177) Investing vs Trading

If you are timing the market, you are trading. NOT Investing.

A Stock or share is "ownership"of a company that does business. You need time to grow the business and need time to make reasonable profits.

Do you time when to open a business? Or you open the business on any date. Well, most people will find an auspicious time and date to open the first day. But after that, the business will be opened during normal business hours. Some shops never close at all. Like few petrol stations and convenience stores.

You don't need to open and close the business randomly, depending on market conditions. Normal business will NOT open longer hours during good market and close earlier during bad market times.

If you are trying to find the best time to buy and sell, you are timing the market. The problem about market timing is that you will never know when is the best time, until it had passed. You will be stuck to the computer screen to look for the best price. You can put in the price you want, but you may not get it.

You can just buy at the current market price to get the stocks. Then after you buy, the price go lower. What do you do? Do you buy more or regretted you bought too early.

Sometimes, you will be able to buy at the lowest price. Then, what do you do? Do you sell it the next day? Or do you wait for it to go higher? Or, you may set 10% profit and you sell it away. Let us say, the price did go up 10% and you sold it away. Congratulations on your good work.

However, the price keeps going higher. What do you do? Is it time to buy again as the uptrend momentum is strong? Or do you wait for the price to go down again before you buy again.

However, be careful of any stocks that just shoot up in a very short time. Those are speculation by traders. When the stock price go up very fast, it will come down very fast too.

If you follow this method, you are trading. A lot of your time will be spent monitoring the technical charts will thousands of indicators to consider. 

Buying stocks to invest is like buying a business. Just as a business needs time to grow, investing needs time. Let time be your friend. 

You will notice that the Stock Market is always volatile. There are ups and downs during the trading hours. But, in the long period, good company stocks always go higher.

The main reason is that the business makes profit over time and thus add value to the company's shares. As business need time to make more profits, the stock price will go up in the long term.

So choose your company stocks well with good business fundamentals. If you don't have the time to search and find good companies, get professional fund mangers to do for you.

What is the difference between investing and trading?

Investing is the act of owning something (stocks, unit trust funds, property) that an investors thinks will have more value in the future. Investors will hold the investment to earn profit when the value increases and will take a more longer term approach. The timing is not so important.

Trading is the actual transaction that occurs when you buy or sell investments. Traders buy and sell the investments to take advantage of short term market swings. The buying and selling timing is very important.

The easiest way to invest into good companies stocks is by investing into Equity Funds. Your Unit Trust Consultant will be able to assist you in recommending suitable funds for your financial objectives.

Other articles with similar topics
https://highlevelrules.blogspot.com/2017/10/time-in-vs-timing-market_24.html




Some quotes by Warren Buffett...

176) How To Calculate Total Returns & See Fund Volatility

 

Investing is mostly about Returns and Risk. 

Risk can be simply defined as the possibility of loss. The more changes in the fund prices, the more volatile the fund is. When you get the Total Return value, the value does not tell you how risky or volatile had the fund been.

Looking at the annual performance of the 3 funds in the chart above, which fund is the best performing fund? Is it:
A) Fund A (light blue)
B) Fund B (dark blue)
C) Fund C (light green)

Let's understand how the 5 Years Total Returns are calculated.
Remember that returns are compounded over the 5 years period. The calculation is shown for Single Lump Sum investment at the beginning of 2014. 

For Fund A:
(1 + TRA) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-1.2%)(1+9.49%)(1-2.34%)(1+12.96%)(1-4.34%)
= (0.9880)(1.0949)(0.9766)(1.1296)(0.9566)
= 1.1416
TRA = (1.1416-1) = 0.1416 = 14.16% (GAIN)

For Fund B:
(1 + TRB) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-3.45%)(1-1.2%)(1-1.42%)(1+25.11%)(1-7.24%)
= (0.9655)(0.9880)(0.9858)(1.2511)(0.9276)
= 1.0913
TRB = (1.0913-1) = 0.0913 = 9.13% (GAIN)

For Fund C:
(1 + TRC) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-14.38%)(1+25.01%)(1-11.91%)(1+10.66%)(1-8.93%)
= (0.8562)(1.2501)(0.8809)(1.1066)(0.9107)
= 0.9502
TRC = (0.9502-1) = -0.0498 = -4.98% (LOSS)

Here is a snapshot of the calculation.

Here is the link to the Excel file


https://drive.google.com/open?id=17TWvKDq6xRzXbGQ7HECh8hjRmrHlkrw9

So, the Winner is Fund A with a Total Return of 14.16%. 

Do you notice that Fund A is also less volatile in terms of returns? The Returns are not the BEST or WORST in any single year. However, Fund A is quite consistent in the returns. Fund A gave moderate returns in the good years and little losses in the bad years.

Fund B is also quite volatile in terms of returns.  Fund B gave the BEST performance with 25.11% return in 2017. The Fund A and Fund C gave less than half of Fund B's returns.

The most volatile is Fund C. For 2014, 2016 and 2018, it gave the worst returns. For 2015, it was the Best fund with highest return.

In conclusion, do look at longer term fund performance. Being the BEST fund for 1 year during good or bad market does not mean it is the BEST fund in the long term.

Look at your objective of the investment. Is it for retirement, children education, down payment for a new house, honeymoon trip or any other objective? When do you need the money? 

Do consult your Unit Trust Consultant on how to do a proper planning for your investment objectives.

174) Different Benchmarks Between Investors and Funds

It is interesting to look at the different Benchmarks used by some Unit Trust investors and the Unit Trust fund itself. 

Every unit trust fund launched has a benchmark. The benchmark is used to measure and compare between the market's performance and fund's performance. It is of the same market that the fund invested into.

In Malaysia, the equity funds main benchmark used is the FBM-KLCI. The FBM-KLCI consists of the largest 30 companies listed in Malaysia's stock market.

The fund managers will try their best to to outperform the benchmark. Outperform basically means to do better than the benchmark.

 

If the stock market went up, the fund is expected to perform better and give a higher return.

If the stock market is in a down trend, the funds are expected not to drop as much. Better if the fund can still give a positive return when the benchmark is giving a negative return.

For example,

a) Fund A gave 10% return while its benchmark gave 8% return. This means that Fund A outperformed its benchmark by 2%.

b) Fund B gave -3% return while its benchmark gave -7% return. This means that Fund B still outperformed its benchmark by 4%.

The fund managers for Fund A and Fund B outperformed.the benchmark.

This is when the understanding and expectation starts to be different.

To the investor, the Fund A did a GOOD performance.

To the investor, the Fund B did a BAD performance.

Investors of Fund B had loses in their investment.

For investors, when the fund is making positive returns, the EXPECTATION is for the fund to outperform its benchmark.

Meanwhile, when the fund is making negative returns, the EXPECTATION is for the fund to outperform the investors' source of money.

If the investors took out the money from Fixed Deposit, they expect the fund returns to be better than their Fixed Deposit return rate.

If the investors took out the money from their Retirement Account, they expect the fund returns to be better than their Retirement Account.

Most investors will have a different expectations of their investment returns.
The expected benchmark for Investment Return Rate is different from the fund's benchmark, especially in negative and low returns situations.

Do set your investment return EXPECTATION correct when you invest into Unit Trust funds.

Do consult your Unit Trust Consultant on your investments.

173) Fund Outperform Other Funds Performance

From the similar quote by one of the most influential people of all times. Here's the concept based on Unit Trust fund performance.

A fund can outperform some funds all the time, and all other funds some of the time, but the fund cannot outperform all other funds all the time.

When you invest into any Unit Trust funds, it is not possible for a fund to outperform all other funds all the time. The fund performance varies accordingly. More aggressive equity funds will outperform the more conservative bond funds in a good stock market uptrend.

However, the equity funds will normally underperform bond funds in a stock market downturn.

A certain country fund will also perform differently in different market situations. Sometimes, an emerging country fund will perform better than a developed country market. And vice versa.

With so much market volatility with different political, economic, market changes, it is very difficult to be right about the market all the time.

Another old saying is "Not to put all the eggs in one basket".

The best way is to diversify your Unit Trust investments into the different markets and asset classes.
Do your asset allocation and monitor the portfolio changes. Stick to your asset allocation ratio and rebalance them when there are substantial changes.





A short video on the Concept of rebalancing during stock market ups and downs.

Do remember to Rebalance your Investment Portfolio regularly. 
Do contact and consult your Unit Trust Consultant for assistance to rebalance your portfolio.

172) Teaching and Learning

 

You heard the old Chinese saying

Give a man a fish and he eats for a day.
Teach a man how to fish and he eats for a life time.

But....
What if you don't know how to teach him?
What if he is not willing to be taught?

Better way...
You motivate him/her to want to learn.

A teacher teaches. A student learns.

A good teacher makes students want to learn.
An excellent teacher makes students want to continuously learn for life.
A great teacher inspires students that want to be teachers of others.

Being a teacher or a student is a matter of mindset.
When you share out what you know,  you became a teacher.
When you absorb in what you don't know,  you became a student.

In a class of 1 teacher and 40 students.
Common understanding is that there are 40 students learning from 1 teacher. 

Only a good teacher will realize that there is 1 student and 40 teachers.

A great teacher knows that there are 41 students and 41 teachers.

A teacher who keeps learning will keep improving his knowledge and improve his sharing.