Before I begin, it is best to know who I am and my views on stock investing. The reason is that this article is not suitable for all. It is meant to assist stock investors, especially aspiring ones, to understand how substantial capital gains can be made in the stock market by savvy stock investing.
For a start, it is helpful to recognise that there are three main participants who wish to profit from the stock market. They are investors, traders and gamblers. I find each participant is different in how they view stocks, hence, would differ in selecting and buying their preferred shares in the market.
Personally, I view stocks like a piece of property. The thought process for buying stocks is similar to buying an apartment. I invest in stocks to earn dividends and hope that the dividends received will rise consistently for many years to come. I invest in properties to earn rental income. Both dividend and rental income are excellent sources of passive income while I wait for both stocks and property to appreciate in prices over the long-term.
A Ridiculous Example:
Let us say, I have bought a small apartment for RM 250,000 and I am earning as much as RM 1,000 in rental income a month. Thus, my gross rental yield is 4.8% per annum, which is not bad. Over time, I can choose to gradually raise my rent to RM 1,100, and subsequently to RM 1,300 and RM 1,500 a month, depending on its current market demand. This increases my rental yield to 5+% per year.
But what if there is a joker who is willing to offer RM 1 million for my property? Will I sell it to him?
I would obviously say, ‘Yes and thank you very much’ for pocketing RM 1 million is better than earning RM 1,000 a month in rent. Understandably, it causes a lot of people to aim solely for capital gains and ditch cash flow investing for capital gains is money to be earned faster. Usually, it is the cause of heartache to many and I will explain why shortly below.
Back to my property, if I am being offered RM 1 million for my small apartment, I will be suspicious of the joker for the offer did not make sense. Would you buy a small apartment for RM 1 million to earn RM 1,000 a month in rent?
For me, I would be suspicious of the joker and will check his background so that the offer is legit before accepting it.
Jokers in the Stock Market
The above illustrated may sound ridiculously absurd to you. But, the thing is –
Believe it or not, there are many jokers like this in the stock market. They would love to buy outrageously expensive stocks and sincerely believe that they are in fact making good investment decisions. It is not just a few of them. In the stock market today, we have a whole army of these jokers and investors love them.
For instance, it is common for people to buy stocks when their P/E Ratios are at 30, 40, 50 … and beyond. Buying a stock at P/E Ratio of 50 is likened to buying a company that is earning RM 1 million a year for a price of RM 50 million. That is insane for the people who bought it would only earn a meager 2% returns from this investment. To make it more unthinkable, these people are literally begging to buy these stocks in the stock market.
In essence, they are sources of great capital gains for savvy stock investors.
Why Do Jokers Buy Expensive Stocks?
As mentioned briefly earlier, most people want capital gains from investing, not cash flow. Receiving RM 1 million immediately is better than RM 1,000 a month in rental income. Inevitably, cash flow investing would then be ostracized. Thus, most people would have their eyeballs fixated on stock prices when they select stocks. Who has time to read financial reports to find companies that have cash flow and earnings?
To find stocks that will appreciate in prices quickly, they will find stocks that had already appreciated in prices. After all, what went up should go up further for it must have done something right for it to go up.
Unknowingly, they would buy into stocks at ridiculously high prices in hope that they will appreciate much faster. It is known as the Greater Fool Theory and it is an unsustainable method of trying to make a profit from the stock market. Why is it so? This is because most people have ended up as the ‘Greatest of all Fools’ in this game of stock betting or speculation.
How Do Jokers Help Investors to Make Massive Capital Gains?
First, it starts by viewing stocks differently from jokers. Instead of being focused on capital gains, savvy investors focus on recurring earnings and cash flows that could be derived from stocks year-after-year. This focus alone is helpful to avoid investors from making bad investments in the stock market.
Second, investors calculate return on investment (ROI) before investing into any stock. Let us say, a stock is earning RM 1 million per year and it has issued out 1 million shares. This means its earnings per share (EPS) is RM 1.00. Thus, the key question is – What is my ROI if I buy the stock at RM 10.00 a share? The answer is 10% per annum. The higher my ROI, the more attractive the investment is. As such, if the stock price drops to below RM 10.00 to, let us say RM 8.00, it would be a great opportunity to buy more because my ROI on the same stock is 12.5% at RM 8.00 per share. Take a moment to digest the table below:
In essence, it is about buying good stocks at their lowest possible prices to reap maximum dividend yields and capital gains.
Third, investors know that the stock market is driven by jokers in the short term and thus, causing stock prices to be either ridiculously depressed or overpriced. In times of pessimism, like COVID-19, these jokers would sell stocks in unison as they fear the worst. This caused many stocks, especially good ones, to drop like flies and thus, presenting great opportunities to buy them at low P/E Ratio.
Soon, when things pick up and the economy recovers, people will then be more optimistic and confident. This would drive the same jokers back into the market to buy stocks, driving up stock prices. The fastest they go up, the more they will pick up. This situation is when people, especially non-investors, wish to test out their luck in the stock market by buying stocks at a very high P/E Ratio or worse still, a stock that does not even have an ‘E’ in the first place. This would be ideal for investors to cash in their investments at absurdly high P/E Ratio so that they can make massive amounts of capital gains for they bought them at ridiculously low P/E Ratio, especially during bad times when no one wants to touch them.
How Not to be a Joker?
The above has illustrated how massive capital gains can be made through savvy stock investing. It takes logic and common sense, which is quite lacking today in the stock market. If you do not understand the write-up above, it is okay. I think it is best for you to take time to digest the contents above before investing your hard-earned money in the stock market. Do not be the next Joker.
However, it is also possible for you to wonder if successful stock investing is just as simple as understanding P/E Ratio and ROI. Shouldn’t stock investing be a lot more complicated, involving technical analysis, charting softwares, interpreting economic news, stock price trend following … etc?
The answer is nope. Stock investing is simple. But, the problem is that there are little people who believe that it is that simple, thus, would not do simple things required to be good in stock investing. In other words, if you do not know much about technical analysis, trend following and stuff listed above, it is still okay as you still can earn massive capital gains by just doing simple things.
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