I remember that when I first entered the stock market, I was very excited and nervous, it felt like a rush of blood. At that time, I had no experience, I didn't study or analyse anything about the market, and I knew nothing about the macro economy. I just kept paying attention to price actions and then picked the stocks or companies I liked.
I got into the stock market in mid-2008. At that time, just like during the epidemic from 2020 to 2021, what I bought went up, I felt that I was very inflated and making a fortune was just easy.
I started using 5x leverage, but when Lehman Brothers declared bankruptcy, I began to sweat, I borrowed money from friends, borrowed money from family members, overdrafted my credit cards and took out a bank loan to cover my positions. At the end of the day, I ended miserably.
It took me about 3 years to pay off my debts by working frugally. Then I started to study the patterns of the market, the financial market concepts, technical and fundamental analysis. Eventually, I spent almost 6 years in trading to cover my losses.
What I want to say is that whether investing or speculating, we all need to have a certain relevant knowledge and experience. After that, the most important thing is emotional control and risk management.
My personal way of picking stocks is looking at outlook, value and macroeconomics etc. To put it simply, stock picking is roughly divided into two categories, technical analysis and fundamental analysis.
First of all, let me briefly talk about technical analysis. I believe that everyone has seen some experts on TV analysing stocks. We usually hear "It has broken through this price level now, and the volume has risen, it is recommended to buy it". It sounds very professional.
In general, technical analysis is to look at the chart and find out the pattern. The main thing is to analyse the past trend of the stock, such as price action, volume and volatility and then analyse its future trend or the potential price.
Personally, I do not suggest over relying on technical analysis. Why would I say that? These days around, there are a lot of quantitative hedge funds or some trading companies with a large group of professionals who study market pattern/price action every day.
When there is a small deviation in the market, or some unbalanced supply and demand are found, then their funds will automatically go in or out of the market. At this point, you and I may still be looking at the chart.
First of all, these funds have a large amount of capital and fast algorithms in all aspects. In some funds, data engineers not only do technical analysis, but also do "text mining", which is to mine the text in the news and then convert the text into a signal and then participate into trading. This is the obvious difference between retail investors and institutions.
There are two ways to affect stock prices in the stock market. It may be determined by supply and demand in the short-term or value-determined in the long run. Therefore, over reliance on technical analysis for medium and long-term investment may not be like a great idea.
Fundamental analysis can be divided into three levels, macro level, sector level and company level.
At the macro level, most of the reasons for the rise of the stock market is dependent on how much money there is in the economy. We can look at the following chart, comparing the amount of quantitative easing by the Federal Reserve with the US stock market. This clearly shows that if money is continuously injected into the economy, then the stock market will also benefit from it.
At the sector level, generally speaking, if the sector's prospects are better, the stocks in it will basically benefit on average. There is actually a big difference between sectors and sectors. We can look back at 2020, and the technology sector has grown by more than 30% while the energy sector has fallen by 30%.
Therefore, choosing a sector is more important than choosing a company. In my opinion there are so many listed companies, I think it is quite difficult to understand all of them in depth.
When choosing a sector, we should always try to understand the cycle of the sector, such as pro-cyclical, counter-cyclical or the policy of the national government. If there's support from the government then the room for the sector to rise will become larger.
Then sector rotation. Sector rotation refers to taking money that's invested in one stock market sector and moving it to another sector. To do this, you simply sell stocks in one sector and then use those proceeds to invest in another. This may allow you to capitalize on a change in economic conditions and make higher returns.
The last is the company level. When I choose a company, it’s mainly based on its future profitability, potential and whether there are any growth points that can enhance the value of the company. For example, the AR headset that Apple might launch by the end of the year.
Then cash flow, I'd also look at the company's balance sheet, income statement and statement of cashflow and then find some different companies for comparison.
The most common comparison indicator is the P/E ratio. But keep in mind that if you compare the P/E ratio, it is only suitable for the same sector or sectors that are relatively similar in nature.
Finally profit margin. Generally speaking, the profit margin of traditional industries is about 20-30%. Different sectors have different operating indicators. For example, in the retail sector, its cash flow is very important. In the real estate sector, their accounts receivables are very important. Therefore, you cannot analyse with just one indicator.
This article was written by Soon Joo.
