Investing is like football. Everyone has an opinion, and everyone thinks they are correct. Depending on when and whom you ask, you would receive different answers to the same set of questions – who is the best player, or which is the best team.
Just like football, answers to questions such as which is the best stock to buy would lead to different answers from different people at different times.
But it does not mean we can go out there and buy any stocks that we think is right. Savvy investors would always find ways to make good decisions.
Here are some important investment mindsets that differentiate the experienced investors and the newbies.
# 1 Experienced Investors Look Beyond Returns
When someone is new to investing, the first thing they will look at is the returns expected for the stock. The higher the return, the better the stock. Right?
Return (almost) always correlates to risk. This is part and parcel of the risk-return concept that all financial practitioners would know, and should be telling you.
The worst way to decide which stocks to invest in is to simply choose what has done well over the past years, and then buy them assuming that they will continue to perform well.
# 2 (NOT) Putting Your Eggs Into One Basket
Just because Elon Musk put all his money into Tesla and SpaceX, and is a billionaire today, does not mean you should just follow likewise.
Elon Musk is an entrepreneur; you are an investor.
Investment legend such as Warren Buffet and George Soros have hundreds of companies in their portfolios. None of them became successful investing in just 1 or 2 stocks.
Regardless of how confident you are that you have spotted the next Apple or Google, the reasonable strategy, for those of us not called Elon Musk, is to get exposure to a diversified portfolio of companies. This reduces the systematic risk in your portfolio without lowering your expected returns.
An easy way to get immediate exposure to a diversified portfolio of companies would be to purchase the Straits Times Index (STI) Exchange Traded Fund (ETF). The STI ETF, offered by Nikko AM and SPDRS, allows you to buy into the biggest 30 companies on the Singapore Exchange.
Read Also: Why Your First Stock Should Be The STI ETF
# 3 Think About Future Liquidity
When it comes to investing, a rule of thumb is that it’s better to hold liquid assets than illiquid ones. The same logic applies when you buy a stock.
There are some stocks that have low liquidity. They get very little coverage from analysts and do not generate much interest among the conversations of retail investors. They are public listed companies that trade like privately own ones.
This does not automatically mean they are bad stocks to own. However, investors need to be aware that the selling, or the purchasing of additional stocks of the company, would come at a much higher spread, compared to other more liquid stocks.
# 4 Understanding Your Own Investment Objectives
All too often, we see people trying to imitate what others are doing. They invest in what the “experts” say are good, or what other “gurus” are doing.
When they do that, they fail to recognise what their own investment objectives are. They are merely copying the objectives of others.
One of the most comment responses we often hear is how most retail investors “just want to invest in good companies and grow their wealth slowly, without taking high risk.” We think that’s a reasonable expectation.
Yet many times, the same people would be asking questions such as which is the best stock to buy, or whether they should be selling their investments now that a recession could be looming.
So much for “growing their wealth slowly”.
As an investor, you should take the time to understand your own investment objectives, rather than be swayed by the noise in the market.
# 5 Understanding Your Investment Strategy
Once you know your investment objectives, you should identify the right investment strategy.
If you want to earn passive income from your portfolio, then you should look at stocks that have a history of paying out stable dividends. Ideally, they should be companies with strong positive cashflow (e.g. SingTel).
If your aim is to grow your portfolio with companies that have growth potential, then you should look at companies that are doing well in growth sector.
An example could be listed companies operating in the pawnbroking industry such as Maxi-Cash. The sector has received social acceptance among Singaporeans in recent years, and as a result has seen massive growth of 19.4% in loan dispersed since 2008.
Another simple trick to identify companies that could do well over the next 10 years would be to take note of their e-commerce strategy. Given the high internet penetration rate among Singaporeans, it’s a matter of time before people start spending a lot more money online.
Listed companies like Challenger are already moving towards e-commerce in a big way through their online brand Hachi.tech. This not only allows the company to offer products not commonly available in their brick and mortar stores, but also potentially enables them to expand their reach outside of Singapore. If successful, the growth upside for the company would be very high.
If you are interested in investing in retail brands such as Challenger, we suggest you first find out more about the companies and the sectors they are in. You can refer to this report from Frost and Suillivan.
# 6 Understanding The Type Of Risk Your Investment Is Exposed To
Remember what we said earlier about return and risk being co-related? If you are investing in the hopes of earning good returns, then it’s only right that you are familiar with the risk you are exposed to.
Every stock belongs to a sector. Every sector has its own unique risk. A company that operates in the Singapore automotive industry would be at risk of high COE prices affecting the sales of cars in Singapore.
Companies in the fashion and apparel space would need to be careful of the online threat posed to them by the numerous e-commerce stores around. They could see their market shares declining in the long run if they are unable to maintain a competitive edge.
As an experienced investor, you need to be familiar with not only the growth factors that could increase the stock value, but also the risks that the stock is exposed to.
#7 Valuing The Company
Last but not least, if you want to get a good deal on the stocks that you are buying, you would need to have some idea on how you can valuate the company.
One of the most common ways to valuate stocks would be to use either the price-to-earning (P/E) or the price-to-book (P/B) ratio. The P/E ratio works well if you are trying to find out if the stock of a company is cheap, compared to its peers within the industry.
The P/B ratio works well if you are trying to find out how much you are paying for a company, compared to the amount asset that it has.
In both instances, a lower number suggests that the company is cheaper to own, compared to its peers.
The next question the experienced investor would want to know is why the stock is cheap. There are usually two main outcomes to this.
- A) A stock is cheap, and hence, a good investment
- B) There are underlying issues with the stock, and hence, it is cheap.
As an investor, it is our job to find out whether it is the former or the latter. If it’s the latter, then we need to determine if a stock is worth buying given the uncertain environment going forward.
Other ways of valuing companies, especially those that generate high sales such as stocks in the retail sectors, would be through the discounted cashflow (DCF) or the price-to-sales (PS) ratio.
If you are looking to invest in companies on the Singapore Exchange, it is important to understand these companies well. You can read an independent report on the retail cluster from Frost & Sullivan if you are looking at companies in the retail sector.
This article was written in collaboration with SGX. To stay up to date with the latest news on Singapore stocks, you can like the SGX My Gateway Facebook Page. All views expressed in this article are the independent opinion of DollarsAndSense.sg
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