The share price is not only a function of the company's performance. It is also affected by the general market movement. Simply put, if the general market is going up, it is likely to have positive impact on the share price and vice versa. In that sense, we cannot purchase price just by analysing the company. It is also important to have a sense of market direction to make sure that we are not buying the shares at the wrong timing. Of course, you need to carry out portfolio management to help you get it right!
Another aspects of portfolio management is this: It is almost impossible to get every single investments correct. Hence, the key for share investing is to make sure that we get more right than wrong investments to generate our target returns. A good analogy will be a badminton match. It is impossible not to lose a point. Hence, the art to win the match should be making sure that we get more point than we lose them! Again, Portfolio Management plays a part here!
There are 2 main steps to Portfolio Management as follows:
1. Economic Analysis
We conduct economic analysis to have a sense of the market direction. The market is highly correlated with the economic performance of the global economy, especially the bigger markets, namely US, Europe, China and Japan. We need to have a sense of how these economies are performing so as to forecast the market directions.
2. Portfolio Strategies
The following are the main activities that define Portfolio Strategies:
a. Setting an investment objective - It is important to know what you want to achieve from investing and will be great if you can even define it in numerical terms, e.g. 10% per annum. This is a good guiding principle for all your actions that follow up later. Without an investment objective is just like playing archery without a target board. You will end up shooting aimlessly!
b. Diversify over at least 30 share counters - If you are a retail investors, there are many risks of the company that we cannot manage. For example, how do you know if the Chairman is going to be healthy? How do you know if the company is not bribing officials? As such, the best way to mitigate all these risks is to diversify. As the saying goes "Don't put all your eggs in one basket!"
c. Diversify over time - Cheap shares can become cheaper when times are bad and vice versa. There are no known strategy that can help an investment to buy at the lowest and sell at the highest. As such, one of the best strategies to get consistent return is to diversify over time!
d. Think risk management and not profit maximization - Greed is the main factor that cause people to lose in the share market. When price is going up, the greedy ones want to wait to sell at a higher price and when the price is going down, they want to wait to buy at a lower price. With this mentally, very likely that the person eventually lose out especially over long term! A better mentality to adopt should be of risk management. When the price is going up or down, we should be thinking that the risk of correcting is higher now. We may not be maximizing our profits with such mentality, but we can be assured of a more consistent returns over long term!
e. Invest for long term - Logically speaking, investment returns will only come after a certain period. Just like running a business for example. You cannot expect to generate returns after starting the business for only 2 days! Very often, short term gains are due to opportunistic occurrence which is hard to predict. For consistent returns, long term share investing is likely to be a more assured way!