Saturday, October 27, 2012

Investment for Beginner–The basic criteria we should have

At the beginning, when I started investing in four years ago, I was thinking investment is something that I can earn extra pocket money in shorter time, so that I could have more money to spend for entertainment and enjoy my life. This lead me to expect I can buy low and sell high. However, the longer I go through the investment journey, the more I realise the initial concept was not true. Investment is not earning fast pocket money, but it is a long journey to reach financial freedom.

Basic criteria before start the journey

Before starting the investment, we should know:

1. Investment is not only about earning money, it’s also about habit of saving money.

2. Investment is a long and life-time journey, patience is the most important criteria we should have

3. Investment is not buying and selling, it’s bringing positive cash flow by using our own capital.

1. Investment is not only about earning money, it’s also about habit of saving money.

In the beginning when I learn investment, I have only minor income from part time job. Since then, I start moulding my habit of saving, little by little, to accumulate the capital for investing.

The difficult part of having this habit is when you are seeing your account balance is growing, the number is increasing every month. The first thing comes into my mind when seeing this is “I want to buy the things I like that I waited for a long time!” This is typical, especially when I was still young and never have my own saving until I start part time.

This leads to a question for myself: Is the thing necessary for me? Or it is just some toy that I desire to have, but not necessary to have? Is it a need, or a desire?

Arh..when I think it’s not really needed, when I think I save my money for investment is better, I keep the money. Let the money grow by investment better than buying something that depreciate in value and it is not needed.

2. Investment is a long and life-time journey, patience is the most important criteria we should have

Never ever ever ever think that investment can earn us fast money. It is not a tool to earn pocket money, but a tool to reach financial freedom. Why? How?

We can’t predict the price of a stock. There are hundred of thousands of investors in Malaysia, including retail investors. We will never know what they are thinking when judging on a stock. Everyone is thinking differently. So, for a particular stock, two persons might judge differently. One might expect it to go down, hence he sell. Another might expect it to go up further, hence hold or add in. This is normal phenomena. Because there is only trade done when there’s buy and sell take place simultaneously.

Buying low and selling high is not the main objective in investment. Instead, valuing the company is. We should know how to valuate the company, based on its financial performance for the recent years, and average performance throughout its entire lifetime. How do we judge? That’s not the question here. This blog, we should emphasize on how we adjust our concept about investment first.

If we are thinking that buying low and selling high is the main purpose of investing, to earn fast money. That’s not investment, that’s gambling. Just like buying “big” and “small” in the Casino.

We must have enough patience. From 5 years experience, the largest return I get from investment is a stock that I hold for 1 year, which gives me about 50% including the capital gain and dividend. Don’t expect that we can earn so high in one month or one week. It is possible, but don’t expect. It is just a gambling.

3. Investment is not buying and selling, it’s bringing positive cash flow by using our own capital.

Investment is not buying and selling, it’s just investing. When we invest, we put our capital into a company, and the company’s management is responsible to manage the invested fund (our money) in their company nicely.

If not buying and selling, how do we earn? One term we call “Cash Flow”. For example, when we put our money into saving account in any bank. If we leave the money untouched for a year, we get the interests from the bank. The interest is the positive cash flow, cash flowing into our pocket. What is negative cash flow then? It’s just when cash is flowing out from our pocket. For example, we pay for something we desire to have, like sports car and big houses. When we borrow money from bank to buy these, we are having negative cash flow where we need to constantly pay back money to the bank.

So, back to the stock market or investment. In bank, the interests is typically very low, 0.25% per annum. Which means, if we save RM10,000 into the bank today, 27/10/2013, we will have RM10,025 in the bank. We earn RM25!

Key point is here. We should aim for higher return while investment. That’s what we call “Return on Investment”. I always aim for 10% per annum in stock market. There is something called “dividend”, which company pay back to the shareholder (investor like us) when the company is earning profit. But, 10% is not easy. But, we could aim for 7% to 8%, as long as it is higher return than the bank interests.

So, if we invested RM10,000 into a company, which has the dividend yield of 10%. One year later, we would have RM11,000. We earn RM1,000! That’s the positive cash flow. That’s how investment should be.

In short, don’t expect to have fast money from investment. If you don’t have enough patience, don’t step into this investment journey. If you think buying and selling is the only way to earn money, change your mind, learn more from seniors. If you think to invest all the money you have, please stop thinking that. You should use your saving, unused, spared money to invest.

Start the investment journey by first learning the habit of saving.

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