A Quick Guide to Successful Investing

A Quick Guide to Successful Investing

A Quick Guide to Successful Investing

  1. When to Invest
  2. Techniques and Psychology
  3. Mistakes to Avoid

Rule of thumb on when to invest

The best times to invest are:

When the investment vehicle is undervalued

An undervalued asset is one that is selling below what is assumed to its intrinsic value. Compare the current price of the asset to its future valuation. It would help to do research to estimate the company’s future prospects. Is the company building products and key relationships? Has it been delivering what it has promised to the public? Which brings us to the next point:

When you are confident about the company

Read up on the company’s concept paper, articles on the products and progress and follow their social media channels to see if there is progress and a community that uses their products and services. Do a Google search to see the company’s impact on the world. Are there press releases documenting the success of the company so far? Are there announcements for future plans? If the answers to these questions convince you of the company’s future, then it may be smart to get in before the rest of the world takes note and the assets become overvalued.

When you are early

Tech companies like Xiaomi may check all the right boxes for a bright future, but if everyone has already heard about the stock, chances are the price has already risen. Oftentimes, it might already be overvalued, thus more likely to experience a price decline.

If you happen to chance upon a promising company that has not yet been discovered by the general public, it’s time to strike. Early investors are the ones who can enjoy the full upside of the investment vehicle.

When a stock goes on sale

If you’re not the first to find out about the company, fret not. If you’re lucky, there can be times where prices of stocks are beaten down, be it due to an overall market sentiment, FUD (fear, uncertainty and doubt) or manipulation that leverages on herd mentality to suppress prices. When that happens, and with the confidence that the markets will recover, you can swoop in to pick up the stocks, now at bargain prices, and enjoy the ride up when the market corrects itself again.

For more information: https://www.investopedia.com/financial-edge/0412/5-tips-on-when-to-buy-your-stock.aspx

Trading Techniques and Psychology

Shorting

How it works

It is a strategy used to take advantage of falling prices of an asset. They borrow an asset, anticipating that the price will go down, and they will purchase it back later at a lower price.

E.g.

Current Price of XSTOCK: $2.00

John anticipates a fall in the price of XSTOCK. He makes arrangements to borrow 1,000 XSTOCK from Sally for a month, and proceeds to sell it at $2.00, which gives him $2,000.

When the price falls to $1.00, he then re-purchases XSTOCK with the $2,000.  This time, the same amount of cash can get him DOUBLE the amount of XSTOCK. The initial 1,000 XSTOCK is returned to Sally, and John gets to build up his XSTOCK stash.

Shorting is a tactic often used by professional investors to gain more of the asset at a cheaper price. However, it entails a much higher risk, and requires substantial experience to be executed well.

For more information: https://www.ig.com/sg/trading-strategies/short-selling-explained-190121

Short and Distort

How it works

Investors take a short position, and proceed to use smear campaigns to drive down the price of the asset. Smear campaigns often involve fake news, which leverage on a cocktail of herd mentality, the panic-selling nature of humans, and false news to scare investors into selling at a low, thus manipulating the markets. Market manipulation is not a new concept, and is pervasive because there will always be people who try to gain an advantage over others by hook or by crook.

Instead of falling into market manipulation trap and panic sell, or try to fight the market manipulation, one can instead think of it as part and parcel of the market structure, and make the manipulation game work for you. When prices are suppressed because of market forces, one can think of this period of time as a chance to accumulate your assets at a discounted price, instead of making the wrong move by panicking and selling your assets, playing right into their game. NASDAQ addresses the other ways the market can be manipulated here: https://www.nasdaq.com/articles/5-market-manipulation-tactics-and-how-avoid-them-2018-04-11

In summary, be alert to manipulation when making investing decisions. The best way to protect yourself from the manipulators is to invest for the long term. Check out the other mistakes to avoid as a rookie investor in the next section.

For more information: https://www.investopedia.com/terms/s/shortanddistort.asp

Avoid these rookie trader mistakes:

Panic-selling

Trading driven by emotion causes unnecessary losses that one can avoid. If your long-term objectives have not changed since you opened your position, then selling into a market decline out of panic can very well cause you a permanent loss.

Instead, consider buying at a time when everything is briefly on sale, to make potential profits when the markets correct.

Obsessive Monitoring

Every company takes time to develop products, strike partnerships, on-board users, gain recognition and valuation.. Becauses of the delayed effect of progress reaching prices, this may mean that the current market prices are not the best indicator to look at, especially if the company has a proven record of development.

Again, as a word of caution, in times of volatility, rookies may be tempted to sell once the price goes down, which causes them to close their position and forfeit the exponential gains that follow once the company’s achievements are recognised.

Being Short-sighted

Whether you have years of experience as an investor, or you’re just starting out, market volatility can definitely overwhelm you. But this should not stop you from looking at the big picture.

Expand your horizon and don’t let this momentary period of downturn affect you. If you project the price of token and progress of a company to a longer timeline, you might realise that the market volatility is a good sign, because you can accumulate your assets for a cheaper buy-in price. In hindsight, low prices might actually be a lucky place to start preparing for a bull run.

Penny Wise, Pound Foolish

Making decisions with small amounts of money that end up causing a loss that affects a larger amount of money is never a wise idea. In fact, market manipulators often bank on this to cause panic selling, resulting in prices that are low and ripe for the (manipulators’) picking…

In fact, some of the greatest trades of all time were made by shorting.

For example, George Soros bet heavily against the British pound; he even borrowed money to do so. He sold over $10 billion worth of British pounds in September 1992, and made profits of over $1 billion for himself when the pound fell over 10% in value.

By borrowing to sell at a high, and re-purchasing it when the price fell, he became known as ‘the man who broke the Bank of England’. 

(Source: https://www.bosshunting.com.au/business/george-soros-made-1-billion-single-day)

Of course, shorting is a technique that comes with years of experience, high risk, and a healthy dose of luck. Coupled with market volatility, people who employ shorting as a tactic must be prepared to incur loss. For those cunning and capable enough to do so, it is also not uncommon to see the markets being manipulated to their favour so that they can profit off their short positions.

An example of market manipulation is Bear Raiding, where a whale forces prices lower by shorting or placing sell orders large enough to cause a visible plunge in prices once sell orders hit. Once the ‘news’ of price falling catches on to the majority of investors, this will start the ball rolling, or more aptly, the prices continuing to move in a downward trajectory.

For more information on the perils of market manipulation: https://www.proactiveinvestors.co.uk/companies/news/900548/explaining-illegal-market-manipulation-900548.html.

Instead of being manipulated, learn from the big boys. Know to expect manipulation, and do it the Warren Buffet way…

Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.” He certainly put that into practice, where he bought American stocks during the equity downfall brought on by the credit crisis circa October 2008. With his acumen and foresight that propelled his investments during that period of time, he eventually made billions through the credit crisis.

John Paulson: Also a success story in the credit crisis, hedge fund manager  bet heavily against the outlook, and made an estimated 2.5 billion dollars through the crisis. The credit

crisis was a severe worldwide economic crisis considered to be the most serious financial crisis since the Great Depression of the 1930s, with declines in consumer wealth estimated to be in the trillions (USD).

Jamie Dimon: At the height of the financial crisis, Dimon, working for JP Morgans, acquired two financial institutions that were thought to be ruined. The shares of JP Morgan have almost tripled since the purchases.

Carl Icahn: A fund investor with a stellar track record of investing in distressed assets during downturns, Carl has flipped his investments by buying at a bargain and selling it when industry conditions have improved.

(Source: https://www.investopedia.com/financial-edge/0411/5-investors-that-are-both-rich-and-smart.aspx)

For more information: https://www.cnbc.com/2018/10/11/when-the-stock-market-tank-dont-do-these-3-things.html

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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