Feb 23
Investing Rule No.1: Never Lose Money
Investing Rule No.2: Never Forget Rule No. 1
-Warrent Buffet
“Preservation of Capital is Always Priority #1″
It is easier to lose money then it is to earn money… hence, Buffet is extremely careful of his money. He invests in “High Probability Events” which gives him almost certain to make money. The risk of loss is tiny and may even be non-existent.
My view: This can be applied to the current situation where the potential profit is high and the market’s chance of furthur degradation is low, though still a possibility.
Eg, STI is 1600. Risk of it going down furthur may probably bring it down to 1300 or so, but potential recovery is expected to be at least the previous high of 3800. The probability of winning is much much higher.
After reading this chapter from the Winning Investment Habits of Warren Buffet & George Soros. The take away for me is: Do not be greedy and try to avoid losses. It is better to miss out the additional 50% then to endanger your assets with a potential market crash.
Feb 18
Learning some basic knowledge about financial ratios can proof useful in many ways. Understanding the fundamentals of investing; awareness of basic underlying risks; having a self-set threshold of entry & exit of the market; and best of all, testing if the person you entrust your wealth with is knowledgeable enough. For many beginning investors, this will be your first filter process to help you distinguish a salesperson & a qualified professional.
Today, I will cover 2 very simple ratios. Price per Earning Ratio (P/E Ratio) & Price to Book Ratio (P/B Ratio).
P/E Ratio generally means the Price the Market is willing to pay for his earning capability. A P/E of 20 means you are willing to buy the company at 20 times it’s net income. Below is a general analysis of the ratio:
0-10: Either the stock/indice is undervalued or substantially high earnings due to selling of assets.
10-17: Fair Value
17-25: Overvalued or a growth stock with earnings expected to increase substantially in the future.
25+: High expected future growth in earnings or subject of a speculative bubble.
P/B Ratio compares the stock price to the book value or “asset value”. A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values. A higher P/B ratio implies that investors expect management to create more value from a given set of assets, all else equal (and/or that the market value of the firm’s assets is significantly higher than their accounting value).
Stocks that trade at a P/B ratio of less than 1 are considered undervalued.
