Random Finance Tip #2

This post is sort of inspired by the Blue Chip stock entry by my friend Robin, of FortuneWatch.com.

I left a comment on it, and I thought I reproduce it here.

Without further ado, the second tip of this series is

“In times of sudden crisis, buy blue chip stocks”

Just in case you are wondering what the heck are blue chip stocks, let me first clarify. Nope they are not potato chips that are blue in color (Sounds yucky to me).

Blue chip companies are generally defined as big, safe, fundamentally strong companies with a market capitalization in excess of billions.

Blue chip stocks are good if you want to add some balance and diversification into your portfolio, but don’t expect any extraordinary gains. They are as safe (some people say boring which is a good thing actually) as can be. If you are looking for wild fluctuations, gyrations and excitement, you gotta look elsewhere.

So why buy in times of sudden crisis?

By sudden crisis, I mean a terrorist attack like 9/11, tsunami or hurricane devastation, death of a leading political figure or outbreak of disease like bird flu or SARS.

Some market rules to look out for

I wrote this in a forum about two years ago. While searching for inspiration on what to write today, I thought I will just reproduce the whole piece for your reading pleasure. Do note, I’m an advocate of marrying both fundamental and technical aspect of investing together, but what I’m going to highlight here are rules from a technical perspective. So here goes:

The market is quite an unforgiving yet fascinating and challenging place. It rewards handsomely when one is right, and dishes out stern punishments when one is careless and underestimates it. Quite like the principal in school ain’t it?

It can be indeed a humbling experience. Don’t despair if you make mistakes and make losses. No one can make money all the time. Not even Warren Buffett if that is a consolation.

Taking this into perspective, even institutional fund managers, floor traders and professionals make mistakes too. You are not alone in this challenge. Important thing is to not focus on how much you make, but rather on how much you don’t lose. Capital preservation should be your no. 1 priority. After all, you need to make 100% just to break even from a 50% loss.

Crazy day at the Market! You want some?

One of the most interesting and fascinating part of investment to me is standing at the sidelines to observe just how irrational investors and market as a whole can be.

Sometimes, at the lure of fast gains, they can get sucked into a trading frenzy, only to have the whole action dying down just as fast. I never fail to be amazed at such cases of mad crowd behavior.

One instance that reminds me of a crazy day in the market, will have to be the first day China Aviation Oil (CAO) re-opened for trading after a long suspension. For those unfamiliar with the Singapore market, CAO is a Singapore Stock Exchange (SGX) listed company based in Beijing, that supplies jet fuel.

It got it’s ass busted for illegal insider trading and crimes linking to risky oil derivatives speculation which resulted in massive losses of US500 million! To cut the long story short, the director, once hailed as a high flyer in the industry, was sent packing to jail, while the company went through a long painful restructuring process, which also saw the two knights in shining armour, Temasek Holdings (the investment arm of the Singapore government) and British Petroleum (BP) coming to it’s rescue.

Mr Market claimed yet another victim!

Image Credit: www.danablankenhorn.com

Today I read a report in the newspaper that got me shaking my head, half in pity and half in weary resignation.

It seems that there are always such cases happening!

The report was about how a student lost $700 000 trading in shares during the recent market slump! In the process, he wiped out his dad’s life savings, lost his girlfriend, and possibly also his family’s house!

Imagine $700,000! That’s not very far off one million! More money that most of us can ever dream of!

I find such cases really sad. Tragic even. Seriously, such cases can be avoided, and I hope this story serves as a wake up call to investors/traders who are living dangerously on the edge.

Some important lessons we can learn here

1. Firstly, he wouldn’t have been in such a predicament had he invested money which he can afford to lose. That is to say, even in the worse case scenario of 100% loss (assuming he doesn’t leverage), there will be minimal disruption and adverse impact to his financial health. He will still be able to carry on the normal lifestyle that he is leading. Alas, this is not the case here.

The Emotional Investor Part 2

Image Credit: BBC.com

I wrote the first part somewhere at the start of February, and wanted to post the follow up a few days later, but somehow this matter slipped my mind. It didn’t help I got so much other stuffs occupying my thoughts and time.

Never mind, better late than never though!

Back to the topic, psychology is a vital and very important aspect of investing. Overlook it, and be prepared to under-perform. The average investors out there are driven predominantly by greed and fear. Price fluctuations are all heavily influenced by emotional investors, as they make up the bulk of the market crowd. Yes even institutional investors are prone to making emotional and irrational market moves.

Some examples of irrational and emotional behavior of investors:

1. Investors hesitate to purchase a stock when it is an obvious bargain, but instinctively chase popular stocks to very high and overpriced valuations. They either probably think that it is too good to be true or it is just too ‘unwanted’ to their liking. The hot stock seem a ’sexier’ choice.

Mistakes and pitfalls in investment you should AVOID!

I know I’ve said this before, but I guess I shall just repeat again because I cannot stress enough how often people, even experienced investors, make such mistakes.

Before you enter investing, you must ask yourself, can you fulfill these 3 basic requirements?

1. Are you knowledgeable enough?

Do you know a lot about the company you are investing in? Do you know its fundamentals and growth prospect? Would you like to be owner of the company yourself? Are you aware of the trends in the business world?

If you are employing technical analysis, do you know enough about the technical indicators and price and volume trend? Do you have the necessary charting skills?

2. Are you able to control your emotions?

Are you able to think with a rational mind, and not let greed, hope and fear rule your head? Do you base your buy and sell decision on hastily following the crowd without proper analysis on your part?

3. Are you disciplined?

Do you follow the investing system you set for yourself religiously? Or you constantly shift your strategy just to justify your actions?