How does one make a profitable investment in times where there is a raging pandemic like Covid-19, political uncertainties in the country and ongoing tensions in trade between China and the United States?
Here are some guidelines that may prove useful.
1. Be defensive at all times
Uncertainties are part and parcel of investing in the stock market so it is prudent to be conservative at all times.
It is also practical to build a resilient stock portfolio that earns money in both good and bad market situations.
2. Don’t buy based on tips
No individual to-date has increased his wealth sustainably over the long-term by buying, holding, and selling stocks through tips and recommendations.
Most people tend to lose money this way and have vanished from the stock market altogether.
Here are some scenarios and the usual questions that many ask and will continue to ask about the stock market:
- The price of oil is now RM609 a barrel. What stocks should I buy?
- The ringgit has weakened against the dollar. What stocks should I buy?
- The ringgit has strengthened against the dollar. What stocks should I buy?
- The PM has just resigned. What stocks should I buy?
And the list of questions can be extended to other scenarios like street protests, trade wars, virus outbreaks and so on.
3. Have a game plan in place
Regrettably, most people do not have an investment game plan.
The key reason why the above questions are asked is that stock investing is perceived to be an activity that involves making the right bets on stocks to attain quick profits in the shortest amount of time.
However, many lose money quickly this way instead of making quick profits.
4. Perform credit assessments
This task is best understood if you look at the job scope of a stock investor.
For instance, you are hired by a local bank to be its credit officer. Every day, the bank opens its door for business and hundreds of potential borrowers submit their loan applications.
You are faced with two questions:
First, can you approve all the loan applications submitted? Second, whose loan applications would you be more inclined to approve first?
To the first question, of course not.
To the second question, obviously, you would prefer lending money to potential borrowers who have both the financial means and track record of making good debt repayments.
Next, how do you identify which of your potential borrowers are creditworthy? You have to perform credit assessments on them before approving their loan applications.
In a way, the job scope of a stock investor is similar to that of a credit officer.
Real stock investors (credit officers) perform stringent credit assessments on a pool of stocks (potential borrowers) to identify their stock quality (creditworthiness) in order to earn recurring dividends as income (interest income) consistently.
The number one reason why most people fail to build long-lasting wealth in stocks is from a lack of performing credit assessments.
A bad credit officer who fails to do his job would inevitably lend to all sorts of borrowers and thus, put his bank at risk of having its loans being defaulted.
If your portfolio consists of poor performing stocks, it’s time you seriously though about credit assessments.
5. Act quickly in times of bad news and uncertainties
Why? This is because bad news and uncertainties create pessimism in the stock market, thus, present multiple opportunities to invest and accumulate great stocks, especially creditworthy ones, at bargain prices.
Therefore, in times of great uncertainty, it usually is a great time to shop around for bargains in the stock market.
On the contrary, shopping for good bargains in times of great optimism is not encouraged as everybody (except investors) will be rushing into the stock market to buy stocks.
How capital gains are achieved in stock investing
Therefore, a key method to enjoy massive capital gains with stocks is to acquire great stocks when they are undervalued, often in times of great pessimism, and sell them when they are overpriced, often in times of great optimism.
A simple and practical method of determining if the prices of good stocks are undervalued or overpriced are through valuation ratios like the P/E Ratio, P/B Ratio and Dividend Yields.
Should you be investing in the stock market today?
First of all, are you a good credit officer? If you are, then, you may prepare to shop for great bargains in the stock market and accumulate some great stocks if their prices are right.
But, if you are not, it is best to learn how to do a proper credit assessment first on stocks before investing your hard-earned money into them.
This article was published in kclau.com
Ian Tai is the founder of DividenVault.com, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks that pay ever-growing dividends year after year.