Educated Investor

I've known many punter that get into the market and lose their pants cause they will invest based on news and rumours. I've made the mistake myself 1 too many time too. Hopefully, this checklist will prevent other people from following my mistake.

1. Educate yourself about valuation of investment.
The bible for value investing is the book by Benjamin Graham, the Intelligent Investor and Security Analysis. This should serve as the foundation your investment philosophy. The book changed the philosophy and life of Buffett himself.

There may be other books out there about investing, I can't recommend any. Ben's book has served generations of investor in their path to riches and I can't think of any other book with the same track record.

2. Educate yourself about the specific company and industry you want to invest in.

I can't think of an activity other than gambling where you can put down your money blindly hoping for a return higher than the amount invested. The share market is no different, it's a zero summed game with winner or loser. By arming yourself with knowledge of the company and the industry that they operate in, you are less likely to be the loser. There can never be too much information! However because of the finite time which you have I recommend that you should look at at least the below:

a) company valuation - this will filter the list of investment option to those that is priced within reason, its historical valuation may also offer insight to the normal value ascribed to the company.

b) Industry of the company - what does the company do and what is the outlook of the industry

c) Competitiveness of the company - Is the company more competitive than its competitor? Look at the gross margin trend relative to its competitor and its announcement for information on its competitive strength. Is its current year earning sustainable?

d) Financial statement of the company - how's their track record in generating cash? What's their leverage? Interest coverage?

e) Management of the company - how's their track record in value creation for the shareholder? Do they use capital efficiently by returning the excess capital to shareholder (dividend and buyback) or do they just increase their own pay? - the management's shareholding and pay is important. You want the management to have equity investment in the company and not pay themselves outsized remuneration relative to performance/market. No one is worth a million a day!

It's not easy to find a great buy! But with the internet and google, research is way easier. 

3. Try, try and try not to lose money - it's hard to get it back.

Illustration:

For a portfolio of RM 100k, losing 20% in Y1.

The same portfolio need a gain of 25% to make whole the capital of RM 100k again!

For a portfolio of RM 100k losing 50% in Y1.

The same portfolio need to DOUBLE to make whole the capital of RM 100k!

4. Be prepared to accept short term volatility

This kinda contradict point 3, but in the short term, market as the voting machine can get the value of the company wrong. As long as you've done (2) thoroughly and correctly, and nothing has changed. Short term volatility is noise that you've to be prepared to accept without losing sleep at night.

Conclusion

Armed with knowledge of the market and your investment target, you will be less likely to be among the loser. However if you are not prepared or able to conduct the necessary amount of due diligence on your target investment, fret not, you will still be able to invest in the market - however, you shouldn't be a stock picker, but rather properly invest through a diversified portfolio of ETF. 

Bulls make money and bears make money, but pigs get slaughtered! 

Trader vs Investor

Trading
Pardon my ignorance, but I've never fully understood technical trading. To me, they seem to be arbitrary lines on graph that claim to represent resistance and support to price. Some people also believe the way tea leave falls in the glass can have predictive effect to our future.


However, when enough traders subscribe to the same belief on technical trading, it can create a self-sustaining truth. (if enough traders believe that by breaching the "resistance level" - the stock will head to a higher high and similarly, by breaching the "support level", the stock is likely to fall further)

Contrast to investing
All being equal, when the price of stock falls, it should be a better time to buy. After all, the purchase of shares in company represent a fractional ownership of a business.

Common sense will suggest that it's better to buy low sell high.

I believe traders will suggest to sell low buy high - awfully confusing.

So?
The follower of Benjamin Graham often pointed out with much more experience often point out that "in the short term, the market is a voting machine but in the long term it is a weighing machine.

Mr. Market

In the short run, the market is a voting machine. But in the long run, 

it is a weighing machine.

In my short investment life, I've learned not to fight the momentum of the market trader. Ignoring the direction of the momentum is often perilous to my bottom line. When the price of my favourite share is crashing for no apparent (or valid) reason I often have to sit back and reevaluate my fundamental analysis of the company. Emotions (panic!) and greed is dangerous. Accumulation of stock on its downward run is akin to catching a falling knife, it must be done with care.

Theoretically, adding small position once the stock bottom out, taking into consideration the risk/reward analysis of the potential downside/upside of the counter will be profitable. But the problem is, without the benefit of hindsight, it's tough spotting the bottom!

In Malaysia, volatility in the short term is often attributed to "news", "rumours" or "gossip".  I've already paid my school fees for the mistake I made in following the hot tip of the week. It is illegal, and market manipulators are just like the snatch thief on the street and should be punished to the full extent of the law. However, like other enforcement mechanism in Malaysia, our lovely regulators are usually asleep.

More excitement on trading can be found outside our border. Wild swing in prices is less likely be due to manipulation of a small group of individual but more likely due to difference in outlook by different market participant can lead to highly volatile prices. Even the smartest of the wall street titan can be wrong. And when they do get it wrong it can be profitable to be right!

I recently began following the counter of HLF listed on NYSE. The price fell from a 52 weeks high of 73 to the current price of 27. Almost USD20 of the fall was in the past week alone! This was due to the famous short selling of one Bill Ackman, claiming the HLF is a pyramid scheme and it should be worth a big fat 0 as it is as illegal as Madoff's ponzi scheme. I don't think it's worth 0. As such I think there may be situational bet on this stock as part of my "gambling" portfolio. The company has something like USD 1 billion in approved buyback yet to be utilised (Market Cap USD 3 B), generate steady and increasing cashflow and will hold an investor briefing to respond to the allegation. This share will be worth a lot less if Ackman is right, and alot more if Ackman if wrong. The answer is somewhere in the middle I would guess. As you can gather, I am amply excited about the volatility in this counter. I am going long!

Share market is a zero-sum game. For there to be a winner, there must be a loser. It's never fun to be the loser. Invest in what you understand better than the rest of the market, this way, you are more likely to have an advantage in this blood-sport.