21 Big Profit Ideas

For Small Retail Investors

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For Small Retail Investors

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21 Big Profit Ideas

For Small Retail Investors

Contents
Disclaimer:.........................................................................................................................................2
#1 - Listen to the Shoe Shine Boy ........................................................................................................5
#2 Invest In Small Caps Stocks..........................................................................................................6
#3 - Look For Insider Trading ..............................................................................................................7
#4 - Buying REITS Below Their Net Asset Value ...................................................................................8
#5 - Sell High Buy Low ........................................................................................................................9
#6 - Follow A Few Stocks You Really Know Well ................................................................................ 10
#7 - Look At Charts ........................................................................................................................... 11
#8 - Ignore The Media ...................................................................................................................... 12
#9 - Keep It Simple ........................................................................................................................... 13
#10 - Do Not Invest In Anything You Do Not Know ............................................................................ 14
#11 - Know Yourself ......................................................................................................................... 15
#12 - If Something Is Too Good To Be True, It Probably Is .................................................................. 16
#13 - Choose Passive Investing If You Do Not Have Time ................................................................... 17
#14 - Patience Is A Virtue ................................................................................................................. 18
#15 Qualitative or Quatitative Analysis .......................................................................................... 19
#16 - Understand the Power Of Compounding Interest ..................................................................... 20
#17 - Think Of Investing As A Sport ................................................................................................... 21
#18 - Differentiate Price From Value ................................................................................................. 22
#19 - Do Not Follow Gurus Blindly .................................................................................................... 23
#20 - Keep Your Biases In Check........................................................................................................ 24
#21 - Track Your Performance and Measure Your Returns ................................................................. 25
BONUS Stock Intrinsic Value Calculator .......................................................................................... 26

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21 Big Profit Ideas

For Small Retail Investors

#1 - Listen to the Shoe Shine Boy

In 1928 in New York City, or so the story goes, John D. Rockefeller was having his shoes
shined. The shoe shine boy, presumably not knowing who Rockefeller was, started
giving him stock tips. J.D. took his shoe shine boys advice but not in the way youd
expect.

He decided that if a shoe shine boy making a penny a shine was giving stock tips it
was time to get out of the market. He did and its the reason his family was able to
stave off the Depression, and continued to be one of the richest in our history.

Who is your equivalent shoe shine boy? Is he the taxi driver? Is he your colleague who
has shown sudden interest in stocks like never before?

The first tip is about increasing your street smarts by surveying the sentiments of the
people around you. When many people are optimistic about investing in stocks, it is
probably time to get out.

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#2 Invest In Small Caps Stocks

Big cap stocks are the favourites of funds, institutions and many investors. Due to high
demand for big caps, there is a premium to pay to own their shares. It is more
worthwhile to invest in smaller caps where they are often overlooked by investors, and
thus, undervalued. Many funds are not able to buy small cap stocks due to a few
reasons and we will only name two.

First, it is difficult for them to buy small cap because they have too much money.
Investing a portion of their funds would make them the majority shareholder of the
company. This is not something they would want.

Second, fund managers want to keep their job, as Peter Lynch said, "If IBM goes bad and
you bought it, the clients and the bosses will ask: Whats wrong with the damn IBM
lately? But if La Quinta Motor Inns goes bad, theyll ask: Whats wrong with you?" In
other words, it is not worthwhile for fund managers to risk their career on unknown
stocks, because like it or not, all stocks will come down in price someday. Since you have
nobody to answer to except yourself, buy small caps for bigger gains. Of course, most
small cap stocks are lousy in terms of fundamentals and you will need to learn how to
filter and invest in the right ones.

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#3 - Look For Insider Trading

Insiders of a company are the decision makers and senior management personnels.
They are normally the CEOs, directors, or substantial shareholders etc. They are the
ones who know best what's going on in the company.

If these insiders know that their company's shares are undervalued or there is a huge
growth potential for the company, they are going to buy their shares NOW while it's still
cheap relatively. They know they will profit handsomely when the share prices run up in
the future.

So, if these insiders buy substantially, it usually indicates that they have a lot of
confidence in their stock.

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#4 - Buying REITS Below Their Net Asset Value

It is easier to evaluate assets than to evaluate earnings. Assets are what the companies
already have while earnings will fluctuate going forward. However, not all assets are
good assets. Assets like investment-grade property and cash are good assets. Assets like
machinery and inventory are not good assets.

Of all the companies listed on the exchange, REITs have very good assets because they
hold investment-grade properties. One way to evaluate their worth is to take the
difference between their total assets and total liabilities. The difference is known as Net
Asset Value or NAV. Then you divide the NAV by the number of shares to know how
much each share is worth.

Lastly, you compare the NAV per share to the share price. The REIT is considered
undervalued if the share price is less than the NAV per share. Buying undervalued REITs
is one of the easiest ways to make money in the stock market.

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#5 - Sell High Buy Low

Most investors are very familiar with "buy low sell high", which work very well if a stock
is on an uptrend. We call it trading the long side of the market. Trading "long", or
buying, is when an investor buys a stock with the hope of making a profit when the
share price rises in value.

However, when stock prices are falling, most retail investors would just stand aside, do
nothing and wait for the next opportunity to long again. Prices tend to fall a lot faster
than they go up. You can make your profit much faster if you are able to participate in a
falling market.

This is where short-selling, or trading short, comes in and give you the opportunity to
profit in a falling market. It is the opposite of going long. Instead you sell at higher price
first and buy it back when it reaches a lower price to earn a profit. Hence the term, "Sell
high buy low"

For eg, you short-sell 1000 shares at $1.00 (value at $1,000), if the share price drops to
$0.60, you buy-back 1000 shares at this lower price (value at $600). Your profit would
be ($1,000 - $600) which is $400. You are able to short-sell via CFDs or through
Securities Borrowing and Lending (SBL)

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21 Big Profit Ideas

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#6 - Follow A Few Stocks You Really Know Well

"It is easier to follow a few stocks well than it is to follow a well full of stocks" ~ S.A
Nelson

Too many investors try to analyse and track far too many different stocks beyond they
can handle and it can lead to information overload. They feel that they need to
understand as many companies as possible, or else they will miss a good opportunity to
buy a good stock.

Nowadays, because of Internet, you can get access to news extremely fast and to keep
up with the ever changing daily events becomes almost impossible. By the time the
news reach you, normally it's too late already. Most retail investors like to follow
companies' news and react according to the news. Bad move. They tend to buy at the
top, got frightened when price falls and sell out at the bottom. Only to see price rise
again!

What you should really do is to just follow a few stocks... can be between 5 to 10 stocks,
whatever you are comfortable. Follow those stocks you know well, have keen interest or
have an advantage in. For example, you could be working in the F&B industry and you
have an in-dept knowledge on how restaurants operate. You can follow stocks that are
in the F&B industry because you know them so well that you have advantage over other
people.

Learn a great deal about them, know them inside-out fundamentally, sieve out the
potential winners and wait for the right timing to buy the stocks.

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21 Big Profit Ideas

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#7 - Look At Charts

After doing your research, you reckon that company ABC is fundamentally sound and is
a good stock to invest in. So when is a good timing to buy? This is where looking at
charts - commonly known as Technical Analysis (TA) - can be useful.

The chart will show the stock's price over time and TA can help investors anticipate what
is "likely" to happen to prices in the near future. Chart reading is about probability and
does not result in absolute prediction about the future.

However, it provides a useful tool for analysis. For example, a very common TA chart
pattern is called "double bottom". If the stock you are interested in is showing such
pattern, it may signal that price has reached a bottom and may reverse soon.

In short, Fundamental Analysis tells you "what" to buy and Technical Analysis tells you
"when" to buy.

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21 Big Profit Ideas

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#8 - Ignore The Media

Whether it is newspapers, mainstream financial websites or TV, the media's primarily

goal is to capture the audience's attention and create excitement. This is why if you
follow the media long enough, you will realize that they tend to exaggerate and take
things out of context.

The markets don't drop or rise 1%, they "plunge" or "drop sharply" or "soar", helping to
create fear or greed in the process. By the time you receive the information from the
media, it is OLD news already.

Listening and reacting on the advice from the media is a recipe for disaster. It will
definitely throw you off from your initial investing strategy. For example, because of a
"bad news" from the media, you sold away your stocks in fear when the fundamentals
are still intact. You need to have your own independent views and should not let the
media affects your emotions.

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#9 - Keep It Simple

Albert Einstein said, "If you can't explain it simply, you don't understand it well enough"

This quote is an excellent way to keep yourself in check. Can you explain your
investment to someone how it works, why you decide to invest, or why is it a good
investment? Would your partner find your explanation convincing? If you struggle to
explain, most likely it's too complicated and you aren't aware of the potential risks.

Just look at those mortgage-backed securities (MBS), collateralized debt obligations

(CDO) and credit default swaps during the 2008 Global Financial Crisis. They were
complex investments that most people had difficulty understanding them.

You don't need complex investments to generate good returns. Sometimes the simplest
ones (stocks, properties etc) are the best!

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#10 - Do Not Invest In Anything You Do Not

Know

A friend excitedly came up to me with insisting that I buy into Australian mining
company Redfork immediately. I asked him when he knew about investing in Australia,
his insight on the mining industry Down Under, and also his thoughts of the company's
prospects.

It turns out that he was acting on a hot tip from another friend and had no inkling
whatsoever. His first purchase has already made him some money and that is all that
matters.

It was then that I realized. The difference between Investing and Speculating is the level
of knowledge. An Investor knows what he is investing in. He knows about the industry,
the product. He knows about the company and the prospects. He knows about the asset
class and the peculiarities. He knows about the risk and reward, the upside and the
downside. He knows exactly how much his investment is worth, and consequently when
to buy more and when to sell. The Investor has sound reasons for making every single
investment.

Be an Investor. Operate in the know.

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#11 - Know Yourself

Remember the last time you bought a shoe without trying it on? Probably not. Even
though you have been buying shoes your whole life and know your own shoe size better
than anyone else, chances are like me, you try on every single pair of shoes before
buying. Because nothing is more painful buying a pair of expensive shoes and then
realizing that it does not fit.

Now try and recall the last time you made an investment. Have you ever paused for a
moment and considered whether the investment is a good fit for you, like the shoe, or is
it going to cause pain and more than a few blisters?

When it comes to investing, the majority of us take an 'outside-in' approach. We see

something with great potential and fantastic returns and waste no time jumping into it.
In fact it will be more beneficial to approach investing from an 'inside-out' perspective.

Look inside ourselves to find out what are our strengths and weaknesses lie, know our
own risk appetite and our own emotional strength, know our interest and our dislikes.
Only then will we be able to seek out the perfect investment for ourselves. Only then
will the shoe fit.

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#12 - If Something Is Too Good To Be True, It

Probably Is

If someone promises you super normal returns for a seemingly risk free investment,
would you do a double take? I would. Often I am seduced, and sometimes I even
considered parting with my money for a shot at financial stardom. But over the years I
have learnt to do a double take on my double take and rationally examine every good
deal that comes along with a healthy dose of skeptism.

If that heritage building redevelopment project in faraway Europe deal is really such a
steal, if that plot of land on the other side of the earth really has that amount of
potential to be redeveloped into a township, if there is really such great returns to be
made, someone who is nearer to the deal, more well informed than you and me and
richer than all of us combined would have jumped on it long ago.

Financial scammers are successful because they have one powerful weapon against us
that we willingly relinquish to them. They play on our emotions; our greed and fear. Just
because someone has made a lot of money and has been made an example should only
serve to put us on our guard more. Unfortunately more often than not we choose to be
greedy when we see the spoils laid out and fearful that others will get to it if we do not,
and that often leads to the ultimate downfall.

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#13 - Choose Passive Investing If You Do Not

Have Time
For the working class and small retail investors, investing has been touted as the way
out of the rat race and towards financial freedom. The allure of multiple passive income
streams drive people to plunge headlong into the stock market.

However, many new Investors do not realize that a buy and hold strategy for stocks is
hardly "passive". Yes, an investor could pick up stock tips and punt the market without
much knowledge or understanding of the fundamentals of the company. But to pursue a
sound and sustainable and successful stock picking strategy requires much effort and
time.

There are Annual Reports to peruse, analysts recommendations to take into account,
fundamentals of the company to consider and other stocks to benchmark against.
Market conditions and situations within the industry change with time and one needs to
remain in touch always.

A typical day for the world's greatest value investor Warren Buffet involves reading five
different newspapers and stacks of reports and trade journals. It is hard work, and
passive would be the last word one can use to describe this form of investing.

Fortunately for many of you who genuinely want to invest and grow your money
passively, there is a free lunch. Invest in an STI ETF. It has returned 10% annually over
the past decade, the charges are low and most importantly, it is a totally hands off
investment suitable for busy people with no time to monitor their portfolio on a regular
basis. Go for it now!

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#14 - Patience Is A Virtue

So you did your research, analysed the financial report and determined that the stock is
undervalued. You bought the stock, feeling that it is going to be a winner for you. Now
you are waiting in anticipation for the price to rise.

A few months have passed but your stock price is not moving at all. You begin to
question yourself whether you made the right decision and your patience is waning.
Then there are bad news in the market, you are shaken and you sold the stock. Sounds
familiar?

Sometimes an undervalued stock can stay undervalued for a prolonged period of time
before analysts uncover the gem. Major advances require time to complete. Your
holding period should be in terms of years, not months. The best investors understand
the importance of patience and it is one of the most difficult skills to learn as an
investor. Be patient!

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#15 Qualitative or Quatitative Analysis

Benjamin Graham mentioned that there are two ways to select stocks. The first way is
to conduct qualitative analysis on stocks. Usually, this requires the investor to
understand the business and be able to evaluate factors that are not quantifiable. For
example, the investor need to assess the capability of the management and the trends
of the industry the company is in, and determine if the company is cheap at current
prices compared to its future value.

The second method is to use quantitative analysis, which emphasises on the companys
past and present financial performance. The investor will usually make use of financial
ratios such as Price-to-Earnings and Price-to-Book to assess the companies, and invest in
them if they are selling below todays value. In this way, the investor does not need to
understand the business as detailed as the qualitative analyst.

Both analyses have their own merits and it is up to the investor to decide which suits
him better.

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#16 - Understand the Power Of Compounding

Interest

The secret to wealth is the miracle of compound interest. Even a seemingly modest
return can generate great wealth if you give it enough time. On the surface,
compounding looks insignificant and even boring. "So what if my investments give me a
6% returns annually. It's so little", you may tell yourself.

In the short term, it doesn't make much difference. But in the long run, the difference is
huge!

For example, if 20 year old John makes a one-time investment of $10,000, in an Index
fund which generates an average of 8% return annually, and if he never touches the
money, the $10,000 will grow to $320,000 by the time he retires! Compounding interest
is more powerful than you think!

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#17 - Think Of Investing As A Sport

Can you beat Roger Federer at tennis? If not, what makes you think you can waltz into
the market place and expect to beat the professionals at their own money game?

Many retail investors and traders see the markets as an easy and accessible way to
make money. Everyone thinks they can invest and trade their way to financial freedom
and great riches in the shortest possible time. Seldom do people consider what they are
up against. The fact is, every retail investor is up against the very best in the business.

Think of investing as a sport. As with all sporting endeavors, the harder one trains, the
better one would be. But if one is not prepared when the bell is rung, one can only
expect total decimation in the arena. By training, we mean get yourself educated - read
widely, attend courses or seminars (can be free or paid), have a mentor and gain the
necessary experience.

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#18 - Differentiate Price From Value

We all know what price is. To find the price of a stock one just needs to get online and
you have all these prices coming at you instantaneously. Despite the speed at which
they change, the price of a stock is absolute. At any one time there can only be one
price. It is absolute, it leaves no room for interpretation and it requires no further
processing.

On the other hand, the value of a stock is subjective. One can determine the value of a
company based on its net assets or a projection of its earnings but even within these
two pathways there are many intricacies to grapple with. At any one time there can be
many interpretations of value, and hence any determination of value requires additional
processing and thought.

And precisely because it is so tough to determine value, that many investors overlook or
disregard the value part of the equation. Warren buffet famously quotes - price is what
you pay, value is what you get. Learn to recognize value and you will never go wrong in
the long run!

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#19 - Do Not Follow Gurus Blindly

At an Investment fair an elderly investor took Jim Rogers to task about his stand on the
China stock market. Rogers, he claims, was bullish on Chinese stocks since many years
ago, but instead of making meteoric highs, the Shanghai Composite Index is now
languishing at half of its peak. The investor has taken Rogers' advice to buy into China
but has since cut his losses.

Rogers was visibly perplexed as he addressed the issue. He has bought Chinese stocks
four times over the years, but till date has never sold a single Chinese stock, he
explained. He bought them for his little daughters and the time frame on this
investment stretches for decades. To him, sluggish performance of that market now is
but a blip. By adopting his stand on the market with no regards to the time frame, the
elderly investor painted himself into a hole and suffered losses as a result.

In the same breathe, Jim Rogers urged all investors present not to follow gurus blindly.
Gurus can tell you what to buy and when, but chances are they will not be around to tell
you when to sell (or not sell). Now that is a piece of advice worth following!

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#20 - Keep Your Biases In Check

Our brains are constantly processing information and drawing conclusions and based on
the stimuli we are exposed to. The amount of neuro activity is mind boggling. Over the
years, we have learnt to apply cognitive shortcuts and heuristics to information
processing and decision making. These shortcuts reduce the load on our brains and
make our lives less effortful.

Unfortunately these shortcuts lead to biases that cause "incorrect thinking" at times.
Experiments exposing participants to an initial random number and then asking them to
provide an estimate for something else found that exposures to higher random numbers
lead to higher estimates. For no reason other than a random exposure, participants
become anchored. Psychology experiments have also discovered that human beings are
more prone to avoiding losses than acquiring gains.

Understanding the anchoring effect brings us closer to the true value of our investment.
Understanding the loss aversion bias frames the way we see profit and losses and allows
us to make sounder investing decisions.

We are guilty of being affected by these biases every single day. Understand them and
keeping them in check will make us better investors!

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#21 - Track Your Performance and Measure

Your Returns

As an investor, you are essentially the manager of your investments. You want to know
what is working and what isn't. You want to know how well your portfolio is performing.
You want to benchmark it against other possible options.

Unfortunately precious few retail investors actually know how well exactly their
investments are doing. Many choose to glorify their wins and forget their painful losses.
Others see it as too much of a bother and disregard this important aspect.

As the old management adage goes, "You cannot manage what you cannot measure".
Start tracking your performance and make yourself a better manager of your
investments now!

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