Nope. I’m not talking about your bedroom adventures, silly.

Neither am I talking about your exercising routine.

We are gonna discuss a more serious topic - your investment approach.

Go The Active Or Passive Way…?

In investing, there are two kinds of approach to stocks investment - the active and passive route.

Active investors are those that take a keen management role for their portfolio. They assume responsibility over their portfolio’s performance.

They frequently pore over financial statements, monitor the stock market news and peer at the stock prices every now and then.

For investors that may not have the time or knowledge, they pass the management over to their broker or fund manager. In any case, the money is still managed actively.

All these are done with one aim in mind - to beat the stock market index. Think Straits Times Index and the S&P 5000.

Passive investors, on the other hand, do not worry about beating the market index. After all, 90% of fund managers and retail investors fail to outperform the index.

So, if you can’t beat it, why not join it? That is the attitude of passive investor - to get returns that mirrors the stock market index’s performance.

They do so by investing in index funds or securities included in the particular stock or bond index.

Which Style Should You Go For?

There are advantages and disadvantages of both the active and passive approach.

For active management approach, you can depend on the analysis of expert fund manager to steer you in the right direction.

If you want to do it your way, then you have the power to choose your stocks, as well as enter and exit the market as you wish. You have that kind of flexibility passive investing doesn’t offer.

And if you choose your stocks well, coupled with a sound risk management plan, there is always a possibility of beating the index.

However we still have to be objective and analyze all angles.

Active investment does have its disadvantages. You will incur higher fees and operating expenses. Let’s not forget, we are all human. We make mistakes. Emotions will come into play. Judgement will be clouded. Can you handle these inevitable issues? 

Also, there are many investment methodologies that may come into conflict with the market condition which will affect your returns. For example, a value investing approach may not work as well in a booming bull market.

Comparatively, passive investment’s expenses are minimal. Best of all, you can set and forget. That is as autopilot as you can get. The lazy man’s style, without the worries of beating the market when you are just riding on it’s coattail.

Then again, your performance will always be dictated by the index. You will *NEVER* have the chance to beat the market. In addition, you do not possess the same kind of control active investing give.

Where Do You Stand?

With everything laid out, now is the time to make a decision. Do you see yourself as an active or passive investor? Think carefully. And hard.

There is no one sized fits all. Go with the one that fits your risk profile and personality best.

If you are wondering, at StocksForGrads, we believe in active management - done in DIY style!

But whatever your choice, we are always be glad to have you on board, as we walk the road together to investment success!

Play It Smart,

Jag Foo

Chief Editor

StocksForGrads.com

This article is available as a PDF Download

   “Ask Yourself Today - Are Active Or Passive?” PDF Download“

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Investors profit from stock investing because they sell at a price that is higher than the purchase price.

The price difference determines the gain. Or loss.

Now, let’s stand back and think for a moment…

Have You Ever Wonder Why Stock Prices Fluctuate?

The stock market is a dynamic place. The price is a direct result of the market forces.

From an economical point of view, people usually treat it as a case of supply and demand.

When there are more people buying than people are selling (higher demand than supply) - the price goes up. The converse is true - price goes down when more people are selling than buying.

Straight Forward Isn’t It?

Not quite.

On further analysis, can we truly treat stock price movement as a result in shift of supply and demand? No.

Here is why…

Supply doesn’t change at all (assuming no stock split, issue of bonus shares, buy back etc).

Therefore we cannot say the supply has risen or dropped, simply because it doesn’t. The amount of stock shares in the market remains constant.

The shares just change hand.

To explain my point clearer, imagine 10 investors in a close room. They are holding a total of 50 shares. No more no less.

When trading starts - what happens?

A buyer looks for a seller. If a deal is good for both sides, a transaction takes place. Many of such deals will continue to happen throughout the trading day.

At the end of the session, the combined total is STILL 50 shares.

So looking at the demand-supply equation, we can safely establish supply will still be the same.

And what about demand then?

Demand remains the same as well! It is not possible to have more buyers than sellers!

Looking at the above example - when a buyer wants to buy - he needs to find a seller. No seller for the buyer - no transactions take place!

There will always be an equal amount of buyer and seller. One needs the other for something to happen.

From here we can establish one thing - the supply and demand equation doesn’t apply in share price movement!

Then What Actually Causes Stock Price To Move?

Think the stock market as similar to an auction system

If we are talking about stock price moving upwards, it is because there are people willing to buy at a higher bid price.

When the stock price goes down, transactions are going at a lower price.

Basically, expectations have changed. Expectations of the future - which prompts the buy up or sell off.

There are many factors that causes the change in expectations and outlook, such as..

• Financial performance (quality of earnings, dividends, debt etc)…
• Industry trends…
• Economical trends…
• Market sentiments (greed, fear etc)…
• Company management actions…
• Market perceptions and investors’ confidence…

I hope this has given you a clearer picture of why stock prices behave the way that they do.

Stocks price don’t magically go up and down on it’s own, or when it feels like it. No. 

The stock market. Dynamic. Daunting. But yet exciting.

Play It Smart,

Jag Foo

Chief Editor

StocksForGrads.com

This article is available as a PDF Download

“The Untold Reasons Behind The Fluctuation of Stocks” PDF Download

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Look. There are many investment vehicles around for you to choose from.

You name it. We have bonds. Real estate. Fixed deposit. Currency (FOREX). Gold. Silver. Commodities. Structured deposit. Money market fund.

All have their pros and cons.

But we are going with just one as our chief investment choice - stocks.

Here’s why we think stocks are HOT:

1. Long Term Returns

Stocks traditionally outperform other investment vehicles such as bonds over a period of time.

Stocks have also historically proven to generate positive returns over the long run.

2. Dividend Income

Dividend income from stocks adds on to our investment gain. Dividends give us more cash for reinvestment.

Or we can simply use it for living expenses. Neat.

3. Liquidity

The stock market is a beehive of activity. For most parts, stocks are highly liquid.

You can put your money in, and then decide when you want to come out.

You decide today is the day you want to get out, and you can sell it immediately. No problem.

For investments like real estate, it is more tricky, as it is harder to find a buyer.

4. The Astounding Power of Compounding Returns

Picture a small snowball rolling down a snow-capped mountain. As it rolls, it gets bigger as it catches more snow particles.

So the ball rolls and rolls and rolls…..

And it gets bigger…BIGGER…..BIGGER….BIGGER…MONSTER!!!

You get the drift.

The same snowballing effect can happen to stocks.

Imagine you have 10,000 dollars for you to invest.

Assuming you are making a gain of 15% per annum (an achievable target), you will have doubled that amount in 5 years.

In 10 years, your $10,000 will become $40,455.

In 30 years, your $10,000 will become $662,117!

In 40 years time, your initial $10,000 will now be a massive mind-boggling $2,678,635!

Now you are not even counting in the amount of money you will pump in along the way.

If done right, you can be left with a massive beast of a retirement golden egg when you are done.

That is the power of compounding returns. No wonder Albert Einstein calls it the ‘eighth wonder of the world’! How apt!

Take Home Message

The morale of the story here is that stocks is a very viable investment vehicle. No doubts about it.

Many have made their millions with stocks through a wise, cautious and calculated approach.

There is no reason why you cannot achieve the same.

Can you be the next Warren Buffett? Probably not. But you are still in with a fighting chance if you start tomorrow, TODAY! 

The key is to invest early. Start young and have a good investment foundation.

And that is what StocksForGrads.com is here for. To be there for you in your investment journey all the way…

Play It Smart,

StocksForGrads.com

This article is available as a PDF Download

“Ignore Stocks If You Don’t Want To Grow Your Wealth” PDF Download

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Everything in life entails risk.

You are taking a risk when you cross a road.

If you are not careful, you may get knocked down.

You are taking a risk when you start a new business.

If you do not know the supply and demand of your niche, your business may end up as a flop.

The same applies to Investment. No exceptions.

Doing investment, especially stocks, is definitely not for the faint hearted.

Before delving into it, knowing exactly the kind of risk that investment brings is extremely important.

Not only should you understand the risk involved, but also your risk tolerance level and a few other factors.

Let’s jump right into it, shall we?

What Kind Of Investor Are You?

All of us are unique individuals. We come from different background and have different needs. 

We also think and approach things differently.

We have to recognize this important fact - what may work for you may not work for others. Simply put - your mileage may vary.

Don’t start investing before you ask yourself the following vital questions:

Investment Horizon

• Are you in for the long haul or are you focused on smash and grab short term profits?

Investment Psychology

• Are you willing to follow your investment plan right down to the tee?
• When you have hit your investment target, will you continue to hold out in hope of more profits (can you control your greed)?
• Are you able to ride out a short term loss on a stock you know has good potential with sound fundamentals (can you control your fear)?
• Do you have the decisiveness to cut loss, instead of wishing the stock will make a rebound (can you stop hoping)?

Risk Tolerance

• Are you willing to wait out for more than one year to see substantial gains (1 fold or more)?
• Do you feel the strong urge to cash out after only a gain of 5% (conservative outlook)?
• Do you prefer safe but slow growth blue chips stock or hot exciting but volatile growth stocks?
• Is the liquidity of the stock important to you?
• When do you  need the money? By next week or  next year?
• Can you take a 100% loss in a worst case scenario (assuming no leverage)?
• IMPORTANT: Can you stomach volatility (stocks are known to move as much as 42% in just a single day!)?

Investment Methodology

• Are you dividends, value or growth focused?
• Do you prefer to put all your eggs in one basket or diversified across a range?
• Are you fundamental or technical inclined? Or both?
• Do you see yourself as a speculator, trader or investor?
• Do you see yourself as an active investor, willing to put in tonnes of research and monitoring, buying and selling everyday?
• Or are you a set and leave on autopilot mode passive investor?

Think over these questions - carefully and hard - and answer them honestly!

When you have them thought out, you will be in a much better position to let your money work harder for you.

Remember, knowing your risk profile well goes a long way in helping you become a successful investor. 

And of course, you can always turn to your friendly and trusty StocksForGrads.com for more tips and strategies that are coming your way.

Play It Smart,

Jag Foo

Chief Editor

This article is available as a PDF Download

“How Knowing Your Risk Tolerance Can Make Or Break You” PDF Download

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This question never fails to irk me.

Everytime.

Now, before I go on, let me recount to you a story I remember vividly to this day.

Many years back, I was discussing investment with a dear friend of mine.

His family just got burnt in the stock market because his dad speculated dangerously with wild abandon.

The result - a whopping MILLION dollar gone down the drain!

He passionately ranted to me that the stock market is like a casino. It is for gamblers. You’ll never win.

Dabble in stocks and I’ll end up like his dad, he advised me.

I knew he was still recovering from the trauma of his dad’s big loss, so I didn’t want to say more and listened quietly on.

It had a major impact on me then as it was the first time I actually knew of someone who lost such a humongous amount of money.

And this story brings me to the topic I’m gonna discuss today.

Is Investing Similar To Gambling?

There is still a widespread perceived notion that dabbling in stock is equivalent to gambling.

While I do admit under certain circumstances, investing can be like gambling, but to lump them together will do gross injustice to all the careful and rational investors out there.

Fancy calling Warren Buffett a clueless gambler?

Or Peter Lynch an ignorant punter?

No way!

The Truth About Gambling…

When you gamble, you are already at the wrong side of the odds, as the house edge is almost always against you.

As the saying goes, “Making a living from gambling is easy - if you are a casino.”

You often hear gamblers cursing their luck and vowing to come good one day with a million bucks in tow.

Well, yeah. Perhaps. But highly unlikely. Make that EXTREMELY unlikely.

Think about this for a moment.

If gambling can really bring you an embarrassment of riches, do you think all the betting houses will still stand today?

Hell NO!

In fact, they are making an obscene amount of money off gamblers who literally hand them cash on a platter.

The fact is, as a gambler, you may have the odd winnings here and there, but in the long run, you will always be in the net negative range.

To put it bluntly - you are in LOSING territory.

Want Cold Hard Statistics?  

According to British Columbia’s partnership for responsible gambling, in lottery such as Lotto Super 7 (The Canadian equivalent of the local Toto’s version), the odds of matching all seven numbers are 1 in 62,891,499!

With slot machines, the chances of winning the top prize at maximum coin play can range from 1 in 4,096 to 1 in 33,554,00.

That’s way way less than 1%!

Now compare this to the odds of getting strike by lightning - 1 in 240,000.

The verdict is out - you will have better luck with the thunder god than the casino table. Whether you like it or not.

Unless you are a super talented professional gambler with a razor sharp analytical mind of a statistics professor.

What About Investing Then?

In investing, the tables are turned.

Unlike gambling, you can control certain factors.

You can choose which stocks to buy.

You can choose when to buy.

And when to exit.

Get them about right, and you have a great chance of snagging a stock that will give you a decent return.

It’s All About A Game Of Probabilities

As previously mentioned, in investing or trading, you actually have power to choose which stock you want to buy as well as when you want to enter and exit a trade/investment.

If these actions are done properly and rationally, it can greatly increase your odds of winning.

Coupled with a sound risk management with a cut loss and take profit plan, the downside risk can be further mitigated and minimized. 

Speaking about getting your odds in your favour, what does it mean for you? Actually it’s a rather simple concept.

For example, if out of 10 times, you make 6 winning calls, in the long run, you will still be in net positive territory. That will happen only when you get your odds right, and you should be striving for it, everytime!

The Importance Risk Management & Having A System

Actually there is something more important than being right most of the time.

The truth is:

It is more about how much you win when you make a right move and how much you lose when you commit a mistake than about getting it right more often. Here is an example to illustrate what I mean.

Let say you make 4 winning calls instead of 6 this time round, but you manage to score big on all 4 winning calls and at the same time limiting the 6 losing calls to small ones, then you will still be on the right positive track in the long run.

And this is when risk management comes in,

How to get about doing this?

Simple.

Firstly, stick with your winners and let your profit run. Secondly, cut the losers and limit the losses! Many losing investors (gamblers?) do the exact opposite - sitting with losers and cutting the winners.

If we can get the probabilities right, going in with the odds in our favour, together with the right risk management, it really isn’t so risky right?

The same simply can’t be said of gambling when your destiny lies in the hand of the house. Your only ally is Lady Luck.

I rest my case.

On A Last Note…

Don’t worry too much about getting it right all the time. This is not possible. Heck, even Warren Buffett makes losing calls.

We just want to be right for at least 51% of the time.

Doable? Definitely.

How?

Play safe.

Be systematic.

And keep your emotions in check.

And of course, you can always turn to your friendly and trusty StocksForGrads.com for more tips and strategies that are coming your way.

Play It Smart,

Jag Foo

Chief Editor

This article is available as a PDF Download

“The Real Truth About Investing and Gambling” PDF Download

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