Stock Market Investment Strategies

Many experienced and disciplined investors have a strategy or plan while investing in stock market. I believe most of them will be successful.

Previously I do not have a clear strategy when investing in stock market, even though I thought I have one in my head. After reading many good investing blogs recently, I think I should develop a clear investment plan to make me more disciplined.

Some of the important & useful plans include:

1. Shares To Cash Ratio

When I have spare cash, most of the time it will be dumped into share market straight away. My spare cash here refers to extra cash excluding usual daily expenses & monthly loan repayment. So 100% of my spare cash will go into the share market, sometimes even more than that!

However, I may start to keep some cash after a lesson learned in August this year. At that time, share price tumbled a lot. I wanted to buy more but I have no cash. Due to market uncertainty at the moment, such "market correction" may occur again soon. So I'll try to keep some cash this time, if I have it.

When everyone is enjoying and laughing all the way to the bank, it is wise to be more cautious. This is the advice by most successful investment gurus. I think I should try to keep a share to cash ratio of 10:1 at this moment (e.g. RM50,000 share value : RM5,000 cash). However, this ratio may change from time to time according to market condition.

We can either sell our existing shares, or avoid investing more into the stock market to achieve this ratio.

2. Growth vs Dividend Stocks

There are 2 types of good company, company with good growth prospect & company with good dividend payout. Most of the time, a growing company will not give good dividend as it needs money to grow. A company that gives good dividend although may still grow, but perhaps not exponential growth.

Some investors like dividend (blue chips or REITS) and some like growth, but most have a mixed portfolio.

Nevertheless, some companies with good growth prospect pay good dividend too. It is for investors to discover them.

For me, I will concentrate 100% on small cap companies that, in my opinion, have good growth potential and at the same time, pay decent dividend. As my investment fund is relatively small at the moment, I hope to grow it as fast as possible by betting on growing companies. 

Currently I do not own any blue chips stocks. However, definitely I hope to pick up a few of them in the future especially during bear market.

3. Diversification

Do not put all your eggs in one baskets. I believe this is true. However, putting your eggs in too many baskets is also not a good move. So, how many stocks should we have in our portfolio?

The ideal numbers differs from everyone. I am comfortable with 8-10 stocks at a time. So I will keep to this number.

Diversification into various business sectors is also important. If you invest in 8 companies and all of them are in property sector, then it is not diversification. For me, I will keep maximum 3 companies in the same sector at one time. If the need arise, i think it is ok to breach this rule, especially there are a few companies in which their business are involve in more than one sector.

4. Which stock to buy

I'm still not very good at this and will not give a detail description. Basically I will look for 

• consistent revenue & earning growth
• high dividend
• high ROE
• low gearing
• low PE

I can't really give numbers for the criteria above as it may differ between industries. Basically, at least 20% yearly PBT growth in the last 3 years, dividend yield of >5%, persistent ROE > 15%, gearing ratio <0.5 and PE <10x are what I am looking for.

I don't bother too much on EPS growth actually, as I think that when a company issue more shares to raise fund for business expansion, we won't see the desired result in short term. Thus, dilution in earning is still acceptable as long as the business and profit continue to grow.

However, if the fund raised from extra shares is just to pay debt or sustain day to day cash flow, then it might be different story.

Of course it is difficult to find a stock that fulfills all the criteria especially during a bull market. Anything that comes close should be good enough.

5. When to sell

This is what I do very badly - selling too early for small gain and selling too late for massive loss. Reluctance to realize loss has cost me very dearly in the past. So, I'll set some criteria to sell the shares.

• significant unexpected fall in revenue & profit
• the share price is well above my own target price
• when bear is approaching

It is not necessary to sell all the shares when the sell signal is triggered. We can always sell partially or in stages when the signal is not clear.

Fall in profit can be an one-off reason or due to temporary market downturn. All these must be taken into consideration as well.

These are strategies of an investor who is still in learning process. It is not for readers to follow blindly. When I change my strategy in the future, I may come back here to make changes.