AB102 - Financial Management

This post is dedicated to those who need some guidance for the AB102 module where you have to trade a portfolio. Your results depend on your portfolio so in a way, it is pretty unfair to those who are not interested in stocks and know nuts about stocks trading or so.

I emphasize that this is my personal advice to those who have no clue towards buying stocks. I attempt to come out with a fit-all-scenarios strategy (pretty hard actually), which may appear stupid in the eyes of some people. Nevertheless, having something to guide you is better than nothing.

The Strategy (a really basic, no brainer, user friendly strategy)

Assumptions

You need to make some assumptions actually.

1. Most people know nothing about the market. Well maybe you will find some people who "know" a lot and claim to be "pro". But in the end, you will realise that the pro is not so pro after all. Alright occasionally there will be a few real pro but since it is bell curve grading, you still have a good chance of scoring A.

2. When the market goes up, everything goes up. When it goes down, everything goes down. So in a way, you don't really care about what stocks you are given. To some extent, this is not an assumption, it is a fact.

Step-By-Step Guide

1. Read a lot. Alright just kidding, please don't stop here. You don't really have to read a lot. What you have to do is to read some nice headlines. Sounds easy isn't it? The idea is to try to understand the psychology of the crowd right now (try...). You can go to websites like www.cnbc.com or www.bloomberg.com. I don't think that reading straits times will help you much. Pick out things to make sense to you and use some common sense.

For eg, on today's cnbc, I can find two interesting headlines - "Asian Markets Slide as Recession Fears Persist" and "Financial Crisis Is Still Far From Over, Market Pros Say". The use of recession and crisis probably tells a lot about how "some" people feel right now. You don't really have to read in details after all you don't have any interest in the stock market.

2. You need to reinforce some of your readings with pictures. Fortunately, you don't have to do this yourself. There is always yahoo finance. Actually, the thing is just go to yahoo finance, click the graph for some market indices like (DJI, SP500, STI, HSI). Expand the timeline to something like 1 year or so and see where the line is heading to. As of now, you probably see the graph heading downwards for quite a while. Some justification for the use of strong words like recession and crisis. Whether it is true or not, we don't care. We only care about whether it is going up or down. I assume you know how to see a basic line graph right! I will touch on a upward trending market first.

3. DO NOT TRADE FREQUENTLY. No one can buy and sell everyday and earn money consistently, if you have a "pro" in your group that claims that he can with all his powerful tools or so, ignore him. The idea is to just buy something and hold all the way for 8 weeks if the market is going up on a whole. You don't have to trade everyday to be top of the class also anyway. This is a common mistake that most people make (those that claim to be pro). LOL honestly speaking, not even the pros in the real world can claim to do so. Just buy something and hold all the way.

4. Look out for those that are heavily traded. You can check on www.sgx.com top 20 volume. Try to buy those that are on the board most of the time, because you have to make sure that it moves with the market.

5. Work with whole numbers. For eg, stock at $1.10 has a $0.90 upside to $2 and $0.10 downside to $1 while stocks at $0.90 has $0.10 upside to only $1 and $0.90 downside to $0. Can you see the risk and reward to this scenario? Of course if the stock at $0.90 breaks $1 to $1.10 then the first scenario applies isn't it?

6. Work with names. A sample of ferrochina, china hongx, unisteel, wilmar. You can tell that 2 are related to china just by looking at the names. Just take a look at how china is doing on a whole, again, supposed china is doing very well (2 years back), it makes sense to ride on it isn't it? Further research will tell you that wilmar is related to oil. It is no brainer. Oil up = oil stocks up, china up = china stocks in singapore up. You have to make simple relationship like this.

7. To deal with a falling market, you need to more vigilant. The idea is to buy a stock that doesn't move much. You must find some bug (glitches among the four stocks) or simply look at the graphs and determine the gradient.

For eg, I know of a class that is given ferrochina, china hongx, unisteel, wilmar. This class is very lucky in my opinion. Again, use your yahoo finance or www.sgx.com and look at the graphs of all four stocks. You will realise that three of them are falling badly while only one remains firm with its price - Unisteel. We don't know why (I know the real reason of course). Just click on unisteel or its news and you will realise that Unisteel has been taken over at a fixed price and will be removed from the exchange on 5th of Sept. That's it, a safe haven until 5th of Sept. You have a nice strategy for 2 weeks. At least you have a good headstart compare to others.

Conclusion

I have made things real simple. 7 Steps guide to doing well in the stocks trading game. Of course, there is more to everything that I have just said but I believe you can do decently by following the guidelines above. I strongly emphasize on step no. 3 because most people feel that they have to make money everything or take quite profits when they are shown with one. 8 weeks is not a very short time period.

Also, stock market is alot about common sense. Steps 4,5,6 are plain common sense. Many of you out there can do well if you do some thinking about it, just construct some simple relationship and test it out. The main problem about trading the stock market is when your emotions overwhelm you and you forget everything that you begin with for every decisions made.

Again I emphasize that this is a really simple guide that is meant to help those who know nothing about trading the stock market. I do believe that these steps are simple and yet effective enough.

Do look out for weekend's post where I will talk about the dollar.

Appropriate old quote to sum up my strategy

I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up.
Jesse Livermore