Hi, I’m Ian.
I wrote my first case study on stocks in May 2016. Ever since, I’ve published two case studies a week. They are made available to a community of 3,400+ readers every Tuesday and Friday. To-date, I’ve built a collection of over 140+ case studies on stocks listed in both Malaysia and Singapore.
How do I picked which stocks to write?
For some, I’ve chosen them. Usually, I’ll cover stocks that grow profits consistently. For others, these stocks are requested by my pool of readers. Some are pretty good picks. However, most of them are not. Intrigued, I began to find their common traits and discovered:
– These stocks had grown in prices rapidly in a short span of time.
– Financial results are often completely ignored.
– These stocks are involved in volatile and cyclical industries.
– Stocks were picked based on a positive view on a single future event.
Regrettably, these traits are common among people who failed to generate consistent returns from their portfolio. Starting with high hopes, many felt disappointed. Often, it marks the unfortunate end to what could have been a sizeable portfolio that generates income to savvy investors year after year.
Personally, I believe poor stock choices were made due to people having a misconception of what stock investing actually is. Many do not know the differences between investing, trading and speculating. Thus, most tend to speculate, believing that they are actually investing in stocks. This erroneous thinking is dangerous as it is detrimental to one’s portfolio. In this article, I’ll share their differences in great detail.
#1: Are you a Speculator?
Here’s how I identify a speculator. It can be illustrated by the following conversation:
Ian: ‘Why do you invest in stocks?’
Speculator: ‘For Capital Gains, of course’.
Ian: ‘Why do you choose this particular stock? What makes it so special?’
Speculator: ‘Because it will go up.’
Ian: ‘Are you sure about it? Why do you think it will go up?’
Speculator: ‘Because it had gone up by 200% in 2 months. Also, I heard this stock is on the verge of clinching a big contract from XYZ Corporation.’
Ian: ‘I see. So, what kind of business is this stock into?’
Speculator: ‘I don’t know. Oil & Gas, I think.’
Ian: ‘How about its finances? Is it profitable?’
Speculator: ‘I don’t know. Ian, is this stock profitable?
Pardon me. I believe, this person is a speculator, believing that he is investing for capital gains. How do I know? Simple. Speculators, especially the bad ones, are those who:
- Don’t have intimate knowledge on his stocks’ businesses and their financial performances.
- Always buy stocks at their highest prices as they attempt to sell them at ridiculously higher prices.
- Don’t have a specific game plan, a system to pick stocks, and a formula to calculate returns from his speculative activities.
#2: Are you a Trader?
How do I spot a trader? Likewise, I’ll use the following conversation to illustrate common lingo used among traders:
Trader: ‘Ian, I’ve just executed a trade on this stock, stroke it at RM 1.00’
Ian: ‘Great. Why this stock?’
Trader: ‘A few reasons. The volume is there. The MACD is there. The EMA is also right. The short-MA line has just moved above the long-MA line. So, I strike la.’
Ian: ‘I see. So, what is your Risk: Reward Ratio?’
Trader: ‘Mine is 2:1.’
Ian: ‘What if your stock prices drop?’
Trader: ‘Well, if it drops below 6% – 8%, I’ll cut my losses and move on.’
Ian: ‘How long do you expect to hold onto this stock?’
Trader: ‘Maybe 1 week or 2. But, for some, I held them for more than a month or two. Nothing more than 3 months.’
Ian: ‘How are you faring in your trading activities?’
Trader: ‘Well, my winning ratio thus far is 51%.’
As you can see, traders are different from speculators as traders:
- Use technical analysis tools to time their entry & exit of the market.
Often, speculators don’t have any tools.
- Buy stocks only if their probability of profits is higher than losses. That’s why traders calculate risk: reward ratio. Most speculators don’t take that into consideration. To be fair, most are not even aware of its existence.
- Know how to cut losses and move onto other trades that give better chances of profits. Most speculators don’t have a plan on what to do if their stocks drop in prices.
#3: Are you an Investor?
So, how do I know that I’m talking to an investor. Simple. Here is how the conversation of an investor would sound like:
Investor: ‘Ian, I’ve just bought this stock.’
Ian: ‘Great, why do you buy?’
Investor: ‘Many reasons. First, I like its business model. Second, I like the management as they are hands-on. Third, it is financially solid. Fourth, it has revealed a number of strategic plans to expand and to grow its income over the next 3 – 5 years.’
Ian: ‘I see. So, what price did you bought it?’
Investor: ‘I bought it at RM 1.00. P/E Ratio is low. P/B Ratio is low. Plus, I’m expecting 4% – 5% in dividend yields at current price. That’s a bonus.’
Ian: ‘So, what if the stock drops in price?’
Investor: ‘I’ll buy more. Why? Firstly, I like the business. If stock price drops, I’ll buy more as I can average down my cost per share. Secondly, with a much lower cost per share, I would be able to enjoy better dividend yields from the same stock. Thirdly, if the stock price goes up, then, I’ll enjoy higher capital gains from my investment in the same stock.’
Thus, investors are very different from both speculators and traders as investors:
- Have intimate knowledge on stocks they invest in terms of their businesses, management & finances. Both traders and speculators ignored them.
- Buy good stocks at reasonably low prices. Speculators tend to buy anything that jumps in prices.
- If price drops, buy more if the stock quality remains good. Investors view it as an opportunity to increase their shareholdings whereas traders tend to cut losses.
- Enjoy passive income by receiving dividends. This is because investors often choose stocks that are cash-rich. Traders and speculators have little interest in dividend income.
So, which way is suitable for me to profit from the stock market?
For a start, the failure rate of speculators in the stock market is relatively high. This is because they pay the highest price for their stocks. If their stocks rise in prices, they would also reap the lowest capital gains as compared to traders & investors. Thus, speculation is taking high risk to generate low returns.
How about trading? Personally, I believe it is possible for one to be a successful stock trader. The question is, ‘Are you willing to learn?’, ‘Can you stomach trading losses as you’re learning?’ and ‘Do you have the intelligence to learn how to interpret chart patterns & comprehend the proper usages of technical analysis tools?’ It’s a complex subject. Even after you’ve learnt, the next question is, ‘Do you have time to do trading?’. Soul searching is needed.
How about investing? For me, investing is much easier, less time consuming, and more rewarding than trading. Why? It’s easy because it takes primary school maths to master. It’s less time consuming as you can do it part-time. It’s more rewarding as it takes relatively lesser risks to enjoy higher dividend yields and capital gains from your investment portfolio.
Case Study Request, anyone?
Perhaps, you’re interested to invest in a particular stocks. Here, I’ll like to invite you to request for a case study. To submit your request, just click the link below, fill in the details, and type in your stock.
I’ll respond to your request within 24 hours. The actual case studies will be written progressively on a first-come-first-serve basis and be submitted back to you once it’s done.
Stock 101 Quiz