Sunday, June 17, 2012


We must throughly clear our minds of winning easy money through good luck. The stock market is not designed to make money for you through good luck. It is not a lottery game. You want to make money, you have to work for it.

When you see someone makes money by just a few clicks of the button, you may feel that you can easily do that yourself. What you don't know is the amount of work put in before those few clicks.

"Investment is most intelligent when it is most business like."  Remember and follow this adage. Know what it means and know it well.

The stock market is never efficient. This means the price of a stock is not reflexive of its value.  Many people make the mistake of thinking that a low priced stock is cheap, and that a high price stock is expensive. In reality, a $10 stock may be cheap, whereas a 50 cents stock can be expensive. It all depends on what value the stock has.

Savvy investors buy stocks for capital gains and dividends. Thus dividend-yield is of utmost importance to them. A stock that has a high dividend growth will always command a better price than one that has no growth. Dividend growth is dependent on earnings growth. When you look at earnings, always look at earnings per share (EPS).

The quality of the earnings must also be assessed. Ordinary earnings from the business is quite different from extra-ordinary earnings made. The latter is often a "one night stand" and probably will not happen the following year. This, you have to factor in when you value the stock.

Why are some stocks traded at high PERs and some at low PERs? The former is generally thought of as being better than the latter going forward. While this is true in theory, in reality there are many miscalculations. It is these inefficiency that present opportunities for intelligent investors to exploit.

Ill-liquid counters are normally unloved. Analysts often leave them alone. Fund managers leave them alone as well. As a result many remain as undiscovered gems for a long time. These counters are known as "Sleeping Beauties". Unless you have the patience and the cash, you will not care about them. But these beauties can actually make you rich if you have cash and know the ways of dealing with them.

Anyone who sees only the bright side without preparing for the dark side is bound to encounter financial difficulties. In a bullish market, making money is easy. You simply buy and you simply gain. But when the market turns bearish, things are not the same. If you don't know when to get out, you will be trapped. When the water  receded, those swimming naked will be exposed.

When you are overbought and your cost of fund is high, fear alone will cause you to become impetuous and irrational. This will cause you to sell out at the wrong time. To avoid this kind of disaster,  never borrow at high cost to trade or invest.

Every time you trade, you give money to the broker firm and the government. Don't overlook these expenses. They are real and they eat into your profits. Anyone who trades on thin margin will find difficulty to keep afloat over a long period of time.

After you have made some profit, don't imagine the next trade is going to be easy.
If you are not careful, you can easily go back to square one.

Whether you trade or invest, the target is the same, to make money. If you failed to do that, it means you have failed. It pays to review your past actions. If you constantly lose money, you will have to change your strategy. If you can't do that, expect more failures. You can't expect to get a different result doing the same thing the same way all the time.

Big money is only made in the long term. Look around to see if you know of anyone who has consistently made money trading short-term. Chances are that you can find none.