Strategies of the successful investor part 3:Do not follow the herd

If there is one thing that I have learned during this 2008-2009 recession is that following the herd is pointless and a waste of time. Hence while everyone was selling in the stock market and buying in the money market, I have been buying stocks on the cheap. the same thing goes for the bond market.

The reason for this is an old instinct from when humans were still like animals, the crowd effect or the herd effect. This instinct meant that when you see a whole bunch of people running in a certain direction, then it must mean that they are running away from a danger and as a result you must run with them.

So how does this translate in the investing world? If you see a lot of investors buying or selling a particular stocks then it must mean that they are right and as a result you must buy that stock too. The second reason is that as people buy that particular stock its value increases and the gain or return on investment increases. As the gain increases those that have not yet bought the stock would be pressured to buy the stock either by the investors that they work for or by their employers. This is a vicious cycle that few could resist.

Guest what I have done it and you can do it also.  How so you would ask.

First of all the only way you could make money on such bull market is to buy it first when it is cheap and then selling to the herd followers when has risen to a high enough value. I would say that this is difficult to do. If you have seen it the surely a lot of people would have seen it. However if you have been able to see it early and get on the bandwagon just wait until it is high enough and wait for some time and sell it so someone else. Do not wait for the top of the ride because when people realised it is all bullsh_t then they would be selling and you would not be able to get your money back.

Apart from such herd following tactics I have my own way of buying stocks. Research is important and as a result you must educate yourself in economics and some basic accounting. Certainly you can watch TV or read newspapers but only to get information on the economy and on spotting trends in the economy that you can exploit by investing in companies that are in that sector.

When you have learned some basic knowledge you can use that knowledge to research companies. You would analyse their financial statements, their future probability and the market they are in. For example you could see that KodaK and their future in the photo reel market is a dead end as they are entering the digital photography market fast enough.

If you want to go into mutual funds, index funds and Exchange traded fund then you could use your knowledge to research the different companies that are offering them. You would make research on historical return, management, commissions and fees and so on.

Very often you would come across the internet websites that promises to teach you how to invest and as a result you would obtain great return. Most of the time you would have to buy a report or a document that promises to give you tips on how to invest and as a result you will make great return. Most of these are false promises and a complete waste of money. Imagine if you have discovered a stocks that promises great return, would you make it public? Certainly not! you would secretly buy it little by little so as not to arouse suspicion. You would keep it a secret and earn the return alone. That is why you should keep to your plan and not buy all the crap documents that are being sold on the internet.

Sure I read on the internet but only information websites like the BBC, Yahoo money or famous economics like Paul Krugman. These website will give analysis on the economy as a whole and will give you indications on what the economy is going to do.

The last advise that i would give is to make your own research and follow your investment plan. Never never follow the crowd. Stick to your investment plan and to you asset allocation and you would stay on tract to meet your objectives.

strategies of the successful investor part 2 :Time is your best friend

As I have written in an earlier post, time is the best friend of the investor. As we have seen in the first post you will have to draw up a plan. this plan will contain information about for objectives, risk tolerance, risk tolerance and asset allocation.

However the time that you have will impact on these four aspects on you investment life.

I am going to take the examples of a person saving for sending his child to university and for retirement and talk about how the time aspect would affect the achievement of these objectives.  

Suppose that a person who is 20 years old want to retire at the age of 60 years old and also to save money for a child who has just been born. Such a person has 40 years to grow his portfolio for his retirement and 20 to send his child to university. Such a person has time on side.

This person can afford to be risk averse and conservative and invest in a greater amount of safe assets. This person can also invest a smaller amount  of money every month because he has the advantage of compounding. Compounding will ensure that his money will grow with time even with small monthly investment. Such a person would be able to achieve his objectives with no problems.

On the other hand if a person is 35 years old and want to retire at 60 years old and want to send his child to university in 10 years then this person will not have time on his side. This person will have to invest more aggressively and cannot afford to be risk averse and must choose assets with greater riskiness but with greater return. Such a person will not also have the advantage of compounding and as a result will have to invest more every month. This person may have no choice but to delay retirement or the time set to attain the objectives.

The lesson that we can learn today is that if you have time on your side then you are a lucky guy. But if you do not have time on your side then it would be harder.

Strategies of the successful investor Part 1: Set up a plan

This is the first part of a series of post which would be about the strategies of the successful investor. As we have previously discussed the only way to be secured financially is through investing. However there are some very important things the the beginner investor must keep in mind so that his portfolio will grow with time.

A plan is the cornerstone of your investing journey. The plan is simply a document that would guide you and make sure that you do not get off-track.

It contains firstly your objectives.Each person may have different objectives and to state them clearly and the time available is crucial to your plan. You may want to retire in 35 years or to send your child to college.

After having written your objectives you would thus try to determine the amount of money that would be required to achieve these objectives.

After having identified your objectives and the money that would be needed, you would then be able to identify the return that would be required to reach that amount of money. Your portfolio will thus have to have a certain annual return so that you will be able to reach that objectives. If you cannot reach that return then you would be unable to achieve your objectives.

However the return is also related to another term and that is your risk tolerance. This is related to the different component of your portfolio and the return of your portfolio. You have to understand that some investment instruments are risky in that you can lose your money especially if the company go bankrupt but if you can hold on to it and the company stays afloat you would have greater return. The higher the riskiness and the greater the return. Some people have a low tolerance and as a result would want safe assets. However safe assets would result in low return. Hence if you want higher return you would have to invest in riskier assets.

After having chosen the return that you want and the risk that you are prepared to tolerate you would thus be able to choose the investment instruments that you need to invest in to achieve the return that you want. 

What is a money market?

The money market is one of the markets that companies and government used to raise funds. What is special about the money market is that securities with a maturity of less that one year are traded in it.

In general all of the money market are debt instruments issued government, banks and companies. These instrument are very liquid and quite safe. As a result because of this safety they have a relatively low return. You would understand that generally instruments that are quite risky have higher yield and vice versa.

The following are the different money market instruments that you can invest in:

1. Treasury bills
2. Banker’s acceptance 
3. Negotiable certificate of deposits
4. repos and reverse repos
5. Commercial papers
6. Eurodollars

However compared to the stock market whereby individual investors can buy individual stocks, money market instruments are issued in high denominations and as a result it is quite difficult for individual investors to but them. The only way for investors to invest in them is through mutual funds and exchange traded funds. However if you have a lot of money you can buy treasury bills from the reserve bank offices.

These money market instruments are like instruments in the bond market in that they are not traded in a stock exchange like shares but are traded over the counter.

There are various reasons for an investor, a bank or an institution to buy securities in the money market and they are as follows:

1. The securities in the money market are very secure and as a result investors that have some money for a short period that they cannot lose prefer to invest in the money market and get a small return until they need the money. They can when needed sell the securities easily to get their money back since money market securities are highly liquid.
2. Some banks are obliged by law to hold a certain amount of money market securities to use as collateral in repo transaction with the central bank. These banks must also have assets that they can easily convert to cash in case money is needed to satisfy liabilities. Since these money market securities are highly liquid they are easily sold in the secondary market.
3. Some type of financial market institutions like short term insurer need by law to hold a certain amount of highly liquid money market instrument so that they can   meet their liabilities.
4. Some investors are risk averse and as a result they have a low risk tolerance. These investors prefer to forgo the high return associated with stocks and prefer to hold safe money market securities that however have low return.
5. Investors and financial institutions that have excess cash, for example after selling stocks and bonds that are falling in value or are about to default and are waiting to invest in other securities, can invest in money market securities and have a small return instead of holding cash with no return.

There are also many other reasons for investing in the money market and as time go by I would increase and refine the list above. So if any of the reasons is appropriate to you then go ahead.

However keep in mind that in the long run investing in the money market is not advised as the return is low. However there is a type of investing strategies called the permanent portfolio that relies on investing in the money market. I would write on it in another post.

How to borrow from prosper?

I must say that ever since Grameen started giving small loans to people, no other organisation has been able to replicate that except may be prosper.

What is prosper?

Proper is an organisation that link those that have money to those that needs money. In a way it is a financial intermediary but with one difference. It is not like one of those greedy banks that give loans at high interest rates and give small interest to savers. It gives the person with money control over who receives his money and at what interest rate. It also allows borrowers with good credit rating, but who have not been getting loans from banks recently, to get some decent loans at reasonable interest rate.

How to borrow from prosper?

In order to borrow from prosper i must be clear from the beginning that not everyone that are not receiving loans from the traditional banks will get it from prosper. If no body is giving you a loans it may be because you have not been paying your loans properly in the past and have a low credit rating. Prosper lends to people with credit rating 520 and above. If you have a lower credit rating you might want to improve it until you are above 520. I will write about credit rating and improving it in future post. If you qualify for prosper read on.Step 2. Complete a loan application.

You will start by filling out a form at prosper.com. You will give all your details and prosper will use these details to check your credit rating. Based on your credit rating prosper will classify you from AA - the best through E and HR (high risk). If you have a rating below 520 your application will be rejected.

Once you have been approved and registered you can now apply for loans. You will fill a form telling lenders how much you want, at what interest rate you are prepared to borrow and what you will do with the money. It is appropriate not to lie and to tell. Since many people lend after having read the application, the better your story the better your chance of getting the loan. Remember that depending on your credit rating, the interest rate at which people are prepared to lend to you will vary. So follow the table provided by prosper. If you deviate too far from the suggested rate, lenders will not lend to you.

Once you have filled your loan application, it will be listed. People will bid on portions of the loans. This is better because if you default then the loss will be shared by many lenders. This s called diversification. After 10 days if the loans have been fully funded then your loan will be approved. The interest rate will be the average of the interest rate that the lenders are offering.

After the loan has been approved the money will be credited to your account and prosper will charge a fee ranging from 1% to 2% of the loan.

After the loan has been granted you will have to pay every month the same amount for three years. If you default then it means that the last company that was prepared to lend to you is closed to you now. So be careful. Be on time.

If you have any experience to share with us or a question leave a comment below.

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How to calculate compound interest on an investment

This calculator will enable you to calculate the compound interest on an investment. This is applicable if you invest a sum of money but do not remove the interest for use. As a result you will earn interest on the interest that was earned in previous years.


This is in contrast to simple interest that you earn when you remove the interest for spending and do not allow interest to accrue on it.

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I hope that this calculator has helped you. If you have any question or idea about any calculator leave a comment.

What is compounding?
How to calculate the interest in your loan
Fixed and variable interest.
How to calculate simple interest on an investment
Simple and compound interest

How to calculate simple interest on an investment or a loan

This calculator will enable you to determine simple interest on a principal and the amount that will be left after a certain time. This is applicable in case you remove the interest for spending.

For example if you have a fixed deposit and every year you remove the interest and spend it.

Please click on "click to edit" and then enter your information.



How to calculate the interest in your loan
Fixed and variable interest.