Invest like a fisherman

Dear Investors,
After so many years, the sea is still our main source of protein. Fishing is still an important industry especially in the
coastal towns. In certain villages, fishing is probably the main profession for the inhabitants.

There are various kinds of fish out in the sea and fishermen do not travel out to the sea to try their luck and attempt to
catch any fish that comes around. They know what they are looking for when they go to the sea.

Market full of opportunities

While the sea is abundant with fishes waiting to be caught, our stock market also provides ample investment
opportunities. What we need is to learn from our fellow fishermen. Their ability to return with a net full of fish may
provide some useful lessons for us to make money from the stock market.

Every investor wants to make money when investing in the stock market. This is obvious. But most investors do not
know the stock market is like the sea with many fishes and there are also constant dangers lurking.

While fishermen cannot attempt to catch all the fishes they want, investors should also not try to make every type of
profit. Some stocks provide high dividend yields but low capital appreciation. Growth stocks could be more profitable
due to the potentially higher price gain, but they are likely to be more volatile and their prices could plunge more in a
bear market.

Politically linked stocks could be exciting from the news flow but they could also disappoint in many cases. High beta
stocks may be more exciting to aggressive punters and they can swing either way. Penny stocks could be explosive
but not all penny stocks are the targets of speculators.

Then there are stocks from various industry sectors such as property, technology, plantation, banking, utilities, REITs,
etc which behave differently. Some investors may want to follow certain owners such as GLCs, prudent owners,
gung-ho yet dynamic proprietors, or even professionally managed companies. Some stocks are tightly held by
strategic investors, others have large free float with tens of thousands of shareholders. Some are popular among
foreign fund managers, others are favourites among local fund houses.

Because of the different variety, some stocks are suitable for investment and some are apt for trading. Some stocks
can be held for long-term investment, others are only good for short-term punt.

Savvy investors, like experienced fishermen, know where the dangers are. There are certain areas they will never
attempt to go. There are certain slippery fish they do not want to catch and there are also dangerous fish not
worthwhile to put their hands on.

Know your catch

Fishermen are very clear with what type of fish they want to catch before they venture into the sea. If they brought the
wrong net or wrong fishing gear, they would not be able to get the right catch.

Investors intending to make money from the stock market should also be clear of what type of profit one intends to
make. Most investors only aim to make money when investing. So long as there is money to be made, they do not
bother with what kind of profit. When confronted with the question of what kind of profit they hope to make from the
stock market, they will appear to be perplexed. To them, profit is simply just profit and they do not bother to
differentiate. Because they are not selective, many a time they end up with something they cannot handle. It will be
an easier decision to make if a purchase (which could be for investment, trading or speculation) started to show profit.
But when the purchase ended in the red, most people do not know how to manage it.

There are three main reasons why people are at a lost when faced with losses. First, psychologically they feel painful
to cut loss. Second, they are not clear with the initial objective of the trade and lastly, they do not have a clear
investment or trading plan.

As such, knowing what you want and what type of profit you intend to make from the stock market is very important.
The type of stock must be in line with your risk profile. Only with a clear goal can an investor concentrate on the
stocks that are suitable and appropriate for the objective. In this way, investors will not mix up between investment-
grade stocks from speculative stocks. The most common mistake made by most investors is to take profit on
investment-grade stocks as if it was for trading and kept speculative stocks instead for long-term investment simply
because the latter was losing money.

Understand the behaviour of your prey

Knowing the behaviour of your prey is
very important. An impatient investor will
find high dividend stocks too lethargic with
smaller price appreciation especially in a
bull market where some stocks may
gallop like a horse. Prices of cyclical
stocks such as those in property, building
materials, plantation, technology,
stockbroking, mining etc can be very volatile as their earnings are substantially affected by the prices of the products
or by supply and demand condition. Knowing the behaviour of the stocks you intend to buy will help to avoid being
“stuck” with the wrong stocks.

If a stock is pushed up by syndicates or traders without real change in fundamentals, the price appreciation is
normally not sustainable. The resultant price behaviour will be like Newton’s law of gravity — what goes up must
come down.

Set your targets

Before a stock is purchased, the targets must be set. Targets, in this case, mean the kind of stock as well as under
what circumstances should one sell the stock.

It must be clear whether the stock is for moderate return to beat the fixed deposit rate, double-digit capital gain or a
punt on a specific piece of news.

For the first objective, a high yield low beta stock is chosen as it is less likely to fall in a bear market but on the other
hand, when the market gallops ahead, it will not likely run too. This is the behaviour of the stock and investors must
be prepared to bear with it. Unfortunately, it is not uncommon to hear laments from investors in a bull market where
many stocks were literally racing on the gainers’ list while the investors’ low beta conservative stocks were crawling
like a snail. When the patience dwindled, they will dump their limping horses and chase after the winning horses to
take part in the race. Such change in target halfway through the investment process is quite common in the local
scene.

In the second case where investors try to make higher capital gain by buying more exciting second tier growth stocks,
things may not always turn out as expected. Being invested in higher risk higher return growth stocks, the risk is
when the economy turns down or when the bear dominates the market, these stocks tend to fall faster. A higher
capital loss may cause jitters among some investors who may regret what they have chosen. Some may even decide
to cut loss and move back to defensive stocks just to be on the safe side.

In the third case, punting on tips and “insider” hot stocks could be exciting. After a few attempts of good luck where
their “tips” worked and brought them handsome profit, they are likely to get bolder and punt more in the future “tips”.
Eventually, one of them ended up as a disaster and the share price plunged like there’s no bottom. Cutting loss and
giving away a big portion of the previous profits is painful and the punters will most likely hold on to the stock and
hope for the best. When things did not revive, not only will they give back all the profits, they may also lose a big
chunk of their capital. After this episode, some will swear they will never dabble in the stock market again. This is one
of the key reasons why there are fewer and fewer punters in our market.

Most of the time investors and punters did not set their target when they first initiate a position in a stock. Even if such
target was set with the corresponding expectation, they did not adhere to the objective when the market cycle takes
its course. When you buy a blue chip, you cannot expect the stock to do wonders and it is not going to double its
price within a year.

Similarly, when a stock has achieved its objective or is no more relevant, it is time to get rid of it. If a dividend stock
has appreciated by 20%-30% in less than a year without any change in fundamental, perhaps it should be sold off.
On the other hand, if a growth stock jumps in price due to improving outlook, it could be worthwhile to keep further.
Not only cutting loss too late is a mistake, taking profit too early is also a common blunder in investment. If the
investment objective is clear, such errors could be avoided.

The biggest failure of most punters is the unwillingness to cut loss on a trading position. When a trade is initiated on a
piece of speculative news, it should be clear that it is just a punt and there is no guarantee it will make money. When
things turn out to be doubtful, unfavourable or when a red flag has been raised, many punters still refuse to get out. A
trading stock is simply just a trading stock and it should be treated like one. It should not be mixed up with investment
stocks. Likewise, a fisherman who is going to the sea to catch ikan bilis cannot change his mind when he sees a
valuable grouper swimming near his boat because his fishing gear is not suited to reel in the grouper.

Segregate the stocks

A fisherman who frequently go to the sea can still throw his fishing gear into the river to catch different kind of fishes
from time to time but he knows that the objective is different, the tools and strategies will also be different.

Serious investors who invest carefully can still dabble in the stock market from time to time, especially in a buoyant
market, but they must know that the type of stocks is different and the strategy to be used should not be the same.
For ease of differentiation, it is better to have a different set of accounts, one for investment and one for trading. In
this way, a clearer picture can be depicted so that the need for different strategies can be better demarcated. Such
segregation will also allow investors to compare the performances of the two portfolios.

Use the right tools

Fishermen who want to catch fish in large and dense shoals such as tuna, sardines and mackerels know that the
appropriate net to use is surrounding nets such as purse seines. They may also make use of light and bait to lure the
fish.

For investors, having made up the mind on what type of stocks to invest, investors should ensure that they are
equipped with the right tools to handle the different type of stocks.

For investment-grade stocks, knowledge on the business concerned is paramount. Investors should understand how
a company operates, where the main profit comes from, who are the other players, what is the competitive advantage
of the business, can the company continue to sustain the earnings, what is the growth prospect, etc.

On top of that, it is also important to know the financial information such as dividend yield, price-earnings ratio, cash
flow, asset backing, gearing ratio, etc.

In the case of a trading stock, the best tool is technical chart. If a trader is not familiar with the use of technical
indicators, at least the price pattern and volume charts will provide a perspective on the position of the stock.
Immaterial of what the news say, the strength of the stock is indicated in the price and volume charts.
Know the other players
Share price is a function of supply and demand. It is important to know who are buying and who are selling, as the
actions of these players will influence the future price of a stock. When a share has too many shareholders, it could
be difficult to move, as every upward movement will attract a large number of sellers. From the shareholder list, the
30 largest shareholders, including the shareholdings of local and foreign institutions of a listed company are shown.
Regularly, the changes of substantial shareholders (>5% stake) are reported indicating the intention of these big
investors.

Some stocks are favourite among foreign fund managers. When the companies concerned perform well in terms of
earnings, their share prices will be well supported and the subsequent large capital gains will be the envy of many
investors as foreigners will pour in more money to push the share prices further. On the other hand, if a company
disappoints or misleads foreign fund managers on certain information or profit guidance, foreign fund managers will
dump the stock at whatever price. The merciless disposals will cause the share price to plunge like a stone. That is
the risk of investing in foreigners’ favourites.

Know when to fish

During certain time of the year, the weather is more conducive for fishermen to cast their nets. A good timing will yield
better results. Those who have some knowledge about fishing know very well squids should be caught at night and
not during daytime.

Investors who always chase the market tend to buy at higher prices. If they took advantage of market weakness to
accumulate additional blue chips and investment-grade stocks for long-term investment, the cost of their investments
will be lower. Unfortunately, most investors tend to buy when the economy is at its pink of health and when stock
prices are substantially higher. From time to time, herd mentality and negative market sentiment drive prices below
fundamental values and these are the windows of opportunities for serious investors.

For those who prefer to buy only when things are clearer and they do not mind to pay a higher price so long as there
is less uncertainties, the strategy is more suitable for trading. Such stocks must be sold at certain point in time and
not to be kept for investment.

Know your capability

Every fisherman knows his capability. There are certain types of fish which they know they will never try to catch.
They know their limitation and they will operate within their means. Fishermen know they must stay away from the
poisonous spines of the toadfish, the venomous barbs in the tails of stingrays and the high voltage of the electric
moray eels.

Investors should not attempt to make all the profits from the stock market. Those who are risk adverse should not
attempt to trade on volatile stocks such as warrants. Those who are not good at cutting losses should stay away from
trading stocks. Difficult stocks that require special skills and closer monitoring should be left to professionals like
stockists or professional traders. Busy executives who try their hands on volatile news-driven stocks will be at a
disadvantage to others who are closer to the market.

Engage helpers
Finally, there are businessmen who invest in trawlers, the appropriate equipment and employ fishermen to catch the
fish for them.

In a similar way, those who want to make money, yet do not have the time and knowledge, may also appoint the right
fund managers to invest for them. The skill required in this case is to identify the right person to do the job, a skill
which the owner of the trawler must also possess. Investing in unit trust funds is akin to employing fund managers to
perform the job of investment.
Ang has 20 years’ experience in research and investment. He is currently the chief  investment officer of Phillip
Capital Management Sdn Bhd.

This article appeared in The Edge Financial Daily, July 26, 2010.