I had an interesting conversation with my friend's young son over the last weekend. He asked me what to invest. I told him to buy a property when he is still young. He said it is out of question at the moment. He just started to work not too long. Then I told him to save enough and prepare to buy property as soon as he could afford it. He complained this is boring, not that save money itself is not important but the amount he could manage to save every month is so paltry that it just doesn't motivate him. It is a plausible reason by a 20-plus young man in view of current cost of living environment.
He shyly told me that he has 10 grands in his fixed deposit account and he wanted to maximise the returns. He wanted to invest in the stock market. The conversation goes something like this:-
Boy : UncleZ, do you have any good shares to recommend?
UncleZ : No need any recommendation. Now the stock market is so positive. Chances are, any stock you pick will go up.
Boy : My friends said the same thing too. They told me they had made many rounds of pocket money. But they got burnt by Dsonic recently. Now I am a bit sceptical. Any advice from you, UncleZ?
UncleZ : Did you ask them why they got burnt in the first place?
Boy : They quickly cut loss when the share dropped so drastically.
UncleZ : That's the problem. Anyway, before I tell you what to invest, tell me your expectation of capital returns?
Boy : I hope could double my capital. My 10 grands become 20 grands.
UncleZ : That is 100% ! How long would you like it to happen?
Boy : Maybe in half a year's time. oh no, it would be nice in 3 months.
UncleZ : Young man, why don't you look at it this way. Bank interest for FD is 3% - 4% per year. So, your investment in stock market should give you returns higher than that in FD. It has to be. Because of higher risk in stock market, the returns must be 10% at the minimum. So, why not take 10% as a start instead of 100%.
Boy : What? 10% only? that means only 1 grand profit in a year's time? That doesn't sound interesting, UncleZ.
UncleZ : You have to manage your expectation mindset first before you put your foot into the stock market. It is a jungle out there. A merciless one on top of that.
Boy : I heard people make money by just making few phone calls a day. Few hundreds, some few thousands a day easily.
UncleZ : True. It is possible. But you are not them. In fact, probably you won't hear when they are making losses. You only hear when they are making profits. Look young man, of course making 10% from stock market is no brainer. You should target to make 100% profit but with a different mindset. Your mindset must be that of long term view. It may takes you 2 years to realise the 100% profit. If you are good in this game, 100% profit in 1 year is possible. If you managed to get 100% profit in half a year's time, that's bonus!
But to set a expectation of 100% profit within few months right from the start is dangerous. You could not manage your emotion if your have such expectation. Greed will take over you. Greed is emotion.
Boy : What shares can I buy with just 10 grands? Presbhd is already close to 4. I only can buy 2.5 lots the most. With just 2.5 lots, I cannot earn much even if the share price fly.
UncleZ : You are right and wrong. Right is that just 2.5 lots won't make a lot of money for you. Wrong is that if it fly, you still good gain in percentage term. The bottom line is, you are still making money and not losing money.
Boy : I never thought of that. I am thinking to buy cheap shares because it has higher chance to increase by 100% or 200%.
UncleZ : There is no such thing as cheap stock. The stock market would not readily wait for you to pick up the cheap stock. There is only affordable stock but not necessary cheap. For example, a 50 cents stock is not necessary cheap. In fact, it may be more expensive than a RM5.00 stock in valuation terms. But 50 cents stock is certainly considered an affordable stock, never mind whether it is expensive or cheap. Speculators do not differentiate that anyway.
Boy : My brain started to jam already. Any affordable shares to play, oh no, to invest?
UncleZ : Invest in this one. It is only 34 cents. It fits your current financial situation for investment. Keep for 2 years or atleast a year. My only worry is, along the way, you may tempted to exit because there will always be temptation of greener pasture over the other side. But don't get distracted. Take this as your first investment training ground. Investment skill is not learnt over night. Anyway, your 10 grands won't get you anywhere if you hop in and out everywhere.
Boy : Alright. Thank you so much. I have one question. DSonic still can buy?
UncleZ : Nahhh..... Not for you. You sure will hop in and hop out the moment the price recovers. You may make little bit money here and there but that is all you will get. No point.
The above is more or less our conversation on stock market. Admittedly, the stock that I mentioned above is not exciting at the moment but I see values in it in the long run. The company's net gearing is in nett cash position. ROI is 13%. Its long term prospect remains intact and the company is also aggressively looking for new overseas market opportunities. This stock is suitable for those who has the similar financial situation like my friend's son. I made my very first RM50k through this way when I started off with my one-and-only capital of just RM13,500 many many years ago. Along the way I rolled it using the same principle and before I made my first 100k in two and half years. I could not afford to speculate stocks every other days because I just don't have the luck.