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5 Different Methods to Make a Profit in the Stock Market


Dear Members,

This is another great question posted by a fellow subscriber of ours. Personally, I believe it is relevant if:

  1. You have a full time job.


  2. You got to run your businesses.


  3. You got a social life.


  4. You do not wish to spend your days monitoring charts in front of a computer screen.  


In this newsletter, I would like to share my thoughts about this question. Hopefully, they will help you to decide on your preferred style of investing and trading in the stock market. For a start, there are 5 different styles of making a profit in the stock market. The differences between them lies in the duration of their stock holdings, the time committed for stock trading activities, and the set of skills and tools required to be successful.


The 5 styles are as follows:


  1. Long-Term Investors


  2. Mid-Term Investors


  3. Short-Term Traders


  4. Swing Traders


  5. Day Traders


#1: Long-Term Investors

In fact, when we own portions of
outstanding businesses with outstanding managements,
our favourite holding period is forever.


Warren Buffett
February 28, 1989


Extracted from Chairman’s Letter of
Berkshire Hathaway Inc. for 1988



This is for the devotees of Warren Buffett, the greatest stock investor in the world. Personally, I’m a big fan of his approach of investing. It is known as value investing. To Warren, stock investing is about acquiring shares of great businesses with excellent managements at reasonably low prices.

 

Thus, there are 2 main skills that we need to replicate the investment success of Warren Buffett. They include:\

  1. The ability to interpret financial statements

  2. Buy shares when they are cheap

 

Bursaking.com.my is catered to long-term investors as it places great focus on compiling actual financial and operating data of over 800 stocks mainly listed on Bursa Malaysia. In addition, our education materials are focused on how you can interpret financial statements. This is because, ultimately, we want you to get to know the business first before making an investment.  


Case Study #1: Gamuda Bhd




Source: Bursamarketplace.com

 


Long-term investors would expect 2 types of gains from their investment.


Firstly, it is capital appreciation of its stock value over the long-term as shown above. In July 2009, you bought shares of Gamuda Bhd at RM 3.03 a share. Then, you do not even bother to monitor the ups and downs in Gamuda Bhd’s share price. By March 2016, the value has grown to RM 4.92 a share, up by 62.4% in 6½ years. Second, during the 6½ years, you will receive a total of RM 0.72 a share in dividends for holding onto shares of Gamuda Bhd.

Hence, the total gains (capital appreciation + total dividends) would be RM 2.61 a share. This works out to be 86.1% in 6½ years or a compounded annual growth rate (CAGR) of 10.9% per annum.

 

Financial Institutions are Long-Term Investors  

 

Often, long-term investors hold onto their stock holdings for a long period of time. It is usually more than 3 years and above.

 

Just imagine Petroliam Nasional Bhd (PETRONAS). PETRONAS is the major shareholder of PETRONAS Gas Bhd, PETRONAS Dagangan Bhd and PETRONAS Chemical Group Bhd. They are all highly profitable companies. Let me ask you:



‘Would PETRONAS sell off shares of the above companies
if their share prices drop?’



Of course not!

 

It is the same with the EPF. Would the EPF sell their shares in RHB Capital Bhd if its share price drop? If you take a look at the top 30 equities holding of the EPF, you will find that the EPF invest in companies that have tremendous cash flow which allows them to pay us above 6% in dividend rates consistently for the past 5 years.

 

The EPF has held these stocks for more than 5 years:




No.

Stocks

No.

Stocks

1

RHB Capital Bhd

11

Kuala Lumpur Kepong Bhd

2

Public Bank Bhd

12

IJM Plantations Bhd

3

Malayan Banking Bhd

13

MBM Resources Bhd


4

Alliance Financial

Group Bhd


14

Malaysia Airport

Holdings Bhd


5

CIMB Group

Holdings Bhd


15


PETRONAS Gas Bhd

6

AMMB Holdings Bhd

16

Dialog Group Bhd


7

Malaysia Building

Society Bhd


17


Telekom Malaysia Bhd

8

Hong Leong Bank Bhd

18

Sime Darby Bhd

9

United Plantations Bhd

19

Axiata Group Bhd

10

Genting Plantations Bhd

20

Digi.com Bhd



Perhaps, you may want to study the investment approach undertaken by the EPF. I believe it is great education for budding investors. After all, the EPF possesses a solid track record of generating consistent investment results for many years.

 


#2: Mid-Term Investors

 

Similar to long-term investors, mid-term investors are also devotees of Warren Buffett. They too would invest in stocks based on their financial performances.

 

The difference, however, lies in share prices. It is best illustrated as follows:



Revisiting Case Study #1: Gamuda Bhd

Source: Bursamarketplace.com



For instance, Warren Buffett does not make investment decisions based on the ups and downs in the stock market. He is interested in owning shares of great companies. He will hold onto them as long as they are profitable and generates cash flow. This could be for more than 10, 20 or even 30 years without selling them.

 

If you follow this approach with Gamuda Bhd, you may need a lot of patience to ride the downward trend in share price as highlighted in yellow.

 

Mid-term investors may apply some basic technical tools to determine his time of entering and exiting the market.

 

The focus is not really on ‘so much’ about trading gains. But, it is about:



  1. Buying shares of great companies at reasonably low prices


  2. Selling them at reasonably high prices


  3. Buy-back them again at lower prices


  4. Repeat Step 1 - 3 as long as the company is fundamentally solid.



Hence, mid-term investors need to be savvy in both fundamental and technical analysis. It is a hybrid, combining the wisdom of investing in outstanding businesses and the art of stock trading. For instance,


Source: Bursamarketplace.com



The SMA-Crossover Method is one of the most popular basic technical tools used by mid-term investors. The Green Line tracks the short-term price trend of Gamuda Bhd. The Orange Line tracks the long-term.

 

Let us assume that you have RM 1,000 to invest in shares of Gamuda Bhd.

 

Here is how you use it:



  1. At B1, the Green Line has crossed above the Orange Line. You buy 333 shares of Gamuda Bhd at RM 3.00 a share in June 2010.


  2. At S1, the Green Line has crossed below the Orange Line. You sell Gamuda Bhd at RM 3.80 a share in May 2011 and thus, receiving RM 1,267.


    Holding Period = 11 months


  3. At B2, the Green Line has ‘Once Again’ crossed above the Orange Line. You buy 367 shares of Gamuda Bhd at RM 3.45 a share in January 2012. Your investment cost is RM 1,267.


  4. At S2, the Green Line has ‘Once Again’ crossed below the Orange Line. You sell Gamuda Bhd at RM 4.72 a share in October 2013. You will receive RM 1,733 in cash.


    Holding Period = 20 months (1 year and 8 months)


  5. Hence, you will receive 73.3% in capital gains for a period of 3? years. It is better than 62.4% in capital gains for a period of 6½ years if you adopt the approach of long-term investors.


  6. Unlike long-term investors, mid-term investors would hold their investment for at least 3 months to at most 3 years.


  7. This is why 2 individuals can achieve different investment results investing in the same shares if they have different approaches to how they invest in shares.


Note:

This serves only as an illustration. The example is on a per share basis. In Malaysia, the minimum amount of shares to be bought is 1 Lot or 100 shares.   

 

#3: Short-Term Traders

 

The stock holding period for short-term traders are shorter than 3 months.

 

If you noticed, I do not use the term ‘short-term investors’. This is because investors are interested in the ownership of the company. Investors want to participate in the future profits of the company. Hence, the ability of reading financial statements is crucial for mid-to-long term investors. Meanwhile, traders are in for trading gains. They are less concerned about the company’s past, present and future earnings. To them, charts are more important than financial reports. To be successful, short-term traders must possess excellent technical analytical skills in order to interpret short-term price movements in a stock.


What Should I Trade?

 

I believe the product is not as important as the trader himself. For instance, with excellent trading skills, a trader may trade a wide range of products such as stocks, currencies, options, futures and even commodities. They are usually not bounded by a singular product. After all, traders look at price charts and not the fundamentals of an investment product.

 

What Short-Term Traders are Looking for?

 

Source: Bursamarketplace.com


This is a zoom-in price chart of Gamuda Bhd from June 2011 to April 2012. As highlighted in yellow, short-term traders would try to identify the ‘bottom’ and ‘peak’ of Gamuda Bhd’s share price in a relatively short period. This requires sophisticated trading tools which may include:


  1. Moving Average Convergence Divergence (MACD)


  2. Directional Movement Index (DMI)


  3. Relative Strength Index (RSI)


  4. Stochastics


  5. Bollinger Bands



More Tools, More Profits?

The above mentioned are just a fraction of over 200 technical analysis tools existed in the world today. It is next to impossible for any traders, even the professionals, to master all 200+ tools available in the market. Usually, professional traders would master a combination of a few technical tools and will adapt them according to their style of trading. No matter what tools are applied, traders work on probabilities of making more winning trades than losing ones.

 

Hence, no technical tools available would guarantee a trader’s success in stock trading.

 

Bursaking.com.my is not designed for short-term trading. If you are into short-term trading, perhaps, you may check out the services provided by shareinvestor.com or chartnexus.com to conduct your trading activities.

 

#4: Swing Traders

Swing traders usually refer to traders whose stock holding period is within a week or a few weeks. They usually get in and out of the stock market at least 3 days to at most 3 weeks.

 

Hence, the level of trading activities required is heavier than short-term traders. This is because swing traders are active traders and not passive investors. Often, they would require high-speed internet and multiple computer screens to conduct their trading activities.

 

This is definitely not for beginners. Personally, I believe it is better to master walking first before attempting to fly.

 



Source: Bursamarketplace.com



This is a ‘Super’ zoom-in price chart of Gamuda Bhd of March 2016. As highlighted in yellow, swing traders would get in at Position 1 and get out at Position 6. Thus, the holding period of the stock is 6 days. Swing traders take profit from the price difference in that 6-day period.

 


#5: Day Traders

By itself, it is a full time job.

 

It trades a stock within the day. Hence, it is known as intraday trading.


Source: Bursamarketplace.com



For instance, on March 26, 2016, at 10 a.m., a day trader would buy Gamuda Bhd at RM 4.92 a share. By 3 p.m., the same trader would sell off Gamuda Bhd at RM 4.93 a share. He will pocket in the RM 0.01 trading gain in that same day.

 

Often, day traders would use leverage to trade. Thus, this would amplified the RM 0.01 trading gain to be more meaningful. Hence, it involves high degree of risk especially for traders who have zero knowledge in technical analysis.

 

You may have heard that trading is a stressful activity. It is if you are a day trader. This is because it is time sensitive. Success or failure is determined by when and how fast you click onto the button.

 

After a stressful trading day, a day trader would repeat the same routine on March 27, 2016. Thus, you must have passion if you want to be a successful day trader over the long run.

 

As much as you can make, it is truly not for everyone.



Conclusion:

Which Style is Most Suitable for Me?

 

If you have a full time job, you may begin with the Warren Buffett approach of investing. You can try either long-term investing or mid-term investing.

 

I believe this is most suitable if you are beginning your journey as a stock investor. It is a more forgiving way to invest and it can be done on a part-time basis or in your spare time.

 

If you are new to stock investing, then, you may want to check out Bursaking.com.my more often. It is a great resource centre for stock investing education who are into either long-term investing or mid-term investing.

 

However, if you are a chart person and is need for speed, then, you may try out active stock trading. Then, Bursaking.com.my is not for you. I would recommend checking out shareinvestor.com or chartnexus.com which has sophisticated trading tools to help you conduct your trade.

 

Hopefully, the insights presented has helped you understand the stock market world a little more than before.