)

2. The sooner you buy, the richer you can become. Take 10% of your monthly savings and put it away into your chosen funds. Do this without fail for the rest of your life. Most of us don’t have lump sum amounts of money lying around, so my choice is force myself to set aside the amount on a monthly basis. When you invest a fixed amount every single month for a long term period, we’re actually practicing a rather sophisticated strategy called dollar cost averaging.

This strategy works only if we continue to buy – especially during the bad times – and hold on until the good times return. If you stop buying during the bad times, you lose the advantage when things rebound. In the book multiple streams of income, Robert Allen says that the numbers one reason the dollar cost averaging is so powerful is that it completely eliminates the need to guess when you should buy. It takes away the need for “market timing.”

3. The longer you invest, the lower the risk. You can always win if you just hang on long enough. Investing must be for the long term. Speculating will just actually increase the risk, not to mention the heartache and stress. If you want to invest your money without risk, take a lesson from the best stock picker in history. Warren Buffets said “My favorite holding period is …forever”. Well I guess that’s why he’s a billionaire. So when do you sell? Like maybe 20 to 25 years time. Especially through the EPF, you can’t use the money until 55 anyway. So let it earn a little bit more than 5%. Do you know how much another 5% will do towards your EPF funds? Well, that’s gonna require you to sit down with me and go through a simple exercise using a powerful financial software…just remind me when we meet next.

So as a summary…

• Start investing immediately
• Select funds that you understand and like, simplest way to invest in the market.
• Dollar cost averaging is convenient and smart for most of us.
• Long term investing is far less risky than short-term investing.

Hope you are able to get a good nite sleep after reading this and if you want any specific information on mutual fund investments, please contact me directly.