Here is an analogy:
Let’s say, I work for Public Bank as a mortgage officer.
Everyday, tens of potential borrowers walk into my office to ask for a mortgage. And, you are one of them. So, my question is, ‘Whose loan applications should I approve and whose should I reject so that I would reduce losses from bad loans and increase earnings for Public Bank, my employer?’.
Well, to answer this question, I would require some documents from you. Here, they include your IC, payslips, tax files, EPF statements, bank statements, CCRIS, and CTOS. These documents will allow me to assess if you are a creditworthy or an uncreditworthy person.
In addition, I would need you to buy a valuation report on the property which is to be purchased. The property is a security of the mortgage to be disbursed. So, with this report, I could calculate the maximum loan amount to be disbursed so that the bank can better recoup its loan principal, if you default on your loan.
As a banker, I would do a detailed background check on you and the property in order to make a better decision on your loan application. If I find you to be one, who is creditworthy, I would approve your loan application. However if let’s say, you are uncreditworthy, I would reject your loan application.
That is just business.
And there are strict policies, processes, systems and structures that govern how I should decide on loan applications, when received.
Now, imagine this.
What if a Bank Doesn’t Have a Credit Policy?
How would it decide who it should lend to and who it should reject?
Without ICs, payslips, tax files, bank statements, CTOS, CCRIS and also valuation reports, it would be almost impossible to identify a creditworthy person, from a truck load of people who are uncreditworthy. Lending would be risky as there is a higher chance of lending to untrustworthy people, which would result in bank losses due to higher potential defaults in loan repayments.
Therefore, a strong profitable bank is one that has a strong credit policy. A poor, badly-run, unprofitable bank is one that has a weak credit policy, if any. Thus, in the context of stock investing, it is the same thing. Stock investors that are good would have adopted strong investment policies. The rest don’t.
Buying stocks without reading financial reports is likened to bankers who would lend loosely to any Tom, Dick, and Harry without asking for documentation. The bankers who do that would soon lose their jobs from their employers especially if the banks are well-run and profitable.
If you had been buying and selling stocks without reading their financial reports and you believe that you are investing, you are not. What you did can be either, trading, speculating or gambling, but definitely, not investing. It is certainly very useful for you to recognise that investors are different from traders, speculators and gamblers. As a matter of fact, they are opposites.
What if I Can’t Read Financial Reports?
Can I still buy stocks in the stock market?
Yes, you can. But, it is useful to know that you are not exactly ‘investing’. Here, I would say that if you don’t know how to read financial reports, that’s okay. This is because reading financial reports is a very learnable skill and you do not need to be good in math to pick this skill up.
As long as you know how to add, subtract, multiply, and divide, you can learn to master the art of reading financial reports. There is no algebra, trigonometry or pythagoras involved in learning this skill.
Once you master this skill, it could serve you for a lifetime. You now would have genuine ability to identify stocks that are investment worthy and separate them from boat loads of others that are not. This skill is one that makes investors rich and wealthy from their investments.
Simply put, you can’t afford to not have this skill.
But, What About Unit Trust Funds and ETFs?
Yes, you can choose to buy those if you like them.
But, do you know how to pick a decent unit trust fund or ETF from thousands in the market that are not? If you don’t, do you know any unit trust agents who’re capable of doing so? Also, if you are not savvy in investing, how could you know or tell if an agent is good or bad in investment matters? Therefore, the thing is:
If you are not educated, you won’t know what questions you should ask.
If you fail to ask the right questions, you can’t tell a good agent from a bad one.
If that is the case, how certain are you in finding good funds or ETFs to invest?
As you can see, unit trusts and ETFs are not bright answers to a lack of skill. This is especially true if you want to earn recurring passive income from investing. In essence, your answer towards better ROI lies in having investment education. It is important to note that today, the questions are not:
Are stocks better investments than unit trust funds and ETFs?
Or, are unit trust funds and ETFs better investments than stocks?
Rather, the more helpful questions are:
If you are interested in stocks, are you a good stock investor?
If you are interested in unit trust funds, are you a good unit trust investor?
If you are interested in ETFs, are you a good ETF investor?
If you are good, you can make anything work. If not, nothing really works.
Where Do I Start Learning About Investing?
Like a good banker, you may start off by picking up two main investing skills:
1. Fundamental Analysis – to find financially solid stocks from others that aren’t.
2. Valuation – to identify undervalued stocks from others that aren’t
Here, we have prepared a free training session that you could check out as your introduction to the world of value investing: