Exams are finally over...A lot of weight off my shoulders. Over the past weeks, I kept trying to find that defining moment that created the lifelong investor in me and what sorts of knowledge I've acquired in the process. Teaching yourself is a long hard painful process, but in the end it is all worth it. I had a friend who played golf for 3 times and went right into the golf course. He wasn't given any preparation for playing in the it. At the end, the experience was good one, he saw and did everything and that learning curve had a very steep surge. You learn by playing and its probably the best way of learning , getting into the action.
I question myself over time, if a person comes up and ask me" What do I need to start investing?". Its a very good question because I went through months of learning on my own,from how to doing it and to actually doing it.It took me quite sometime to find a starting point. You can know how to read financial reports and analyse companies , but to transform it into investing requires quite some work. Today, I've prepared a few tips on skills and knowledge potential investors should acquire to start things off. I will have a few posts, and this one would be the first of a few.
1) Information
As an investor you need tons of information. Getting the information is not very hard but you need to get information that is timely and comprehensive.It is quite obvious you need as much information to make the best decisions. Here are the places I get my information on a daily basis. Being updated is very important.
Share prices - You can choose to go to the stock exchange's website to access the prices. But I STRONGLY recommend opening a trading account with a good brokerage firm. All of them are free of charge by the way. In Australia it takes on 3-4 days to open one. Once they receive your signature of agreement, its 2 days. Look at the features they offer before registering and also what the brokerage fees are like. Banks usually have their brokerage arms so just about any recognised bank will offer brokerage services. With the account, you can access all the information you need in a more simplified form. You can set up a list of your favourite stocks and this makes tracking much simpler. Here are the sites I go to.
Yahoo Finance - Here I set up a portfolio of stocks I watch and it comes out in one list which makes it easy to look at.Thus you only see the ones you want to know and it saves a lot of time. The prices are on 20min delay except for US stocks. This site gives me the daily news and this is where I track the US market.
Brokerage Firm site - Depending on which firm you are with. Their websites gives you more than just stock prices. It gives you financial ratios and historical data, comparisons to industrial average and announcements. This will save you A LOT OF TIME. You don't need to look for all sorts of financial information and doing your analysis and calculating ratios. The information are available and all you need to do is read. Earnings per share, Net Profit, Revenu and all the important ratios and numbers are there, you don't need to lift a finger. Being updated to announcements are also very important. Announcements such as releasing quarterly results, announcing entitlements, new contracts , new acquisitions and all the information the company reports to the Stock Exchange. ALL of these information affect share prices!!! Thats why you need all the required information and be updated.
There are also other websites like Bloomberg, Wall Street Journal and many others to stay updated with news. If you are interested in gold and silver, you can go to Kitco. If you want to replicate a market index, you can go to the iShares website to find your best suited ETF.
2)Fundamentals
There are two main ways of analysing a company/investment. Fundamental and Technical investing. Fundamental investing is simply analysing financial reports and financial information. Technical investing is more of looking at graphs and limits. As I always do, I don't really like to mention what we can read in books. But I just like to give you a head start to things. If you already knew, its great. But if you haven't...Prices reflect future "EXPECTATIONS". Fundamentals still has a huge weighting on the share price, but its expectations I believe make up more. Here I always observe people making errors in placing too much emphasis on either one of them and it is wrong. Both are equally important. Things work together, the fundamentals has very close correlation with expectations. So make sure you don't make the mistake of saying" Prices reflect expectations, forget about the historical data". This is plain wrong. This also links with the Efficient Market Hypothesis which I would write on my next post.
Many weeks ago, a guest speaker taught the class how to look at financial reports. I was like "Hmm, this must me pretty simple for me". And yes, just when I thought I knew how to analyse one, there were so many different aspects I missed out. Thanks to the accountants and auditors today, the reports we look at today provides very credible information. Being an investor, you need very accurate information that reflects the company very fairly. Only recently, I could learn to appreciate the importance of accounting standards and the world adopting international standards. People like us today are pretty lucky, years ago different countries with different standards and policies, you can't compare anything beyond your own country. Now we can..
I read this recently on the Singapore Exchange site. It says, if you had 10 minutes to look at an financial report, what would you do. Here is what it says...
• Glance through the Chairman / CEO’s statement. Read the first two and lasttwo paragraphs in detail. This should give you a gist of how the businessis going. Do the same for the management discussions and operational analysis.
• Check if independent auditors gave a clean bill of health.
• Look at the financial statements and check if:
1. net profits are positive, rising or falling;
2. sales are rising or falling;
3. operating cash flow after working capital adjustments is positive or negative;
4. net debt is rising or falling;
5. dividends are rising or falling (as a % of net profits).
• Look for the segmental breakdown in the notes to the financial accounts and review the sales and earnings for each segment to see if they are improving or declining.
• For all areas which suggest deterioration, look for an explanation in the discussions or seek clarification from the company.
In short, this is what you should do if you lack the time. Looking for one-offs are also important. Is the profit consisting of a one-off sale of maybe a division? Is the loss because of a one-off restructuring?
Two examples. First, AirAsia in 2008 posted a massive loss of 600million because of oil hedging and interest rate swaps. Their share price plummeted as investors had a sell-off. But is AirAsia fundamentally a terrible firm? The answer was no, they posted a profit before recording the "abnormal" loss. For investors who didn't understand and panicked, they would have made a bad decision. For those who knew it was a one-off and capitalised on the panic, their money would have doubled. Share prices went as low as 70 cents and went back as high as $1.50.
Second, DBS Bank. DBS is the largest bank in the South-East Asia based in Singapore. Almost the same thing. They offered structured investments in Lehman Brothers (now bankrupt), and when things collapsed, they had very massive writedowns and their share prices also followed. Another one-off. At the low of things, their shares were as low as $6.40, now, even after a rights issue, the share trades at $13.50. Btw, the right issue was the right to buy at $5.50, if you know DBS's fundamentals, money comes running to you.
This is it for part one, next part I will writing about some misconceptions about mutual funds, creating a portfolio, outside investing considerations and more about diversifying.
~deyao~
