Some Commandments in Stock Investing

By Randell Tiongson on April 24th, 2013

So honored and blessed to be featuring a guest blogger whom I respect and admire so much. Efren and I have been friends for quite some time now and he remains to be a role model to me and many ways. More than a colleague, Efren is a great mentor. More than an investment expert, Efren is a genuine advocate who practices more than what he preaches.

In this installment, Efren puts some wisdom on stock market investing. With so much attention and curiosity in stock investing, Efren’s wisdom is so timely and his balanced view is something that he is really known for — I take his insights and advise very seriously. 

Efren will be featured in iCon 2013: The No Nonsense Investments Conference this June 22, 2013 at the SMX. He will tackle the very important topic of investment planning. Check out the conference HERE

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Some Commandments in Stock Investing

by Efren Ll. Cruz, RFP

Question:Are there any rulesthat I should strictly follow in stock investing?– via email

Answer:To be sure, there are many rules to follow.  But here are some that immediately come to mind.

1) Do not make money a graven image.  Money has always been and will always be just one of the tools to achieve the more important things in life. The same goes for stock investing. Don’t get me wrong though. Money and stock investing are important tools. Just don’t let your life revolve around them as if they were the reasons for being. And when you make money, don’t forget to whom the glory belongs.

2) Forget about buying at the bottom and selling at the peak. Your chances of buying at the lowest point and selling at the highest level is as slim as winning the 6/55 lotto (about one in nearly 29 million). Why? Because you will only know that a particular price is either the lowest or the highest after the fact. Worse, you may not have even placed your order before then.

3) You beta watch out, you beta not cry. Stock prices tend to move together.  It’s just that some move faster than others.  A way to measure this relative movement is to measure a stock’s beta.  Usually, a stock’s beta is measured against a broad market indicator like the Philippine Stock Exchange Composite Index or PSEi. Operationally, if a stock’s beta is 1.5, and the PSEi made a 2% return, that stock should make a 3% (i.e. 1.5 x 2%) return.

A higher beta would mean a stock with a more volatile and, therefore more risky behavior vis-à-vis the PSEi. This is not to say that stocks with high betas should be totally avoided.  You just need to match your risk tolerance with that of the stock you are buying. In other words, buy with eyes wide open. You don’t need to perform the computations for deriving beta as you can simply ask for them from your stock broker.

4) Investment decisions have manufactured and best before dates. Do not cry over spilled milk as they say.  If you are truly diligent in studying your options before investing, you would always make the best decisions given the information available to you at the time.  However, the only thing that is constant in life is change itself. Your investment decisions will have a shelf life as many factors can change with the underlying companies you bought.  So make it a habit to review your investments periodically.  Once a quarter should be good enough.

5) Do not covet your neighbor’s allocation. Even if someone comes up to you to brag about the tons of money he made from a certain investment allocation,that is his allocation and not yours.  You will need to come up with your own according to your own return objectives and risk preference.  How else will you be able to tell your own story?

6) Do not get too excited with breaking news. Stock investing is manic-depressive.  Keep your cool when you come across exciting news. In the first place, if it wereexciting news about a certain stock, it would already be a time to sell that stock and not to buy it. You are supposed to buy before the news breaks. More importantly, it is the long-term earnings and growth prospects of the underlying companies you boughtthat you should focus on.

There are much more stock investing commandments to write about.  But the foregoing should give you enough to chew on for a while.

Thanks to Randell for allowing me to post this guest blog.  More power to you my dear friend.

Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to [email protected].

Copyright 2013 Efren Ll. Cruz, RFP.  All rights reserved. This material should not be published, broadcast, rewritten or redistributed without the express written of the author. 

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Some Commandments in Stock Investing