Wednesday, July 18, 2007

Share Investment lesson

Quick simple share investment ideas. Simplified.

Why do people invest in shares?

Simple, to make good profits. If you bought good quality shares - esp. during boom times - you can make at least over 20% profit in one year.

Recently, the share market gains have been extraordinary - Bank shares in Australia went thru the roof from 1996 - 2006. Check out the share price for Macquarie Bank- from $5 - to $75. Over here in Singapore you have DBS going from $15 last year to $24 currently.

Just a word of caution, DBS was at $20+ in 1997. Then following the Asian financial crisis it fell to as low at $10 - its taken it over 10 years to recover. There were also several institutions that went bust during that period too.

In Australia, many building societies went bust in the 1990s - and the investors and depositors lost all their money.

So.... on to my next point. You can also easily lose a lot of money on shares, esp. when you borrow money to buy them - or when you use non-disposable money, ie. money that you need to use soon.

So how do you choose good shares?

Remember this: buying shares should be as easy as ABCDEF.

A for Assets: what assets does the share have?

B for Boss: whose in charge of the company?

C: for Creditials: how long has the company been in operation for?

D: Direction - what is the company involved in?

As usual this part is a bit like fashion. In the 1990s, any I.T., internet or telecommunication company was all the flavor. And like fashion, they can be all the rage - you've seen it before - flares for men, Bubble skirts, huge platform shoes, etc.. It was as if everyone wanted them at one stage.

Most of the IT, internet and telecommunications stocks were making little or negative profit. Yet, they were going thru the roof. My friend bought an Aussie tech company called Sausage Software in 1999 for 10 cents. He sold it at 20 cents. It went up to $1, $3, then finally $8.00. I think it went bankrupt a year later. I took part in the float of Melbourne IT - the Aussie domain register company. I got it for $2.80. It debuted at $8.00 on the first day. I sold at $7.90. It later rose to $14. Now, its about one dollar.

Right now, anything that has to do with China and Energy is just hot now. Put look up any company that uses the words- China, Steel, Gambling, Energy - and its probably gone up 300% to 500% since last year.

It takes special skill, experience, and luck to "play" with those sorts of stocks.

But when the hype dies down, people look for earnings and fundamentals.

Basically - does the company make a profit? And if so, how much? And so people look for what is known as PE ratios (Price Earnings Ratios). Its the current price of the share / divided by the earnings per share. So if the share price is currently $10 -  and the company makes $1 per share last year - the PE Ratio is 10/1  =  PE of 10 - which is pretty good. That's like saying the company is making a 10% profit.

When there's a bull market though- many investors don't pay attention to this. Again, its like fashion. Herd mentality. Everyone must have it. It crazy. And that's how you see normal sane people street fighting over Hello Kitty Limited Edition dolls.

The majority of IT Companies like Sausage Software weren't making any money. Most of the telecommunication companies were overvalued and spending more money than they were earning. Quite a lot of them went bankupt. Share Investments can be RISKY - You need to know this. If you can't handle risk- then put the money in a fixed deposit and earn 3% a year.

In many respects, share investments is like gambling. In gambling, Blackjack, for example, you can beat the house by counting cards. A group of stats Uni students from MIT did this and made millions of dollars from the Casino. Similarly there are astute investors like Warren Buffett who carefully study the companies - and invest millions of dollars in them- and hold the stocks for years before selling- making billions of dollars.

You can read more about Buffett here.

And like gambling you also have the reckless and foolhardy - people who are reckless and tremendous risk takers or worse have no fear.

This might sound controversial- but I believe that there is nothing wrong with gambling. Its not an addiction, though it may become one. It is not going to cause you to lose your house, IF you don't bet your mortgage money on the roll of the dice.

In fact, I would regard less regard for a person who doesn't bother maintaining the brakes of his car- than for a person who goes to the casino limits himself to say 1% of his salary a month and is not addicted to it.

Its all how you deal with RISK. Now I'll talk about risk later on.

But anyhow if you haven't done any share investments. Why not just do this- read the Business section of the paper- familarize yourself with some of the business terms. People waste their lives on unprofitable things like watching hours and hours of TV, computer games, etc.. Just spend sometime educating yourself about companies and nations. Go to the library, peruse the investment book section and find something that makes sense, read it. You can read books on Warren Buffett. Or just look online for stuff to read.

Right now- everyone wants to get into China- its believed that it will become the World's Next Great Power- superseding America - and dominating the World's Economy and Politics. Well, that's what they also said about Japan in the 1980s too. Buffett bought into China Petroleum in a big way. Same idea- China needs oil, fuel. And China Petroleum seems to have a good balance sheet, management and credentials.

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