21 Big Profit Ideas For Small Retail Investors

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21 Big Ideas
#1 - Listen to the Shoe Shine Boy #2 - Invest In Small Caps Stocks #3 - Look For Insider Trading #4 - Buying REITS Below Their Net Asset Value #5 - Sell High Buy Low #6 - Follow A Few Stocks You Really Know Well #7 - Look At Charts #8 - Ignore The Media #9 - Keep It Simple #10 - Do Not Invest In Anything You Do Not Know #11 - Know Yourself #12 - If Something Is Too Good To Be True, It Probably Is #13 - Choose Passive Investing If You Do Not Have Time #14 - Patience Is A Virtue #15 Qualitative or Quantitative Analysis #16 - Understand the Power Of Compounding Interest #17 - Think Of Investing As A Sport #18 - Differentiate Price From Value #19 - Do Not Follow Gurus Blindly #20 - Keep Your Biases In Check #21 - Track Your Performance And Measure Your Returns

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#1 - LISTEN TO THE SHOE SHINE BOY

In 1928 in New York City, or so the story goes, John D. Rockefeller was having his shoes shined. The shoe shine boy, presumably not knowing who Rockefeller was, started giving him stock tips. J.D. took his shoe shine boys advice but not in the way youd expect. He decided that if a shoe shine boy making a penny a shine was giving stock tips it was time to get out of the market. He did and its the reason his family was able to stave off the Depression, and continued to be one of the richest in our history. Who is your equivalent shoe shine boy? Is he the taxi driver? Is he your colleague who has shown sudden interest in stocks like never before? The first tip is about increasing your street smarts by surveying the sentiments of the people around you. When many people are optimistic about investing in stocks, it is probably time to get out.

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#2 INVEST IN SMALL CAPS STOCKS

Big cap stocks are the favourites of funds, institutions and many investors. Due to high demand for big caps, there is a premium to pay to own their shares. It is more worthwhile to invest in smaller caps where they are often overlooked by investors, and thus, undervalued. Many funds are not able to buy small cap stocks due to a few reasons and we will only name two. First, it is difficult for them to buy small cap because they have too much money. Investing a portion of their funds would make them the majority shareholder of the company. This is not something they would want. Second, fund managers want to keep their job, as Peter Lynch said, "If IBM goes bad and you bought it, the clients and the bosses will ask: Whats wrong with the damn IBM lately? But if La Quinta Motor Inns goes bad, theyll ask: Whats wrong with you?" In other words, it is not worthwhile for fund managers to risk their career on unknown stocks, because like it or not, all stocks will come down in price someday. Since you have nobody to answer to except yourself, buy small caps for bigger gains. Of course, most small cap stocks are lousy in terms of fundamentals and you will need to learn how to filter and invest in the right ones.

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#3 - LOOK FOR INSIDER TRADING

Insiders of a company are the decision makers and senior management personnels. They are normally the CEOs, directors, or substantial shareholders etc. They are the ones who know best what's going on in the company. If these insiders know that their company's shares are undervalued or there is a huge growth potential for the company, they are going to buy their shares NOW while it's still cheap relatively. They know they will profit handsomely when the share prices run up in the future. So, if these insiders buy substantially, it usually indicates that they have a lot of confidence in their stock.

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#4 - BUYING REITS BELOW THEIR NET ASSET VALUE

It is easier to evaluate assets than to evaluate earnings. Assets are what the companies already have while earnings will fluctuate going forward. However, not all assets are good assets. Assets like investment-grade property and cash are good assets. Assets like machinery and inventory are not good assets. Of all the companies listed on the exchange, REITs have very good assets because they hold investment-grade properties. One way to evaluate their worth is to take the difference between their total assets and total liabilities. The difference is known as Net Asset Value or NAV. Then you divide the NAV by the number of shares to know how much each share is worth. Lastly, you compare the NAV per share to the share price. The REIT is considered undervalued if the share price is less than the NAV per share. Buying undervalued REITs is one of the easiest ways to make money in the stock market.

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#5 - SELL HIGH BUY LOW

Most investors are very familiar with "buy low sell high", which work very well if a stock is on an uptrend. We call it trading the long side of the market. Trading "long", or buying, is when an investor buys a stock with the hope of making a profit when the share price rises in value. However, when stock prices are falling, most retail investors would just stand aside, do nothing and wait for the next opportunity to long again. Prices tend to fall a lot faster than they go up. You can make your profit much faster if you are able to participate in a falling market. This is where short-selling, or trading short, comes in and give you the opportunity to profit in a falling market. It is the opposite of going long. Instead you sell at higher price first and buy it back when it reaches a lower price to earn a profit. Hence the term, "Sell high buy low" For eg, you short-sell 1000 shares at $1.00 (value at $1,000), if the share price drops to $0.60, you buy-back 1000 shares at this lower price (value at $600). Your profit would be ($1,000 - $600) which is $400. You are able to short-sell via CFDs or through Securities Borrowing and Lending (SBL)

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#6 - FOLLOW A FEW STOCKS YOU REALLY KNOW WELL

"It is easier to follow a few stocks well than it is to follow a well full of stocks" ~ S.A Nelson Too many investors try to analyse and track far too many different stocks beyond they can handle and it can lead to information overload. They feel that they need to understand as many companies as possible, or else they will miss a good opportunity to buy a good stock. Nowadays, because of Internet, you can get access to news extremely fast and to keep up with the ever changing daily events becomes almost impossible. By the time the news reach you, normally it's too late already. Most retail investors like to follow companies' news and react according to the news. Bad move. They tend to buy at the top, got frightened when price falls and sell out at the bottom. Only to see price rise again! What you should really do is to just follow a few stocks... can be between 5 to 10 stocks, whatever you are comfortable. Follow those stocks you know well, have keen interest or have an advantage in. For example, you could be working in the F&B industry and you have an indept knowledge on how restaurants operate. You can follow stocks that are in the F&B industry because you know them so well that you have advantage over other people. Learn a great deal about them, know them inside-out fundamentally, sieve out the potential winners and wait for the right timing to buy the stocks.

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#7 - LOOK AT CHARTS

After doing your research, you reckon that company ABC is fundamentally sound and is a good stock to invest in. So when is a good timing to buy? This is where looking at charts - commonly known as Technical Analysis (TA) - can be useful. The chart will show the stock's price over time and TA can help investors anticipate what is "likely" to happen to prices in the near future. Chart reading is about probability and does not result in absolute prediction about the future. However, it provides a useful tool for analysis. For example, a very common TA chart pattern is called "double bottom". If the stock you are interested in is showing such pattern, it may signal that price has reached a bottom and may reverse soon. In short, Fundamental Analysis tells you "what" to buy and Technical Analysis tells you "when" to buy.

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#8 - IGNORE THE MEDIA

Whether it is newspapers, mainstream financial websites or TV, the media's primarily goal is to capture the audience's attention and create excitement. This is why if you follow the media long enough, you will realize that they tend to exaggerate and take things out of context. The markets don't drop or rise 1%, they "plunge" or "drop sharply" or "soar", helping to create fear or greed in the process. By the time you receive the information from the media, it is OLD news already. Listening and reacting on the advice from the media is a recipe for disaster. It will definitely throw you off from your initial investing strategy. For example, because of a "bad news" from the media, you sold away your stocks in fear when the fundamentals are still intact. You need to have your own independent views and should not let the media affects your emotions.

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#9 - KEEP IT SIMPLE

Albert Einstein said, "If you can't explain it simply, you don't understand it well enough" This quote is an excellent way to keep yourself in check. Can you explain your investment to someone how it works, why you decide to invest, or why is it a good investment? Would your partner find your explanation convincing? If you struggle to explain, most likely it's too complicated and you aren't aware of the potential risks. Just look at those mortgage-backed securities (MBS), collateralized debt obligations (CDO) and credit default swaps during the 2008 Global Financial Crisis. They were complex investments that most people had difficulty understanding them. You don't need complex investments to generate good returns. Sometimes the simplest ones (stocks, properties etc) are the best!

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#10 - DO NOT INVEST IN ANYTHING YOU DO NOT KNOW

A friend excitedly came up to me with insisting that I buy into Australian mining company Redfork immediately. I asked him when he knew about investing in Australia, his insight on the mining industry Down Under, and also his thoughts of the company's prospects. It turns out that he was acting on a hot tip from another friend and had no inkling whatsoever. His first purchase has already made him some money and that is all that matters. It was then that I realized. The difference between Investing and Speculating is the level of knowledge. An Investor knows what he is investing in. He knows about the industry, the product. He knows about the company and the prospects. He knows about the asset class and the peculiarities. He knows about the risk and reward, the upside and the downside. He knows exactly how much his investment is worth, and consequently when to buy more and when to sell. The Investor has sound reasons for making every single investment. Be an Investor. Operate in the know.

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#11 - KNOW YOURSELF

Remember the last time you bought a shoe without trying it on? Probably not. Even though you have been buying shoes your whole life and know your own shoe size better than anyone else, chances are like me, you try on every single pair of shoes before buying. Because nothing is more painful buying a pair of expensive shoes and then realizing that it does not fit. Now try and recall the last time you made an investment. Have you ever paused for a moment and considered whether the investment is a good fit for you, like the shoe, or is it going to cause pain and more than a few blisters? When it comes to investing, the majority of us take an 'outside-in' approach. We see something with great potential and fantastic returns and waste no time jumping into it. In fact it will be more beneficial to approach investing from an 'inside-out' perspective. Look inside ourselves to find out what are our strengths and weaknesses lie, know our own risk appetite and our own emotional strength, know our interest and our dislikes. Only then will we be able to seek out the perfect investment for ourselves. Only then will the shoe fit.
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#12 - IF SOMETHING IS TOO GOOD TO BE TRUE, IT PROBABLY IS

If someone promises you super normal returns for a seemingly risk free investment, would you do a double take? I would. Often I am seduced, and sometimes I even considered parting with my money for a shot at financial stardom. But over the years I have learnt to do a double take on my double take and rationally examine every good deal that comes along with a healthy dose of skeptism. If that heritage building redevelopment project in faraway Europe deal is really such a steal, if that plot of land on the other side of the earth really has that amount of potential to be redeveloped into a township, if there is really such great returns to be made, someone who is nearer to the deal, more well informed than you and me and richer than all of us combined would have jumped on it long ago. Financial scammers are successful because they have one powerful weapon against us that we willingly relinquish to them. They play on our emotions; our greed and fear. Just because someone has made a lot of money and has been made an example should only serve to put us on our guard more. Unfortunately more often than not we choose to be greedy when we see the spoils laid out and fearful that others will get to it if we do not, and that often leads to the ultimate downfall.

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#13 - CHOOSE PASSIVE INVESTING IF YOU DO NOT HAVE TIME

For the working class and small retail investors, investing has been touted as the way out of the rat race and towards financial freedom. The allure of multiple passive income streams drive people to plunge headlong into the stock market. However, many new Investors do not realize that a buy and hold strategy for stocks is hardly "passive". Yes, an investor could pick up stock tips and punt the market without much knowledge or understanding of the fundamentals of the company. But to pursue a sound and sustainable and successful stock picking strategy requires much effort and time. There are Annual Reports to peruse, analysts recommendations to take into account, fundamentals of the company to consider and other stocks to benchmark against. Market conditions and situations within the industry change with time and one needs to remain in touch always. A typical day for the world's greatest value investor Warren Buffet involves reading five different newspapers and stacks of reports and trade journals. It is hard work, and passive would be the last word one can use to describe this form of investing. Fortunately for many of you who genuinely want to invest and grow your money passively, there is a free lunch. Invest in an STI ETF. It has returned 10% annually over the past decade, the charges are low and most importantly, it is a totally hands off investment suitable for busy people with no time to monitor their portfolio on a regular basis. Go for it now!
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#14 - PATIENCE IS A VIRTUE

So you did your research, analysed the financial report and determined that the stock is undervalued. You bought the stock, feeling that it is going to be a winner for you. Now you are waiting in anticipation for the price to rise. A few months have passed but your stock price is not moving at all. You begin to question yourself whether you made the right decision and your patience is waning. Then there are bad news in the market, you are shaken and you sold the stock. Sounds familiar? Sometimes an undervalued stock can stay undervalued for a prolonged period of time before analysts uncover the gem. Major advances require time to complete. Your holding period should be in terms of years, not months. The best investors understand the importance of patience and it is one of the most difficult skills to learn as an investor. Be patient!

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#15 QUALITATIVE OR QUATITATIVE ANALYSIS

Benjamin Graham mentioned that there are two ways to select stocks. The first way is to do qualitative analysis on stocks. Usually, this requires the investor to understand the business and be able to evaluate factors that cannot no numbers can to be put on the company. For example, the investor need to assess the capability of the management and the trends of the industry the company is in. The investor will need to assess whether the company is cheap at current prices compared to its future value. The second method is to use quantitative analysis where there is more emphasis on the companys past and present financial performance. The investor will usually make use of financial ratios such as Price-toEarnings and Price-to-Book to assess the companies, and invest in them if they are selling below value. In this way, the investor does not need to understand the business as detailed as the qualitative analyst. Both analyses have their own merits and it is up to the investor to decide which suits him better.

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#16 - UNDERSTAND THE POWER OF COMPOUNDING INTEREST

The secret to wealth is the miracle of compound interest. Even a seemingly modest return can generate great wealth if you give it enough time. On the surface, compounding looks insignificant and even boring. "So what if my investments give me a 6% returns annually. It's so little", you may tell yourself. In the short term, it doesn't make much difference. But in the long run, the difference is huge! For example, if 20 year old John makes a one-time investment of $10,000, in an Index fund which generates an average of 8% return annually, and if he never touches the money, the $10,000 will grow to $320,000 by the time he retires! Compounding interest is more powerful than you think!

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#17 - THINK OF INVESTING AS A SPORT

Can you beat Roger Federer at tennis? If not, what makes you think you can waltz into the market place and expect to beat the professionals at their own money game? Many retail investors and traders see the markets as an easy and accessible way to make money. Everyone thinks they can invest and trade their way to financial freedom and great riches in the shortest possible time. Seldom do people consider what they are up against. The fact is, every retail investor is up against the very best in the business. Think of investing as a sport. As with all sporting endeavors, the harder one trains, the better one would be. But if one is not prepared when the bell is rung, one can only expect total decimation in the arena. By training, we mean get yourself educated - read widely, attend courses or seminars (can be free or paid), have a mentor and gain the necessary experience.

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#18 - DIFFERENTIATE PRICE FROM VALUE

We all know what price is. To find the price of a stock one just needs to get online and you have all these prices coming at you instantaneously. Despite the speed at which they change, the price of a stock is absolute. At any one time there can only be one price. It is absolute, it leaves no room for interpretation and it requires no further processing. On the other hand, the value of a stock is subjective. One can determine the value of a company based on its net assets or a projection of its earnings but even within these two pathways there are many intricacies to grapple with. At any one time there can be many interpretations of value, and hence any determination of value requires additional processing and thought. And precisely because it is so tough to determine value, that many investors overlook or disregard the value part of the equation. Warren buffet famously quotes - price is what you pay, value is what you get. Learn to recognize value and you will never go wrong in the long run!

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#19 - DO NOT FOLLOW GURUS BLINDLY

At an Investment fair an elderly investor took Jim Rogers to task about his stand on the China stock market. Rogers, he claims, was bullish on Chinese stocks since many years ago, but instead of making meteoric highs, the Shanghai Composite Index is now languishing at half of its peak. The investor has taken Rogers' advice to buy into China but has since cut his losses. Rogers was visibly perplexed as he addressed the issue. He has bought Chinese stocks four times over the years, but till date has never sold a single Chinese stock, he explained. He bought them for his little daughters and the time frame on this investment stretches for decades. To him, sluggish performance of that market now is but a blip. By adopting his stand on the market with no regards to the time frame, the elderly investor painted himself into a hole and suffered losses as a result. In the same breathe, Jim Rogers urged all investors present not to follow gurus blindly. Gurus can tell you what to buy and when, but chances are they will not be around to tell you when to sell (or not sell). Now that is a piece of advice worth following!

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#20 - KEEP YOUR BIASES IN CHECK

Our brains are constantly processing information and drawing conclusions and based on the stimuli we are exposed to. The amount of neuro activity is mind boggling. Over the years, we have learnt to apply cognitive shortcuts and heuristics to information processing and decision making. These shortcuts reduce the load on our brains and make our lives less effortful. Unfortunately these shortcuts lead to biases that cause "incorrect thinking" at times. Experiments exposing participants to an initial random number and then asking them to provide an estimate for something else found that exposures to higher random numbers lead to higher estimates. For no reason other than a random exposure, participants become anchored. Psychology experiments have also discovered that human beings are more prone to avoiding losses than acquiring gains. Understanding the anchoring effect brings us closer to the true value of our investment. Understanding the loss aversion bias frames the way we see profit and losses and allows us to make sounder investing decisions. We are guilty of being affected by these biases every single day. Understand them and keeping them in check will make us better investors!

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#21 - TRACK YOUR PERFORMANCE AND MEASURE YOUR RETURNS

As an investor, you are essentially the manager of your investments. You want to know what is working and what isn't. You want to know how well your portfolio is performing. You want to benchmark it against other possible options. Unfortunately precious few retail investors actually know how well exactly their investments are doing. Many choose to glorify their wins and forget their painful losses. Others see it as too much of a bother and disregard this important aspect. As the old management adage goes, "You cannot manage what you cannot measure". Start tracking your performance and make yourself a better manager of your investments now!

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