Investing has more in common with shopping than you’d think! Here are 4 good reasons why.
#1: Brokerages = Supermarkets
If you buy groceries regularly, this should come as no surprise. Some may wonder, what does this have to do with investing?
First a simple thought exercise: If budget was your main concern, would you buy similar quality vegetables at a high-end supermarket or no-frills one? The answer should be obvious, the no-frills one.
If you think of supermarkets as retail stock brokerages, the parallels between both should be clear. Since the product you are buying (company) is similar across brokerages, it would be wise to choose a brokerage that offers you lower commissions – given your investment size, product and so on.
Pro Tip: There is a large investable universe outside of SGX stocks, and there is a number of reputable overseas brokerages which charge a tiny fraction of what local brokerages are currently charging.
#2: Paying more than you should
With certain fruits, such as avocados, you want to buy them when they are in season (ie. When supply is high). Odds are much higher that you will get more bang for your buck.
Again, you want to put the odds on your side when making investments. Since you are simply buying a piece of a company, using simple financial metrics like Price/Earnings and Price/Book Value should give you a rough idea whether you are currently overpaying.
For example, after doing your homework – you like the fundamentals of XYZ company, which deals in software. You then find out that among all the software companies, its P/E ratio is lower than the average – signaling undervaluation. Probability is on your side that you will be getting more bang for your buck.
#3: Resale market
Let’s draw some more parallels with big-ticket items, such as property and cars. Just like these, you want to make sure you can get decent resale market value on your investments.
Although stocks do not require longer waiting periods for buyers to come along, sometimes investors are so in love with a company that they neglect to see if the stock is liquid or not.
Certain stocks, such as local household listed names, are very thinly traded, and should you need to sell the stock to raise cash, any buyers of the stock would pay much less than what they should – just because there are not many buyers. This results in gigantic bid/offer spreads, which can be made much worse if you own so much stock that it overwhelms the average daily trading volume.
Always remember that even long-term investments may eventually have exit points – don’t be caught by surprise in such a scenario.
#4: Do your own homework
This point seems obvious – almost everyone would claim that they understand this. But how many truly apply this?
Again let’s use cars as an example. Most people are usually on the watch for unscrupulous car salesmen, because chances are pretty high that he/she is going to get taken advantage of when dealing with them. Yet many investors do not exercise the same caution when it comes to stock picks from unsavvy financial advisors/friends/family/some random dude on some Facebook group.
If you don’t understand what you are getting yourself into, investing based on someone else’s analysis or tips is a foolish game to play in the long run. If you don’t have the time to do your own homework, please don’t use YOUR hard-earned money to test if SOMEONE ELSE’s stock view is correct.
That’s not investing, that’s gambling.
