by William J O’Neil
Ten Ways to Invest Smartly
1: Cut your losses
As a new investor, be prepared to suffer small losses and always cut losses at about 7-8% below your purchase price. That way, you will learn to preserve capital.
Caveat: In a whipsaw market, you can be cut in two before too long. Markets these days seldom move in one direction long enough for one to cut losses.
2: Get started now – anytime is a good time
It does not take much to get started - only about $1,000 as deposit if you want to trade online. Concentrate on high quality stocks and avoid volatile ones.
Caveat: But volatile areas are where all the fun is. You can double your investment in a week but you can also lose your pants. Anytime is a good time - but only with the benefit of hindsight.
3: Follow a system, not emotions
Do not get emotional about a stock, follow a set of rules on what to buy and sell. For example, buy when the price-earnings ratio goes below eight or sell when it is 18.
Caveat: Easier said than done. Rules are made to be broken and it is human nature to go with emotions. That's why we are humans and not robots.
4: Fundamental or technical analysis? Use both!
Using a combination of fundamental and technical investment styles is better than other.
Caveat: It's almost impossible to combine the two ways of investing, The technically inclined will say buy when it is going up and that’s where the price-earnings multiples are at their highest.
5: Earnings and Sales are Most Important
The most important facts about the company's prospects are earnings and sales. Stocks with rising sales and earnings are most likely to perform.
Caveat: True, true. But alas and alack, they do not apply to Internet stocks and there are many ways to fudge sales figures.
6: Relative price strength, or RSI, is a key technical indicator
Knowing where the RSI is will allow one to buy low and sell high.
Caveat: Many a time the RSI gives false signals and a stock can stay overbought for months or oversold for years simply because they are either in fashion or out of fashion.
7: Know a stock by the company it keeps
Pick stocks that are leaders in their sector. Among banks for instance, it will be DBS Bank and property, City Developments Ltd.
Caveat: Market leadership does not occur all the time and when the market is directionless, you may end up in the leaders' lap for a very long time without any profit.
8: Volume and sponsorship are important
The volume traded on the way up or sold on the way down indicates where the smart money is going.
Caveat: It is not always possible to know whether there is net buying or selling. Sometimes when the volume is high on a price ascent, it could be due to distribution rather than accumulation.
9: Growth and value – the perennial debate
Growth stocks show consistent earnings growth and generally trade at a higher price earnings ratio. Value stocks may look cheap but will remain cheap simply because their underlying assets have not been unlocked.
Caveat: There is often more hype than fact in growth stocks and the growth story sometimes remains just that – a story. Buying value, on the other hand could see value sinking even lower.
10: Don't try to be a Jack of all trades
The more counters you own, the less attention you will have for each. Keep the portfolio simple and keep it small.
Caveat It is always possible to add another winner - hope springs eternal so long as there are more and more IPOs.
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