How to invest in the stock market

When the bear market hits...

When the bear market hits...

Ah yes. It’s about time I talk about one of my favorite things to do – invest in the market. It is something that not everyone can do, or knows how to do. I just want to share some of my thoughts and experiences about it so far.

I started investing in November 2008 – around the time the financial crisis happened. I recognized a great opportunity then to invest because the markets were all down as a result of global economic malaise at the time that the next great depression was happening. All the major indexes were down to their 1998 levels and it was a good time to get in. Fast forward a year or so later and we can see that all the indexes have gained 30-60% from then and the DJIA is hovering between 10,000 and 11,000.

Investing in stocks is something that many people are afraid to do. They are afraid of risk or losing money in case a company goes bankrupt. Or what if the stock price goes down and I lose a lot of value? I’d like to take a quote from Winston Churchill who said that ‘Pessimists see the difficulty in every opportunity and Optimists see the opportunity in every difficulty‘. Investing in stocks need not be a daunting task. A lot of people think you need to be really knowledgeable about finance, or you need a lot of capital. Neither. Much of it is common sense and I started my portfolio with a measly $1000 in savings.

The basic premise of the stock market is to make profit and/or earn money. You can do this two ways: buy common stock and hope that it goes higher and then sell it at a profit. This is the most common way. Or you can buy preferred shares and hold it long term and make income from dividends. I would suggest the latter if you have a lot of cash handy. The main goal of a company is to be profitable. Once a company is profitable the stock generally goes up and assuming you have bought it at a lower price you can sell it to make profit, buy more of it hoping it goes up more or hold it to see how much it goes up. I’ve taken a pretty standardized routine of buying stocks now. I’ve invested for over a year, learned the good and bad and generally this way has worked for me. During all of 2009 I have yet to have a month where I have had a net loss. Last month was the first month I ever actually had a net loss for my investments, and it was mostly due to a stupid glitch with my brokerage. You want to know how I invest? Here’s how I invest (keep in mind that I’m a short term investor):

Look at which companies are currently profitable and can sustain their profit margins. If a company has a product or service that can be differentiated from its competitors that’s a good sign. If a company is in an emerging market, like China, that’s a good sign because there’s room for growth. A prime example is Sirius XM Radio (NASDAQ:SIRI). Back in Nov 2008 this stock was trading at $0.25/share. Now if you look at it Sirius XM has a good product: it’s the sole provider of satellite radio. It also increased subscribers year after year and more car manufacturers were offering it in their cars. In addition, this stock was so cheap that it had very little room to fall. So it’s a good investment. And if you look at the quotes for SIRI now, you’d see that it’s trading at more than $0.90 a share, that’s almost 4x the price it was back when I first invested in it. If a stock’s value seems cheap for what it is, then that’s a good deal. Two other stocks I would like to call attention to are Baidu (BIDU) and Ctrip.com (CTRP). These two Chinese stocks are at the top of what they do, in terms of market share, revenue, etc. Baidu is the leading search engine in China and because of China’s nationalistic spirit, I doubted that Google was going to surpass it (turns out they pulled out completely). Baidu was trading around $120/share back in February 2009. This is an incredibly attractive price for a stock that had such a huge potential for growth (online advertisement, search deals w/government, etc). And currently Baidu is trading at around $430/share. This is likely to sustain for a few more years because of its dominance of the Chinese market and to benefit from its growth. Next, Ctrip.com is the leading provider of travel service in China. This is another potential segment for growth because as middle class Chinese move up benefiting from China’s growth, they have more purchasing power allowing them to spend more on such things like travel. In addition, Ctrip provides both international and domestic flights. Again when you have a company that is in an emerging market and said company dominates its competition (EPS, Revenue, etc) then you have a winner. Ctrip’s value went from $17/share back in March 2009 to $76/share last month before it split. Again more than 400% gain.

After analysis of the stock and purchasing x shares of y company, there’s the thought: what if the stock falls? There’s two things I would in this case. Stocks fall for a number of reasons: a) Stock fell because earnings report b) Stock fell because of increased competition c) Stock fell because the market fell. In case a) and b) I would suggest selling the stock depending on how bad it was. If it’s not expected to return to profitability anytime soon, it’s gonna tie up your portfolio which you could be using to purchase better deals. In a worst case you should hold it because a) and b) tend to have longer term repercussions on the stock’s value. On the other hand, if it’s c) there’s one thing I would do: invest invest invest and/or average down. When those bearish days hit and the Dow drops 100+ points you know that’s a good time to buy. Because usually it doesnt mean anything about the company, it’s mostly a market reaction of investor fears and as Warren Buffet says ‘be greedy when others are fearful and be fearful when others a greedy‘ these down drops are typically temporary and the stock typically goes back up once the market recovers.

Making profit. I tend to have a general rule about stocks. If I make more than $100 on a stock, I sell it. Sure it means I lost out on the opportunity to make more money but some profit is better than nothing and it builds up. If a stock is really high then I would use a stop limit to lock it in. Limit orders are also a nice way to ensure that you buy low and sell high. But one rule in general is that the most profit tends to be made longer term. In fact if I had held alot of my stocks I invested in before until now I would’ve been 10x richer at least… but for those with short term thinking like me, locking in little profits a bit at a time helps too. In general, limit your risk by knowing when to sell and when to hold.

Three things to think about: How to purchase a stock, what do to if a stock falls, and when to make your profit. Stocks aren’t really as complicated as some people make it out to be.

Here’s some tips in general for making a profit on the market in the long run:

1) Be a contrarian: Buy stocks when others sell, and sell stocks when others buy. This can be very hard to do, but remember that once a stock is oversold – it will reach a certain point where it will look cheap to value investors and thus go back up, what goes down must come back up. Same thing when it’s high. When everyone is buying, it reaches a certain point where it looks too expensive, and then people will sell, and it will go down. It’s hard to tell where the peaks and bottoms are, but don’t try to time the market, just try to get a good idea of what’s happening to the stock.

2) There’s no software in the world that can make profit consistently: Don’t be sold on certain programs that can make money, because it’s impossible that it can make profit all the time; if it did, then everyone would be using it, and whatever gains would be gone, because if everyone bought or sold the stock, then the opportunity for profit disappears and the software is useless.

3) Use Limit, Stops, and Limit Stops: Limits are executed when the stock goes above a certain limit price, stops are executed when the stock goes below a certain price, and limit stops are executed when the stock is above a limit price, and below a stop price. Use these two tools to trade stocks because they are very useful. For one thing, buying at market may not guarantee you the price you want. Limits are usually used to maximize profit, and stops are usually used to minimize loss. With these tools, you know what price your stock is going to be bought/sold at, giving you more control over it. Using them helps exercise your patience (below):

4) Have foresight and patience, take advantage of human irrationality: Do not panic about a stock. There are a lot of times where certain common sense scenarios don’t get processed by investors right away. Example would be, when Ford Motor Company (NYSE:F) was trading about $1 in Dec 2008, Ford declined to take bailout funds from the US government. One would think that the stock price would be higher given that Ford didn’t need a bailout – you would expect Ford to be doing pretty well – now Ford is trading at around $16, and making billions in profit. Wasn’t this expected?
Baidu Inc (NASDAQ:BIDU) was at about $46 in Jan 2010, then news that Google would exit China’s market was revealed and Baidu shares went up – thing is, it didn’t go up enough to account for just how much profit Baidu could make. The average investor could realize that the shares were still undervalued and bought some – because now, Baidu is trading at $110, over 100% gain.
Shares of Home Inns (NASDAQ:HMIN) and Ctrip.com (NASDAQ:CTRP) didn’t go up substantially until after the Shanghai Expo was already underway. Given that these were huge Chinese travel stocks, one would think it obvious that these companies should be making a huge profit – and they did. Point is, it takes time for people to absorb the information. If one has patience, they could use this delayed reaction to make some profit.
Another curious thing that occurs, is that whenever an announcement is made, or IPO is made, it takes a few hours after the opening for the news to absorb. The stock could then keep going up or down depending on the nature of the news. Humans make irrational decisions sometimes, they overreact to news, and they take time to absorb information. Take advantage of human nature, and you can make profit.

5) Use fundamental and technical analysis: Fundamental analysis is looking at the company’s balance sheets. Technical analysis is looking at the trends. You should make use of both. If a stock is trading below it’s 50 day moving average, and it’s balance sheets are still solid, then that’s a good prospect for a buy. If a stock is trading on high volume above it’s 100 day moving average, and it’s trading at a high EPS, then it’s being heavily bought on speculation, and should be sold soon. Use both types of analysis to your advantage, it can tell you a lot about whether investors are behaving irrationally or overreacting (see previous point).

6) Generally, do not short a stock: Shorting a stock means potentially unlimited losses, as that stock could go up over 100%, that’s why I highly recommend against it. I have personally never made money by shorting a stock. Stocks have natural tendencies to go up because people want to see the companies do well, and companies want to make profit. Only in an extreme bear market would I ever consider shorting a stock, and/or terrible news for the company has been revealed (ie. BP oil spill, Goldman Sachs charged with fraud, etc). When you buy a stock, the worst that could happen is that the stock goes bankrupt and you lose all your money that you invested – but no more than that. If you want to hedge your position, buy gold or exercise options instead (below).

7) Make use of options: Options can be very useful if one uses it well. Never buy/sell an option by itself, it’s a huge risk, and you could potentially end up in a naked position. However, you can use options in combination’s and/or together with stocks to hedge your position. There are two types of stocks: blue-chip stocks (ie. General Electric, Apple, Microsoft) that trade on a large market cap (over 50 billion), those stocks tend not to move a lot and are generally not risky. Small and medium cap stocks are stocks with a market cap of a few hundred million to a few billion, and these stocks are more volatile and risky, but with potentially higher returns. There are certain option strategies that can be used with both:
Small/Medium cap stocks with bullish indicators: Bull Spread (buy a call option at one price, and sell a call option at a higher price), Straddle (buy a call option and buy a put option), Strap (buy two call options, and buy a put option).
Small/Medium cap stocks with bearish indicators: Protective Put (buy the stock, and buy put options on it), Bear Spread (sell a call option at one price, and buy a call option at a higher price), Straddle (buy a call option and buy a put option), Strip (buy two put options, and buy a call option).
Large cap stocks: Covered Call (buy the stock, and sell call options on it) , Butterfly Spread (sell two call options, buy a call option at a lower price, and buy a call option at a higher price).

8) Do not day trade: Day trading is basically gambling; you are betting that the stock will go up, and if it doesn’t, then you’re screwed. Not worth it. It’s just as risky as naked options trading. If the stock goes the wrong way, then you are losing potentially all your money.

That’s basically all for now, I am still learning as I invest, and will add to this article as I go along. I hope this has been useful for the majority of you.

Faraway

Leaves like precipice, wind chimes like the vast seas,
I await the return of sparrows.
Time has been scheduled, to make a play of coincidence,
Yet you quietly walked away.

A story outside the city walls, thick fog unable to dissipate,
The script unable to be seen clearly.
You can’t listen properly, even though the sound of wind doesn’t exist,
But it is I who mourns in regret and sorrow.

Awaken from the dream, who is at the windowsill,
Revealing the ending of the story?
The future as thin as the wing of an cicada,
Who is to tear it off?

I send you away, thousand miles apart,
You don’t make a sound at all.
This silent era, perhaps we should avoid,
Too distant a relationship.
I send you away, to the ends of the earth,
Are you still there?
Where are the sounds from a piano from?
Life and death unable to be conjectured,
I shall use this lifetime to wait for you.

Scent, tears, and sound enters the woods,
Searching for the white petals of the pear flower,
Only to find a row of lichen.
The sky outside the mountains, rain falls on the flower terrace,
Both our hair turns Grey.
Scent, tears, and sound enters the woods,
Searching for the white petals of the pear flower,
Only to find a row of lichen.
The sky outside the mountains, rain falls on the flower terrace,
I’m waiting for you.

A life like precious stone glazed in white,
Transparent like dust, your love flawless.
You come in the rain, poetry dissolved the sorrow,
I bathe in the present.

Pluck lotus from the water surface,
Shadow of the boat is still, but you don’t return.
Covered completely by this lifetime
The beautiful bloom you spoke of,
And so the past becomes nothing.

Difficult to characterize myself

Well just woke up from a lovely dream today…it was again one of those James Cameron moments. Giant reactors shooting light beams into the sky, huge spaceships flying in the air and sleepy villas in the background. I often have these grand majestic dreams, flying around floating cities or mountains with waterfalls for example. Not quite sure what it means – but it’s lovely.

Anyways I have little to do today – no work or homework, but I do have to make another speech next week so working on preparing that. I guess after an unpleasant hangout with my friend yesterday got me thinking to how others perceive me. It may make a good topic for a speech.
It’s difficult to characterize myself and that’s probably a good reason why I have so few good friends. Few people (if any at all) really understand who I am. Am I an ambitious and confident person or am I a lazy and conceited individual? I’m both. I lack a passion in any one area – I like to be a master of every aspect, that’s a reason why I can’t keep my attention to one thing or one place at a time, I always have to travel to other places, expand my experiences, etc. I go on wikipedia daily for trivial information, anything that I don’t know in Chinese I look it up and store it in my Iphone for future reference, I can’t stand living in one place for too long, I don’t want to focus in one major too much (computer science), I want to be a musician, a speaker, a politician, a programmer, a video game designer, a philosopher, a scholar, a historian, a teacher, a web designer, a writer, an actor, a dancer, a composer, a diplomat, an ambassador, a statesman, an artist, a CEO, an entrepreneur, serve in the military, etc. So much to do, so little time. So I always rush myself (this in addition to my recklessness about dying young explained earlier).

I’m also insecure about myself. I always think others think I’m below them. It may or may not be true but I think it comes from the fact that people ignore me alot. Since I was young, people ignored me maybe cause my voice was too small, now these days people don’t pick up the phone when I call them, don’t message me back on msn/facebook or text me back. And I always think it’s because they think I’m not important enough for them so I have to keep trying to make myself better all the time.

So I don’t blame people for failing to understand me. Am I a Canadian, or an American or Fobby Chinese wannabe? All of them. I’m both serious at times and not serious at other times. I poke fun of myself a lot. I have a strange and weird sense of humor. People may think I’m desperate and creepy when it comes to some things like relationships, and in truth I like to flirt but I don’t like to commit. I can be impulsive with my spending and also meticulously frugal. I’m one of the most random people you may ever meet. I’m quiet and shy in real life, but more open and flirty online. I’m conservative in thought but liberal in execution. I can be selfish and rude and I can be nice and caring. I’m can be blunt, divisive and opinionated yet Honest. There’s many sides to me so it’s hard to explain all of them and even I fail to understand myself sometimes.

When I was a child, I was so lonely that I made up different characters and personalities for all my toys. My Lego characters would have personalities and I would do battle with them using Dragonball Z attacks. I would create games from index cards and 3x5s. I had a pile of them so I drew wild and imaginative (I wish I still had them) characters on those index cards and cut them out and do battle with them. There were guys with one eyeball, six arms, roller skates that had rockets on them, backpacks that shot missiles, shot spikes from their shoulders, etc. I had booklets from school that I would create mazes and trivia games on, and draw different characters. I even had a first person shooter game drawn on a sheet of paper with the different buttons to shoot and everything… I had a sonic maze game where you had to maneuver a guy with a top hat through the spikes and stuff, of course you had to think how he would do that because its not actually interactive obviously.
There were games based on computer games I played. I remember one game called Sir Bombalot where its like chess pieces but with different moves and attacks for each piece. I created a game out of cardboard with all of my own rules and pieces. I had an entire carton full of those cardboard guys. Me and my brother would act out certain ‘episodes’ with my Lego characters with a dialogue and everything. How fun my childhood was. That’s what happens when you grow up with no friends.

But I exaggerate sometimes. I do have friends now, some are more important to me than others, and some understand me more than others. But know that I am a pretty complicated individual to understand. But I’m sure most people are ;).