Lately, I received an email as followed:
I found an interesting stock trading phenomenon which had me confused about stock trading. Here, I would quote two examples:
Example 1: Padini Holdings Bhd
Example 2: Supermax Corporation Bhd
I’m really lost and couldn’t understand the stock market game.
What is your take on this? Thanks.
Here is my honest and sincere answer to the above – ‘I don’t know.’
There are many reasons for my answer. First, I am not a stock trader myself and hence, are less sensitive to the ups and downs of any stock markets in the short term. Second, I learnt there are many different participants in the stock market. They include investors, traders, speculators and gamblers.
Let’s start with investors. They view stocks as businesses and like to invest them if their share prices are attractive. With that being said, there are many types of investors such as dividend investors, growth investors, deep-value investors and the list goes on.
Now, let’s talk about traders who are in to profit from stock price movements in the short-term. Here, once again, there are many types of traders such as swing traders, day traders, scalpers, momentum traders and so on and so forth. There are also hundreds of technical analytical tools to use and each trader could let’s say, master up to 5-8 different types of these technical tools to do their trades.
Meanwhile, speculators or gamblers are people who are in the stock market for leisure. Some believe that they are either investing or trading which in actuality are not doing both. These are people who buy and sell stocks without any plans or knowledge of what they are getting themselves into.
These are people who participate in the stock market on a daily basis. Everyday, people make decisions to buy, hold, or sell stocks and their reasons for doing so differ from one another, depending on who they are (investor, trader, gamblers, or speculators), how much are their transactions (thousands, tens of thousands or a lot more than that), and their beliefs on what stocks are.
Why am I telling you all of the above?
It is to share with you this. How would I know what millions of people are going to do next in the stock market? I’m not God himself so I don’t know.
But, isn’t market prediction the secret sauce to successful stock investing?
Fortunately, I found that the answer is nope.
Success is not found in knowing what the market is going to do next for nobody can predict that with great accuracy. From the email above, we see examples of stock prices moving independently from their financial results for the short run. This is because there are millions of people who make their decisions of buying and selling stocks only for the short-term, not for the long-term.
Therefore, stocks can move anywhere in the short-term.
So, are stocks risky?
Well, if your intention is to hold onto your stocks for the short-term, then, I find it to be risky if you don’t know what you are doing. Personally, I don’t trade and thus, couldn’t comment how best to trade or if stock trading is a risky venture. I think you should find a professional stock trader and post this question to him.
Instead, I’ll share my take from the viewpoint of a long-term investor.
I don’t think stocks are risky in the long-term. Cash is of greater risk than stocks for it is a certainty that it loses its purchasing power for the long term. Stocks, if their businesses are fundamentally good, should grow in value over time in line with its increase in sales, profits, assets, cash flows and dividend payouts. Thus, stocks can be a good store of value in the long-term as compared to cash itself.
So, l learnt the focus should not be placed on the stock price movements in the short term.
And the Secret Sauce is …
Rather, the secret sauce of successful stock investing is to have an intense focus on the stock’s income productivity for the long-term. This simply means to have checked its past financial track record, know its latest financial positions, and to learn about its future initiatives to expand its businesses to grow its income.
Thus, it is all about the stock’s ability to generate profits and cash flow over the long-term that really matters in stock investing, especially if you are investing in a stock for the long run.
In essence, one of the best methods to reduce investment risk is to focus not in achieving capital gains but to focus on receiving cash flow.
Refrain from trying to make a killing in the stock market. Most got killed instead of making a kill that way. I find it very helpful and profitable if you focus instead on milking your stocks by emphasizing on collecting and growing your dividend income from your stock portfolio.
It is a more freeing way to build your portfolio than to look at ups and downs of the stock market each and every single day. So, if you wish to learn more about building a stock portfolio that pays dividends year-after-year, I’ll conducting my webinar training session where I’ll share my background as an investor, how I’d built my portfolio and a detailed case study walkthrough on a stock I’d invested that made me 100+% in total returns (capital gains + dividends) for 3+ years.
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