My first baby steps in stocks investment

After considering that putting money into bank savings account and unit trust funds (more discusssion on my experience with unit trust funds in another later post) are not very lucrative in generating returns, I embarked on exploring investment in stocks. Being wary of the dangers and risks of the stocks market (from seeing how my father has lost money in his stocks investment), I decided that the best way to approach the stock market is to be educated in stocks investment. Thus, I began to visit the library to borrow up books on stocks investment. I recall my friend who was my financial consultant told me about this guy Warren Buffett who is very successful in stocks investment. I then began to keep a look out for books written about him and his investing approach. I also searched online for articles written about him and his investment approach.

Warren Buffett is a really excellent legend in investment. He managed to compound his returns from stocks investment at a high rate of around 23% consistently over a period of at least 30 years, a feat not easily achieved by many investors. After being amazed by this excellent track record of him, I began to study his investing methodology carefully. He is a value investor who does value investing. Value investing is buying stocks at below their intrinsic value hoping to pay less and get more returns out of the investment. Warren Buffett was influenced by his mentor Benjamin Graham who is known to be the father of value investing to see the worth of value investing.

After reading up from some books and the internet about Warren Buffett and his value investing methodology, I was still a bit hesitant about entering the stocks market, still not able to overcome my fear of the possibility of losing money. During that time, my financial consultant friend also introduced me to a virtual stocks website. I decided that I shall try out stocks investment with this virtual website. Afterall, there is no real money involved in such virtual stocks website. I finally started my hands-on experience on stocks investment with this virtual stocks website.

In this virtual stocks investment website platform, one can try out many things without fear of losing money since one is not playing with real money. I recalled I was given $50k virtual money. It was around May 2008 that I started playing this virtual stocks website. I noticed how fellow players in this virtual website made or lose their money. I found that those successful ones actually bought only one or two companies stocks, but bet large number of shares in just one or two companies. When the stock price rose a little bit, they made lots of money since they were holding a large number of shares. Those that diversified into many stocks holdings (more than 5) had mediocre results from their investments (as some stocks rose while others sank in prices which even out their profits). However, those that focused on only one or two stocks also saw the most loss when the stocks sank in price. So, betting heavily on less stocks can boost one's returns as well as risk big losses. To prevent this from happening, I also noticed successful players immediately sold their stocks if the stocks has fallen by a certain amount (which later I found out they were working based on principle of cutting loss) to prevent risk of making big losses. So, with a strict cutting loss principle in place plus a focused approach (buying only one or two stocks), those players tended to be more successful over a period of time.

The above was my learning experience from playing the stocks market virtually. I stopped playing with this virtual stocks website sometime in late June 2008. This virtual stocks website exposed me to playing the Singapore stocks and I at least got familiar with the different names of the companies that were traded on the Singapore stocks market. This experience paved the way for me to start off my adventure with real stocks in the real Singapore stocks market come late June 2008. I finally started a trading account with a local brokerage firm in late June 2008. All excited, I began to buy my first real baby stocks in late June.

To be continued..........

Discussion points:-
Many of my prior investing experiences did not make sense to me then until later when I aligned my experience to what I know in theory or practise.....for example, Warren Buffett adopts a focused investing approach investing heavily in only a few top holdings which he saw the highest potential while less funds were held in less promising stocks. I now realised this focused approach was already displayed in the successful players mentioned in my virtual stocks investing experience who invest heavily in one or two stocks. But their way of playing is on short-term basis while Warren Buffett's focused approach is more robust in that he analyses and only put his funds into excellent businesses and he wishes to invest long term in such few excellent top holdings of his.

Also, it was only later that I learnt about the principle of strict cutting loss which was already displayed in the successful players of the virtual stocks who sold their shares immediately when the stock price had hit a certain cut loss percentage below their holding price. This was to prevent them from incurring large loss since they betted heavily in only one or two stocks.