How best to invest in the stock market today as we continue to be plagued by a series of events such as coronavirus, political uncertainties and ongoing tension in trade between China and the United States?
Here are a few things that come to mind:
1. Be Defensive at All-Times
Personally, I realised that uncertainties are part and parcel of the stock market. Hence, I believe it is wise to be conservative at all-times when investing. I find it more practical to build a resilient stock portfolio that earns money in both good and bad market situations. In other words, I prefer a stock that has a good track record of consistent growth in earnings, especially in the worst of times, as I am investing with a mindset that uncertain events could happen in the future.
2. But, I Want Recommendations on Stocks …
Pardon me. I have yet to come across any individual to-date, who has increased his wealth sustainably over the long-term via buying, holding, and selling stocks through tips and recommendations. Most people I know lost money from them and have vanished from the stock market. Here, I list down questions that most people have asked and will be asking about the stock market in the future:
– Oil price is now US$ 140 a barrel. What stocks should I buy?
– Oil price is now US$ 40 a barrel. What stocks should I buy?
– RM has weakened against the Dollar. What stocks should I buy?
– RM has strengthened against the Dollar. What stocks should I buy?
– There is a recent cut in OPR. What stocks should I buy?
– There is a recent hike in OPR. What stocks should I buy?
– PH is now the ruling government of Malaysia. What stock should I buy?
– PM has just sent in his resignation letter. What stock should I buy?
And the list of questions would be extended to protests, trade war, virus and so on and so forth. Sincerely, my personal response to all of the questions above is as follows: ‘What is your investment game plan?’. Understandably, most people do not have any game plan. The key reason why the above questions are asked, I believe, is because stock investing is perceived to be an activity which involves making the right bets on stocks to attain quick profits at the shortest amount of time. Many lost money quickly instead of making quick profits.
I think the questions above are speculative in nature. If you find yourself asking the questions above and believe that knowing them is a key ingredient to profit in the stock market, it is a perception held by stock speculators, not investors.
3. What is True Stock Investing?
Here, I would like to share what I believe is the job scope of a stock investor. Let me explain:
For instance, you are hired by a local bank to be its credit officer. Everyday, your bank opens its door for business and you will have hundreds of people lining up to submit their loan applications. Two questions. First, would you approve all of the loan applications submitted to you? Second, whose loan applications would you be more inclined to approve first?
Answers. To the first question, of course not. To the second question, obviously, you would be more likely to lend money to potential borrowers who have both the financial means and track record of making good debt repayments over the others who do not have for they are more creditworthy. Hence, this would lead us to our next question. How do you identify which of your potential borrowers are creditworthy from the ones that are not?
The answer is for you to perform credit assessments on these borrowers before approving their loan applications. That is what you are hired for.
In a way, the job scope of a stock investor is similar to a credit officer. Real stock investors (credit officers) would perform stringent credit assessments on a pool of stocks (potential borrowers) to identify their stock quality (creditworthiness) in order to earn recurring dividend income (interest income) consistently.
The #1 reason why I think most people fail to build long-lasting wealth in stocks is because of a lack in credit assessment. A bad credit officer who fails to do his job would inevitably lend to all kinds of people and thus, putting its bank at risk of having its loans being defaulted. He should be fired. If your portfolio consists of poor performing stocks, it is time for you to think about credit assessments.
4. Investors Like Bad News and Uncertainties
Why? This is because bad news and uncertainties create pessimism in the stock market, thus, present multiple opportunities for stock investors to invest and to accumulate great stocks, the creditworthy ones, at bargain prices. Therefore, in times of great uncertainty, it usually is a great time to shop around for bargains in the stock market. On the contrary, in times of great optimism, it is actually not the best time in the world to find good bargains as everybody (except investors) are and would be rushing into the stock market to buy stocks.
5. How Capital Gains are Achieved in Stock Investing?
Therefore, a key method to enjoy massive capital gains with stocks is to acquire great stocks when they are undervalued, often in times of great pessimism, and sell them when they are overpriced, often in times of great optimism. Hence, it behooves us to have a simple and practical method of determining if the prices of these good stocks are undervalued or overpriced. Personally, I would depend heavily on valuation ratios like P/E Ratio, P/B Ratio and Dividend Yields to guide my investment decisions into any stocks in the market. Without them, I will find it hard to tell if a stock is cheap or expensive and that is dangerous in investing.
Should you be investing in the stock market today?
Well, my question to you is: ‘Are you a good credit officer?’
If you are, then, you may prepare to shop for great bargains in the stock market and accumulate some great stocks if their prices are right. But, if you are not, it is best for you to learn how to do a proper credit assessment first on stocks first before investing your hard-earned money into them. Personally, I’m running an online membership site known as Dividend Vault, where I’m teaching people to perform credit assessments on stocks before investing. The membership is now closed but you may get onto the early-bird list so that you’ll be informed on my next launch. Check it out: Dividend Vault.