Saturday 25 April 2020

[Post 106] Investment Book Summary 1:Secret of millionaire investor by Adam Khoo

For the first book review ever on my blog, I am going to summaries some key points from the book that I have just recently borrow from the library "secrets of millionaire investor " by Adam Khoo.

Image result for secret of millionaire investor pdf

The book is actually quite interesting to read compared to at least 70% of investing books out there. Not a sponsor post by the way(is there even anyone that wants to sponsor me?😂).

Anyway, back to the book. The next few posts are going to be the key points from the book.

Chapter 1 is basically an introduction, so let's begin with chapter 2.

Chapter 2:The power of investing in building your wealth

1.Investing in low risk and high return

  • Most investors in the world are risk-averse,(surprise surprise, Warren Buffett is one of them!)
2.A quick introduction of the US stock market
  • There are three primary U.S. stock exchanges: New York Stock Exchange, Nasdaq, and American stock exchange 
  •  The general market performance is measured by the index
  • An index is a chosen stock portfolio that is used to represent the entire stock market
  • One of the most common stock indexes to evaluate the U.S. market is S&P 500(now you know what it means and you can show off in small conversations with friends),
  • The S&P consists of the top 500 companies in the US market and represents more than 70 percent of the US market
  • The S&P 500 is calculated by taking the average price of the top 500 companies
  • Another popular index is the DJI (Dow Jones industrial)index (another term to show off to friends)
  • The DJI index consists of 30 largest companies in the US, similar to our STI ETF
3. Choosing the US market or the Singapore Market?
  • The author recommends the US market as he makes the best return from there
4. Why the author prefers to invest in the US market?
A wider selection of stocks and deviation
  • Over 9,000 listed companies in the US market compared to 620 companies on the Singapore market
  • Easier to find a company that is able to meet the criteria to invest
  • US companies have a higher potential to increase earnings and sales as the number of  US consumer is huge compare to the number of Singapore consumers
  • More US companies stock have options written on them allowing us to use a wider range of trading strategies
Higher liquidity and volume
  • US market has a higher volume of stock liquidity per day.
  • Us market also has "market makers" who will buy the stock that you are selling even if there are no people who want to buy
Superior research data and tools at a much lower cost
  • Basically, US stocks data such as financial ratio are more easily and readily available on the internet compare to Singapore Stock(totally agree with this!!, not all the financial ratio of a Singapore company may be found easily online and often one have to used paid service to analyze Singapore stocks)
  • The US has cheaper brokerage fees compare to Singapore(totally agree!!)

5. Four investment strategies, from beginner to expert level as follow

Growth strategy 1:Buying Market index and Sectors
  • Index such as the S&P 500 index, Dow Jones index, Sector refers to the different sector such as healthcare, financial, etc
  • (>12.08% return annually)
Growth strategy 2:Value investing
  • A strategy employ of Warren Buffett. In value investing, you will learn to buy high companies at a fraction of what they are worth.
  • In order words, you will learn when to buy companies stock at a cheap bargain(undervalued) and sell it when the market realize its true value
  • (15% -25% return annually)
Growth strategy 3:Momentum investing
  • A short time frame of 3-6 months. Momentum stocks tend to be priced above their fair value.
    However, due to the optimism of the entire market about the shares potential, these stocks tend to rise significantly in value within a very brief period of time before they are overbought and fall (this is when you sell and make enormous earnings).
  • (>25% return within 3 to 6 month)
Growth strategy 4:Options trading
  • the art of how to make 100%-500% returns on your money from as short as one day to a maximum holding period of 3 months, pretty risky
  • (100% return within 1 day - 3month)
6.The psychology & habit of a successful investor

Buy on strict rules and not emotion

  • Buy and sell based on rules and not emotions, for example, many successful investors sell their stock once the stock price drop below 10-20%.
  • They do not let emotion define their buy and sell.
Become an expert and Don't rely on expert
  • Simply read a little everyday, Don't rely on outside tips.
When there is nothing to invest in, Don't  invest
  • It is not always a good time to invest, invest only when the investment criteria are met(e.g the financial ratio is healthy)
Take 100% responsibility for your result
  • Don't blame others for your mistake, learn from your mistakes
Be passionate about investing
  • You must enjoy investing and not see it just as a tool for money-making(When you see shopping malls think CapitaLand, food court you think koufu, etc).
  • Better yet, be passionate till you dream about investment in your sleep(just kidding!)
Reduce Risk and maximize return

  • A master investor will only invest if he finds an investment with a very high probability of success, one with very high potential upside with limited downside.
  •  So, only invest when with minimal risks and very high returns.

Chapter 3 has an interesting pov of why we should invest in ETF if this doesn't convince you to invest in ETF, nothing will!

Chapter 3:Buying Index and Sector

Growth strategy 1:Buying index and sector

From the chart above showing the S&P 500 performance from 1950-2016, you can deduce a few things
  • In the short term, the stock is volatile (goes up and down).
  • In the long term, the stock will only rise higher and higher
  • The stock market is always on a long-term uptrend.
  • This means that each low point is higher than the previous low and each high point higher than the previous high.
S&P 500 (an index comprising the top 500 companies in the US) obtained an annual compound return of 12.08 percent with reinvested dividends.

However, this does not imply that every year the stock market increased by 12.08 percent
Some of the years, you can see the stock prices drop, and in some years, the price increase. However, the stock price is always increasing in the long term

7. Why do stock prices rise?
  • Stock prices are affected by company earnings
  • The greater a company's earnings, the higher its shares will be priced.
  • Over time, inflation pushes greater prices of the products and services of a company
  • For instance, a MacDonald meal today costs twice as much as it did ten years ago and it will be even more costly in the future
  • While the world's population is growing and becoming richer (particularly in developing nations such as China and India), more and more individuals are selling their products to them.
  • For businesses, higher prices at higher volumes lead to higher and higher profits/earning. This constant increase in the company profits over time help to push their stock price higher
The next part is not from the book, though I  will simplify and summarise it

Here is a ten-year performance of the US stock market from 1970-1980

As you can see, in the short-term, stock prices randomly move up and down. If you had bought stocks at one of the peaks in 1973; you would have had a massive heart attack when the market plunged the next following year (1974). If you panic and sold the stock at the bottom, you would have made huge losses.

This is exactly why most ignorant investors lose their life savings in stocks and find it extremely risky. 

However, let's say you brought at 550 points of the S&P in 1973, if you had held the stock until today, it would have increased to 2900, you would have made over 600%(without dividend reinvest)

Now let’s take a look at the actual gains and losses from the S&P 500 year-on-year(*Note: this refers to the percentage changes(or difference) of the stock price at the beginning of the year and the end of the year). Take note that these annual returns include the dividend(refer to credit)

From the table, you can see from 2000-2018, you will make a negative return in 2000,2001,2002(dot com bubble),2008(2008 financial crisis) and 2018(trade war)

But what if we put all in a 5 year period?

Average annual return of 5 year Period of the S&P500(yes, I calculate it myself)

From the table above, you can see the average annual return of 5 year period(the figure is taken and calculated from the previous picture of S&P 500, year on year) returned a positive figure.

So, what is the average annual return?
  • The average used by investors to measure the performance of investments over a period of time
  • It takes into account the effects of compounding interest and it is more accurate than using the simple interest formula
  • The average annual return means that your money will increase 15.85% per year if you invest from 2010(see 2010-2014)
Most of the 5 year period average annual return is positive, this means that if you kept your money invested for at least five years, your chance of loss would be ‘zero’.

But as you can see in the period 1970-1974 and 2000-2004, it has a negative average annual return. To conclude, if you invest in a period of 5 years, it would decrease your chance in making a loss

However, what if we invest in a period of 10 years or more?

  The average annual return of 10 year Period of the S&P500

As you can see if you invest in a period of 10 years, the chance of loss is zero. That includes 2000 and 2008 two financial crises, dot com bubble and 2008 financial crisis). This means that your money will grow by 1.212% per year. It is not an impressive figure but it proves that investing in the stock market for a long term such 10 years,20 years, or even 30 years would ensure that the chance of loss is zero.

If you are interested to read the rest of the book, do borrow it from the library:), hope this post proves useful!

Sunday 19 April 2020

[Post 105] Learning investing/trading together part 23:Investing vs Trading

This week on learning investing/trading,we are going to compare Investing vs Trading.

Investing vs Trading

  • Investing and trading are two a different way to profit from the market
  • Investors and Traders both attempt to seek profit from the market
  • Investors seek higher return buying and hold for a long period of time
  • Traders seek even higher return by using various trading strategy to profit
  • Build wealth slowly over an extended period of time by purchasing and maintaining a portfolio of stocks, share portfolios, mutual funds, bonds, and other investment resources.
  • Investments are often held for years, or even decades, taking advantage of benefits along the way, such as interest, dividends, and share splits.
  • Although markets naturally fluctuate, the investor will hold the stock when its share prices are declining, with the hope that stock prices will stabilize and any losses will eventually recover.
  • Usually, investors are more concerned with market fundamentals such as price/earnings ratios and current ratio, etc
  • Anyone with a CPF is investing even though they don't monitor their investments on a daily basis. Because the goal over the decades is to build a retirement account.
  • Trading includes transactions that are more frequent such as buying and selling stocks etc. The goal is to achieve returns that surpass buy-and-hold investing
  • Trading profits are created in a relatively short period of time by buying at a lower price and selling at a higher price. 
  • It is also possible to make trading profits by selling at a higher price and purchasing to cover at a lower price (known as "selling short" or "shorting") for profit in falling markets.
  • Traders usually fall into one of four categories: Position Trader: Positions are held from months to years.
  1. Position Trader: Positions are held from months to years.
  2. Swing Trader: Positions are held from days to weeks.
  3. Day Trader: Positions are held throughout the day only with no overnight positions.
  4. Scalp Trader: Positions are held for seconds to minutes with no overnight positions.
Image result for investing vs trading

  • If investing is a is like homework, trading is like preparation for an exam
  • There are plenty more factor to take note of such as low commission rate due to regular buying and selling of share as they add up quickly
  • Working hours: if you are working the regular hour of 9-6, the US market may be suitable for you as it does not clash with your working hours, otherwise you would probably have to place your stock order whether buy or sell early in the day before you go to work
  • As they always say, why not a mix of both investment and trading?