AuthorMeng Teck is the chief editor & team leader of Savwee Investment. Archives
April 2015
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Don't Jump Into The Bandwagon6/9/2014 Are you an independent investor?
Independent investor- In this context, it refers to investors that can think and make decisions independently based on facts,common sense and logic. Let's run these tests. Try answering the following questions and it should effectively diagnose if you are an independent investor, a hunch follower/speculator or a blind follower. 1)Why did you buy the stocks that you are holding now/or about to buy? 2)What is your target price or estimated intrinsic value of the share and how do you justify that number? Are you able to answer both the questions with clarity and confidence? If yes, Congratulations, you are an independent investor. However, if you even have the slightest hesitation,doubts or uncertainty on answering those two questions, chances are, you are not a fully independent investor. If you're only able to answer the first question, you are probably a hunch follower or speculator.(There is nothing ethically,morally or legally wrong with being a speculator or hunch follower). Why? Usually, a hunch follower will buy a business thinking that the business is a good business or just because they heard news that might benefit the industry but the problem is, they might not know how to evaluate a company. No doubt having a good business model and good development in an industry will always benefit the underlying company, however, if you're not able to justify the target price(I hope you have one) or intrinsic value with actual numbers ,you're probably not going to get a very good return. For example, iPhone is a great product, no doubt the quality is good, but paying for an iPhone that's worth of RM2,300 with RM5,000 just isn't a very clever decision. Moreover, if you're buying based on good news, chances are, the positive impact has already been reflected in the share price. Worse still, if you can't justify the target price or intrinsic value based on your own analysis, probably you don't know what is the financial health of the company or whether the company is well positioned to benefit from the growth of the industry. Even if the company happen to be in a good position and is appreciating over time, you might not be able to achieve as good a result as those who know what is the right price to buy and sell because you might have overpaid for that counter. Then comes the blind follower, if you are unable to answer both questions based on your own analysis, chances are, you bought it based on hot tips or friend's recommendations.( This my friend, I'm not qualified to comment on whether it is legally,morally or ethically correct). Chasing hot tips is like playing with fire. Remember what mum always say? If you play with fire, you're gonna get burnt eventually. Many people like to chase hot tips, they buy a stock on the hope/promise that they share will appreciate greatly in value, while sometimes these may come true, other times, it is pure tragedy when they see the share price free falling way below their purchase price. What's worse? Fueled by their previous success,some of these people might have borrowed money to enhance their return only to end up with deep debts that might lead to bankruptcy. How about buying based on friend's recommendation? Well, it depends on how good an investor is your friend. But one thing is certain, those who buy based on friend's recommendation will at least experience some emotional stress. Why? This is because their emotion swings like a roller coaster with the share price. My mother is a very good example of this, whenever the security that she is holding experience a sudden rise or drop in price, I will get a call, whenever there is a news concerning a potential war in Russia, I will get another call. You see, not being able to understand why and what to buy will make you very insecure in your decision. You will keep asking people if you should buy or sell and start believing in "gurus" on what might happen to the share price in the next few days( next time someone predicts something, write it down and compare to what really happen, you will realize how foolish you are to have wasted your time reading their predictions). The truth is, it takes experience and knowledge to become an independent investor. A successful investor must be able to avoid herd thinking, control their emotion and make decisions based on facts ,common sense and logic. Money is a very emotional thing to people, and that's why we have to train ourselves to detach emotion from the equation. Nobody like to see a loss in their portfolio, but fluctuation is the nature of the stock market, the earlier you accept this fact, the faster you can become a successful investor. How to know if you have become an independent investor? Your portfolio shows gain over time and you can sleep soundly even after buying a large amount of shares. If you are not an independent thinking investor yet, I urge you to start feeding your mind by reading more books and practicing on how to control your emotions.
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