Stock Enlightment

Been investing for almost a year now.

Despite setting the goal to increase my dividend income, I don't want to rush into things and risk making mistakes. Good companies are getting more expensive and I really want to evaluate them before "nibbling", a term I caught on from some of my favourite bloggers.

Anyway, I have compiled the essence of what I have learned. Gonna jot them down here:

- Invest for the long term. Don't be afraid of volatility. Volatility works in long term investors favor. The market is a voting machine in the short term, and weighing machine in the long term.

- The easiest way to destroy your portfolio is to think you can time the market with frequent trading. Patience is your greatest asset. The toughest thing about investing is doing nothing.

- Diversify to reduce your risk. Don't pay huge fees to fund mangers. Don't use leverage.

- Cash to a business is like oxygen to a person. You don't think about it when it's present, but you will die when you don't have it. Always have emergency cash to capitalize on opportunities, and act as buffer against bad situations.



I also came across an article on when to sell a stock. Here are some signs:

- A shockingly high P/E (i.e I would classify that as above 50)
- Its economic moat (aka competitive advantage) is in danger.
- A drastic change in leadership, business model, direction.
- A stalling/falling revenue, and profit margin/earnings.
- It recently cuts dividends.

Financial Education

Stepping up on my homework lately...

- Completed most of the important courses at Wall Street Survivor [Highly recommend their "Reading financial statement series].
- Spent a lot more time reading financial blogs and forums.
- Setting up a watchlist at Google Finance.
- Read through some company financial statements (never thought I'll do that).

I've also began attending some newbie seminars by CIMB.

For most investors (who made money from the price rising), there are 2 criteria you must ask before buying a stock:

1. Is it a good company?
2. Is it the right time? (aka right price)

The speaker gave his 2 cents worth on evaluating a good company:


1. Positive Net Income for the past 10 years

This is the company "take home" pay - what is left of their revenue after paying the workers, taxes, expenses etc...

Companies can sometimes manipulate this figure by playing around with stuff like depreciation to make it look nice, for a year or two - But for 10 years? Not likely. Any scam would have fallen apart.

This means the company is a money-maker.


2. Consistent dividends in good & bad times

This is important as it show that you are taken care of as a minority shareholder.

If the dividend payout ratio is reduced, what is the reason? Is it justified?


3. Positive operating cash flow (OCF)

This sounds very similar to net income, but it's not the same. A company may make lot of net income, but still run in cash flow problems. It only deals with cold hard cash on your hand right now. [Not receivables, buildings, machines]

If this is negative, check what the company did. Maybe it brought a new building/equipment for future investments.