Sunday, June 03, 2007

mindset for investing

The topic that im going to talk about this week was inspired by two friends elizabeth and raffy boy when i had a talk with them on two separate occasions and “the art of war” by sun tzu. i could say that it was very timely with how our market has been like lately. :) anyway i will try to discuss this in the simplest way possible. Here is the line that really struck me in the book: “know your enemy, know yourself, and your victory will not be threatened. Know the terrain, know the weather and your victory will be complete.”

Know your enemy and what does this mean to the market? Your enemy in investing would be the more than 200 companies in the philippine stock market. And why do i consider them as enemies? Like in war you try to conquer your enemy to gain more power but in investing you need to “conquer” companies being traded in our market. Just like in war you study your opponent and look at its weak points and strong points and from there you make your approach on how to defeat your opponent. In investing you study the different companies and see what is the best price to buy the stock. Study the different companies and find out what are its good points and bad points. When you know your stocks well you would know that it will do even better in the long run. As ive said before you should buy the stock when everything is in your favor. Quoting warren buffett, “when holding a bad stock time is your enemy and when holding a great stock time is your friend.” For a great company will almost always increase shareholder value in the long run. :)

knowing yourself will help you a lot in investing. What are you good at and what are your weaknesses? When you know your strengths you can use it to your advantage and then find ways to cover up the weaknesses. :) this is what i figured with my friend raffy boy who has been asking me since last week if ive sold my holdings in the market and i told him that im still in the market and i havent sold anything yet. He just told me the other day that he has sold all his holdings in the market except for two because he got scared because the market dropped more than 1% and the market might have reached its peaked already. And then the next day the market goes up 2% and the next day another 2% and just this afternoon he texted me that he made a bad call in selling his stock holdings. What i see that is wrong here is his refusal to recognize that he needs help on how to read charts, on how to study companies and on judging the trend of the market. He would rather make decisions to buy or sell stocks based on his “feel” on the market. If he recognized his weakness he couldve avoided the mistake of selling. :) and listening to him he gives me the impression that he wants to be a long term investor but buys and sells stocks like a trader. In other words he also doesnt know what he wants from the market. knowing yourself it would make investing easier, for you would know which style of investing would suit you be it short, medium or long term and when you know this it would make investing more “comfortable” for you. :) do you think a sprinter would do well if he joined a marathon? :)

know the terrain means understanding where you are doing battle and that is philippine stock market itself. Understand the stocks being traded and the nature of securities. By nature, equities fluctuate in the short term but in the long run it usually follows a certain trend. :) if you recognize this it would make you a better investor and not make hasty decisions. Again i'll mention what i said awhile ago with what happened to my friend raffy boy if only he recognized the nature of stocks he wouldnt have panicked when the market went down 2%. :) are you risk averse or risk tolerant? To be a good long term investor, one has to have the stomach to see the market drop 10% in a day and be okay with it. If youre not comfortable with that then you should use a different style in trading. as the great investor warren bufett said “the ticker is just there to see if there is something foolish being offered in the market.” :)

know the weather means being able to analyze how the market will respond to everything thats happening around us. Be it increase in interest rates, a higher or lower inflation, a higher gdp and so on. But there are so many things that are happening so how do you know which one to watch? Personally i believe that it is better to analyze the company than the economy. Why? Because i cant think of anybody who can control the economy and there are so many factors to consider that one way or another you would make a mistake but one could correctly analyze a company. And from there you could make a conclusion at what price to buy the stock. :) when you know the company that you own, you wouldnt panic if it drops in price because you know its real value. :) you might even want to get yourself more shares. :) you dont have to buy the stock when it is trading at 30 times its price-earnings ratio but you could buy it when it is trading at 10 times its pe ratio. Its all about being patient. :) and i remembered when i had a talk with my friend elizabeth about being passionate in everything that you do. Well i believe that in everything that you do, your heart and soul should be in it. If that is not the case then why do it? :) a long term investor or any trader for that matter should be passionate but detached. You might want the stock of a certain company but when the time comes that it is trading at such a high premium you have to be able to unload it. Such is the nature of investing. :) invest to get something in return. :) but dont be too passionate because you might also run out of steam and for long term investors i discourage tracking the market for it is the nature of stocks to fluctuate and as such it might make you uneasy or panic then cause you to commit mistakes. Again the attitude one should take is passionate but detached. :)

the market ended this week gaining over 2% on thursday and friday. :) and again the market has made a new high. I think that the market will make a strong move again the next few weeks but of course anything can happen because the market is irrational. :) as ive mentioned last week the market has now set 3,800 as its minimum upside :) lets wait and see what happens. :) in a bull market it is in the sitting that you make money. :) but for now enjoy the ride! :) good luck on your trades and god bless. :)

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