‘This is our top performing fund. You should invest in it.’

‘Buy this stock now. Most analyst reports are giving it a ‘Strong Buy’.

In order to become a savvy investor, one must first have the ability to differentiate, classify, and assess the quality of investment information received. This ability will enable you to capitalize on information which is truly valuable and discard information which is worthless.

Funny Munnee Comic

 

Here are 5 important aspects that should be considered when classifying investment-related information so that you too can become a savvy investor.

#1: Is it a Fact or an Opinion?

 

For instance, when a stock analyst puts a target price to a specific stock and recommends a ‘Strong Buy’ on it, we need to ask ourselves this question:

 

‘Is the Target Price of RM xxx per share a fact or an opinion?’

 

Similarly, if a unit trust consultant tells you that a specific fund is good, you may want to ask why he thinks so and the basis of his opinion. Is his opinion based on facts which can be verified? Or, is it a prediction of what might possibly happen in the future?

Usually, savvy investors will collect factual information to assess the potential of an investment. For instance, if we are looking for stocks, we want their financial reports. If we are looking for unit trusts, we want their prospectus and interim reports.

 

#2: Increase Your Financial Vocabulary

There are different words used for different investment vehicles.

For instance, in unit trust, you may come across words such as ‘Net Asset Value’, ‘Portfolio Turnover Ratio’ and ‘Fund Volatility Factor’. Meanwhile, in stocks, you have words such as ‘Dividend Yield’, ‘Market Capitalization’, ‘P/E Ratio’, ‘Debt-to-Equity Ratio’ and so much more.

These words are tools that differentiate a solid investment from a bad one. If you do not know what the words above meant, you may want to take some time to learn about them first before investing your hard-earned money.

 

#3: Trust, but Verify

 

This is a signature phrase of former US President – Ronald Reagan. It applies the wisdom of verifying the accuracy and the trustworthiness of a piece of information.

 

For example, bankers do not lend money randomly. If you claim to earn RM 10,000 a month, bankers would want ‘documented proof’ such as your pay slip, credit report, EPF and Income Tax Statements to verify your income first before lending you money.

Hence, we should apply the same attention to our investment related information. Usually, savvy investors would look at financial reports (documented proof) when assessing stocks. It is to verify that cash is indeed flowing into the company from its customers.

 

#4: Capital Gain versus Cash Flow

An investor invests to achieve two primary outcomes:

 

  • Capital Gains and/or
  • Cash Flow

 

We must determine our preferred outcomes before investing. In simple terms, capital gain is the profit an investor makes from buying shares to sell them at higher prices. Cash flow is achieved when we purchase shares to receive dividends on a quarterly, half-yearly or an annual basis.

Once we have set our priorities, we can categorise the investment information better. For instance:

  • Is the information given helpful for us to achieve capital gains?; or
  • Is this information helpful for us to generate regular cash flows from our investment?

 

#5: Avoid Chasing the Flavour-of-the-Month

‘The exchange rate is now below RM 4.00 per 1 US Dollar. I think it is time to move out of export-related stocks’

‘The price of oil is rising again. Should I buy shares in the oil & gas sector?’

‘Company A has just received a RM 2.1 billion contract. Should I buy shares of Company A now?’

You can discover a lot about a person’s approach to investing over a cup of coffee. The above are just some of the statements often made by people with an ad-hoc approach towards investing. This explains why their decision to invest is greatly influenced by short-term events.

Instead, savvy investors place more importance in finding out whether a company is able to stay profitable despite the volatility of the Ringgit’s exchange rate against the US Dollar. For them, the exchange rate is of less significance compared to the fundamentals of the company itself.

Similarly, in the case of oil prices, savvy investors would try to find out whether oil & gas companies can remain profitable when oil prices are volatile. Consistency in providing returns is more important than the ups and downs in oil prices.

Instead of looking out for short-term events, savvy investors implement a long-term plan to achieve their investment goals. The plan would often include a system to decide what stocks to buy, when to buy or sell them and how much to invest. It is a system that helps investors to achieve consistent investment results in the long run.

Becoming a Savvy Investor

 

Regardless of your choices, the level of returns ultimately depends on whether you are a savvy investor who makes informed and smart investment decisions. If you are not, the question would then be how devoted you are towards educating yourself to become a better and savvier investor.

If you are willing to learn, you must start by attending classes, lessons or seminars on the subject of investing. In general, various sources of information are available through online materials, books, workshops and more.

Did you know that InvestSmart, an investor empowerment initiative by the Securities Commission Malaysia (SC) organises stock market and unit trust seminars for retail investors? The seminars aim to encourage members of the public to take control of their finances so that they can be responsible for their own future and wealth, to equip investors with the knowledge, skills and tools needed to exercise good judgement and discretion in making investment decisions, and to encourage more informed retail participation in the capital market. To find out more, log on to www.investsmartsc.my

This article is sponsored by Securities Commission Malaysia, under its InvestSmart initiative.

Securities Commission MalaysiaInvestSmart

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: admin@investsmartsc.my.


KCLau
KCLau

Personal finance author and trainer

    2 replies to "FACT vs OPINION: 5 Ways for You to Filter, Categorise and Classify Investment Information"

    • Francis Xavier Lazarus

      For the past 2 weeks I have thinking of my neighbors house that has come up for sale. They are asking for RM600K for a 20×70 double story terrace house in Bandar Botanic Kelang.
      My present house is has still got about Rm250K outstanding loan but being a end lot with land can fetch more I think. Got about 20′ in front and side has 15′ while back has 15′.
      Neighbor’s house is an intermediate lot and can be purchase would make my house like a castle.
      Problem is I need to figure out how to raise 10% of the purchase price add the S & P amounting to about RM70K. Thinking of refinancing my existing house and then buy the neighbor’s under my son’s name and pay 2 loans.
      As I am already 55 my loan tenure cannot be long and wondering if I should go for it

      • KCLau

        Hi Francis, technically this can be done. You have equity in your existing house to raise the cash.
        And joint-loan with a younger person does help the tenure to be lengthen.

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