The Stock Market Secrets

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In last month's newsletter, I wrote about the Million Dollar Secret and the response from our members have been overwhelming and inspiring. I know some of you are looking forward to this month's tip and I told myself that I better give you a good one this month. After much consideration, I decide to write about one important part of the Million Dollar Secret - The stock market.

Last month alone, I made more than S$10,000 from the stock market. This month, till now, my portfolio is up by another S$20,000.

Do I have a secret formula to trade stock? I don't.

Am I a stock trading expert? Trust me, no one is.

Have I lost money in the stock market? Always!

If so, why do I still make 5 figure income from the stock market?

Simple, because I understand the Million Dollar Secret PLUS the Stock Market Secrets.

Here're the secrets in application:

As you know, we are now in the booming economy (this is very obvious in Singapore and USA). In a booming economy, you don't need to be a guru to pick a winning stock. The only question is, which stock can give you the most return in the shortest time. To answer this question, you need to understand the mindset of institutional investors.

Institutional investors are typically fund managers or people who has lots of money, enough to move the market. Like it or not, the stock market is really a manipulated market. Our job as an individual investor is to follow the big move and profit from there.

At the initial stage of a booming economy, institutional investors will buy up the stocks of the heavy-weights (we call these stocks blue chips). So the blue chips will be the first to appreciate in price. Let's say for property stocks, if you have invested in companies like Capitaland and Keppel Land last year, you would have easily made 100% return. But now, blue chip stocks have become 'expensive'. Therefore, these investors start to move their funds to cheaper stocks such as Wingtai, Orchard Parade and even CSC.

When will the bubble burst is everybody's guess. But one thing for sure is it will burst or there will be a major correction, it's just a matter of time.

Knowing the fact that you are going to lose some money if you want to play this game, what you need to do is to practice good money management. There is only one money management system that I follow religiously - Sell the stock when it falls10% below your purchase price or the highest daily price, i.e. set a 10% trailing stop loss. This means if you invest today, the worse case scenario is you lose 10% of your capital. But the upside is the bubble burst after you've made 20% gain. In that case, you are still up by 10%.

So how do you know when institutional investors are moving in to a particular stock?

It's simpler than what you think.

When institutional investors buy up a particular stock, they have to buy in huge quantity and this will typically result in a price surge. Through technical analysis (Yahoo! Finance offers quite a good technical analysis tool), you can easily see this volume and price surge. This usually marks the beginning of another big move. Go to Yahoo! Finance and check out stocks like CoscoCorp to see what I mean. Conversely, when institutional investors sell out a stock, they will sell in huge quantity, resulting in a price dip. If you see this happening, it's better to stay away from this stock.

Institutional investors are not speculators (neither should we be). When they move into a stock, they will hold it for a few months, if not years. During this period, more institutional investors will follow suit, resulting in more volume and price surge. This is how you ride the wave and make handsome profit from the stock market.

Before I end this topic, let me quickly run through with you a few things that many people do wrongly when it comes to stock investment. Just make sure you don't do them!

1) They sell their winning stocks for 10-20% profit and keep their losing stocks, saying that the price has reached its bottom and going to reverse soon. (This is a silly thought. Assuming you are 50% accurate in choosing a winning stock, if you make just 20% from each of your winning stock and lose 30% on the other stocks, your net profit is negative. What you should do is to make 50 - 100% from your winning stocks and cut all your loses at 10%.)

2) They use average down approach, i.e. they may buy a stock at $2 and when the stock price fall to $1.50, they buy again, thinking that they will get a cheaper average price. This is nonsense. A successful investor, on the other hand, use an average up approach, i.e. he will buy a stock at $2 and when the stock price increase to $2.50, he buys again.

3) They see the stock market as a speculative game, similar to gambling. Their mentality is to bet, make some money and bet again. If that's your mentality, you will never be rich. You can make a few thousand this month and lose your shirt tomorrow.

Despite of all the tips I've shared with you, you should still look at the fundamental of the business and ask yourself a logical question "Will this company make good money in the future?"

It doesn't take a genius to predict if a company can make money in the future. Simple common sense can tell. For example, with the current property boom, who do you think will benefit the most? The developers of course! Another example is our Singapore stock exchange, SGX, which is also traded in the stock market. Do you think SGX can lose money? I doubt it. How about ChinaAviationOil? As long as they don't speculate in Futures trading, oil business will always be a profitable business.

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