Position Sizing

How to do position sizing for stocks

There are few ways to do position sizing (how much you should allocation into your portfolio)

One of the easiest way based on $100k investment will be:

Firstly, you can utilise 30% which is $30k to buy under-valued or fair value stocks. Do remember to look out for companies that pays out at least 4% in dividends (Well, would you rather put the money into your CPF special account which give you 4% interest or invest in companies which give you less than that?)

Secondly, reserve 30% of that cash ($30k) and invest when a mini crisis has arrived.

Last, you can then choose to show hand your remaining 40% cash ($40k) when major crisis came.

What above mentioned is one of the easiest way for position sizing. Do you have any other easy way to do position sizing? If yes, what do you think is a better approach?

Please comments below.......

When to Sell?

Knowing when to sell is important!

Knowing what to buy, when to buy and how to buy are as important as when to sell.

I would like to share with you some of the factors as listed below of when you should sell your stocks:

1) Over-valued (Sell it when its over-valued especially when you know for sure that their earnings are unable to keep up with their share price. A high PE ratio is one of the good indicator telling you this)

2) Mistake (Admit that if you made a mistake. For example you might thought that company A is the market leader however, after more analysis, you realise that the actual market leader is company B)
3) Max 8 (If you would like only 8 stocks to be in your portfolio, then when you spot a company which is way under-valued, you should sell away the one that gives you the least return)

4) Story no longer hold true (Some company failed to be innovative and over time become irrelevant, for example Nokia, kodak etc)

5) Over-heated (You will know it when everyone you know or even stranger i.e hairdresser, cleaners etc start to talk and speculate in stocks investment.)

Portfolio Management

Is diversification important?

For many investors out there, most know that the importance of diversification.

But how much diversification do you really need? What are the number of stocks you need to own in your portfolio?

Research, experts and gurus have proven that it is important to diversify adequately but not excessively.
Although personally I would recommend around 30-50 in a portfolio, but for those who are CFA (Chartered Financial Analyst) holders, you guys definitely would recommend not more than 30.

So which are the exact numbers?

Well, if you really understand about those companies that you invested in (all of them) around your finger tips, then you can diversify around 8-10 of them. Though the real guru said that 6 are enough to make you super rich.

Last but not least, just remember that you shouldn't be investing more than 20% of your portfolio in any stock. Just in case of human error (ultimately everyone will make mistake no matters how intelligent they really are).

As the saying goes; rule number one "Don't lose money" and rule number two "Don't forget rule number one."

Twin Engines to Financial Freedom

Basically, there are two main "engines" towards your financial freedom.

One is to create a business while the other is to invest.

For those business owners out there, you certainly know that it's not easy to start up a business. Especially when there are lucrative market out there, soon a lot of competitors will come in and snap up your market share.

So what are the alternative? Well, if you can't create your own business, you can invest in others' successful business.

This can be done through buying listed companies' shares (at the right price) or buying company's share through private equity (usually only accessible for individual high net worth or institutional investors) before they went listed.

Do you know any other engines? Or you would like to find out my third engine which I have built over time here?

The 3R Model

As always I like things which are simple and easy to understand which is why I created Simple Investing Approach.

Therefore, today I would like to share with you about the 3R Model, something which I learnt recently and would like to simplified it further.

So how do we approach investing simply by using the 3R Model? What exactly is the 3R Model?

Basically, 3R means:

1) Right Business Model
We need to invest in a business model that we understand and avoid those we don't. We must choose a company with moat (competitive advantage). We also need to ask ourselves whether the company will still be around in 10 years time or more. Are they innovators or just a follower in the business world?

2) Right Management
Management of the company must have integrity. How do we know? Simply by observing their actions. Did they fulfil the promise they made? Did they admit its their fault if they make a mistake? Are they one of the substantial shareholder of the company?

3) Right Valuation vs Price
Do they have consistent growth (preferably more than 15%), net profit or earnings? Are we overpaying for their business?

In summary, we want to own a great leading everlasting company at the right price that comprise of honest able people.

Something Which Is Worse Than Fear & Greed

Worse emotion one shouldn't have

If you have been investing or speculating for quite sometimes, you would know that fear and greed is the behaviour that drive prices up and down especially in the stock markets where you can see the price movements.

However, do you know that in fact there are something which is worse than FEAR & GREED which will cause you to sell everything in your portfolio or even go bankrupt?

Yes! There is such an emotional that will do so.

Want to know what this emotion is?

Its ENVY! "Why is that so?" You may wonder.

Let me tell you a story.............

Shawn as usual would drive his Kia Picanto to meet his best friend, John once in a while for coffee. So as usual, John will ask Shawn what he has been doing for the past few weeks especially when he noticed that Shawn has just bought a new watch, Rolex.

"I just made some good money from buying ABC stocks! You should buy this particular company too" exclaimed Shawn.

"No, No! Stocks are too risky for me. Perhaps you are lucky only." said John.

So, few months later, Shawn and John meet up again. However, this time round Shawn was driving a BMW instead of a Picanto.

"Wow, seem like you are getting richer! What's the lobang?" John asked.

"I told you to buy this ABC company remember? I just sold them and made 5 figures profit from the stock market. This time round I'm going to buy XYZ company as I got insider news that they are going to be acquired! You better don't miss this opportunity!"

John who was envy of Shawn's "great success" decided to use all his hard-earn savings to "invest" in this XYZ company this time round. Seeing that Shawn has a new Rolex watch; driving a BMW and full of confident, he thought that he's also going to make a lot of money just like Shawn did.

However, few days later XYZ company's share price plunged due to its lawsuit against a patent right infringement. This has led John to sell his stocks hastily and caused him to lose around $50k.

Story ended.

Now do you know why I say that ENVY is an emotion which is worse than greed? ENVY is a driving force for GREED! So build up your knowledge and do not let your greed drive you just because you envy others.