While there is no sure win formula for stock markets, understanding some time tested models will go a long way in providing consistent returns. By Kathlyn Toh
# Many methods can generate money if used with proper risk management, but the choice of method will largely depend on our personality, risk appetite, experience, as well as availability of time and capital.
# Contrary to popular belief, methods or strategies are not the most important success factor. Trading well requires discipline and the ability to manage our typical human emotions e.g. greed, hope, fear, excitement, impatience and denial.
Since 1998, Beyond Insights Investment & Trading Education has trained over 1,700 people from all walks of life on how to generate returns consistently from the market. These methods are the culmination of the extensive research done during my more than 20 years of experience both as a part time and full time investor in the stock market.
In this series of articles, we will share a concise version of what it takes to become a smart investor (or trader) in the stock market. We will start by introducing a complete framework that everyone can follow in order to achieve long term and sustainable success, as well as the knowledge, skills and critical success factors every smart investor should possess.
The 3M pie chart represents the 3 areas that an investor or trader needs to pay attention to. The size of the pie shows you the impact of each area on your success.
We find that a lot of people, especially when they are new, tend to approach stock investing from a narrow viewpoint, which leads to an unpleasant surprise when the big picture changes.
When we invest into a stock – we will expect it to increase in price. But what actually affects the price? From our research, stock prices are influenced by three major factors:
- Overall market sentiment – About 40% of the day-to-day stock price movement is affected by the overall market sentiment, indicating that the price movement may have nothing to do with the company’s financial performance itself. The obvious example would be the 2008 US financial crisis, which saw billions of dollars lost in the stock market worldwide with stock prices falling across the board. The European credit crisis in recent years has also caused a lot of volatility 2-3 years ago. Investors will need to understand this well so as to not panic when it happens, but rather, to take advantage of the situation. Like what Warren Buffet had said, “Fear comes from not knowing what you are doing”.
- Sector or industry trend – Defined as the trend within a specific industry or segment, this affects 30% of the price movement. For example, a company with poor financial fundamentals may belong to an industry filled with investor euphoria, such as the dot-com stocks of the late 1990’s, where most of the dot-com stock prices rose because of investor enthusiasm and optimism that undermines the value of strong financial fundamentals. Perception of the industry’s competition, and supply and demand can also affect stock prices.
- Company specific performance or news – This contributes to the other 30% of price movements. A stock may rise because of the actual fundamental performance of the company or just because of anticipated product releases, or based on speculation about an upcoming project or government concession. It is also common to see stock prices moving sharply prior to annual or quarterly earnings announcements.
By “method” we mean the strategy or rules that one uses to decide when to take action to enter or exit an investment/trade depending on your investment/trading style (long term investment, mid-term trading, short-term trading or intraday trading). It is important to know that there is no Holy Grail in trading methods.
Many methods can generate money if used with proper risk management, but the choice of method will largely depend on our personality, risk appetite, experience, as well as availability of time and capital.
Whichever method one choses, we advocate the 4-Step Formula as a guiding principle of what everyone should learn and apply:
- Selecting the best – The ability to find fundamentally strong growth stock will increase your chances of success, no matter which strategy you use.
- Timing – The ability to recognize market sentiment and assess the valuation of the company; in order to determine the best price to buy and sell. You can do this based on fundamental valuation of the company or the stock chart pattern.
- Protect – This is the most important step of all, protecting your capital when the market turns against you.
- Multiply – This step is relevant if you want to start with a lower capital or be able to accelerate your rate of return. This step involves proper usage of leverage instruments like Contract for Difference (CFD), Options and Futures.
We believe that this 4-Step Formula is a holistic approach that will make an investor or trader versatile and successful. We will describe this formula with more detail in part 3 of this article series.
Statistics show that only 5-10% of people are successful in achieving consistent results in most major endeavors, be it in business, multi-level marketing (MLM), etc. The statistics also applies to trading as most people are unaware of the proper way to invest or trade, which is to have clear rules on what/when to buy and sell while adhering to money management rules.
It’s important to have a proper coach rather than doing this on a trial and error basis. As the saying goes, “You either pay the market to learn or you pay for a proper education”.
Contrary to popular belief, methods or strategies are not the most important success factor. Trading well requires discipline and the ability to manage our typical human emotions e.g. greed, hope, fear, excitement, impatience and denial. Hence, having the right mindset and emotional fitness are the keys to long-term profitability.
All the knowledge, skills and aptitude that we have covered in the 3M model are learnable. We believe that investing/trading is one of the best businesses in the world, because if we compare the reward we can get over the effort we put in, not many other businesses or career can come close in comparison.
It’s able to give us financial freedom, time freedom, location freedom and freedom from managing people.
So, keep an eye on the next few articles in this series, we will be sharing with you all the points mentioned above in greater depth.
Kathlyn Toh is a Professional Investor and Trader specialising in the U.S. and global equities market. She is also the Director and Chief Coach of Beyond Insights Sdn. Bhd., an institution that offers the most complete curriculum in our region on the subject of stock market investing. Beyond Insights has also been awarded the Top Financial Training Company in Malaysia in 2013.
Go to www.beyondinsights.net, or follow Kathlyn on Facebook fb.com/beyondinsights to find out more.