Why You Should Start Saving Now

Nowadays, the youths don't see the importance of saving early. And I guess, it's hard to see it because society moves so fast. It's hard to take a step back and do something to reap the long-term benefits.

I am going to try to help you understand how saving early can have a pretty big impact on your financial health down the road with a simple example.

Imagine that there are 3 person, Mary, John and Tom. I know, I have no creativity, but bear with me.

They are all 25 years old. They all save $1000 a year and they all currently have $10,000 in their bank account. Let's assume that the interest earned from their respective banks are the same at 0.50%

Mary spends all her annual savings buying her favourite bags. Givenchy, Balenciaga, you name it, she buys it. (Okay, I know $1000 can't really get you those bags but assume she gets it on carousell or something.) She only realises that she better start saving after year 20 years, when she's 45 years old.

John is the kind of guy that doesn't spend on much now, he wants to save up for a big purchase in the future. Perhaps a nice watch, a down payment for a car or a great holiday getaway. He saves every year till he is 45 and starts spending all of them.

Tom on the other hand is a no nonsense guy, he saves every year without fail. He plans to retire comfortably and knows the importance of compounding. The goal is to be like Tom.

I have done up a simple excel spread sheet to help you visualise the effect of these 3 different saving pattern.

You can see that at the end of 40 years, Mary has the lowest amount of money. Even though she saves the same amount of money as John. The only difference is that she spends first then saves later, while john saves first then spends later.

Due to this tiny difference, John has about 7% more savings than Mary.

Tom's saving pattern is basically the combination of Mary's and John's. He saves for the first 20 and the next 20 years combined.

Tom has a whopping 70% more savings than Mary and 59% more than John.

And this is only at 0.5% interest rate. When the interest rates start going up, the difference between the savings amount will be amplified.


You can see a chart below to better help you see how their savings move with time.

I have attached the excel spreadsheet for you to experiment with it.

You can download the excel spreadsheet here

Feel free to change the:

• Initial Capital
• Interest Rates
• Individual Amount Saved
• Their names if you don't like them

Till next time,

Cheers.

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Why Stop Losses are Counter Intuitive

(Source: Forbes)

I'd like to start out this article with a personal story. When I first started trading, I made one of the worst mistakes any trader could make, which is to not adhere to your predefined stop loss level. I would enter a trade, if the trade went in my favour, I'd start to move my stops to tighten it. But if the trade went against me, I'd start adjusting the stops to make sure that I wouldn't get stopped out. (You're probably cringing)

If you are new to trading and you're struggling with sticking to your stop loss, keep on reading.

I ended up losing more than expected, and closing winning trades way too early. Perfect recipe to wipe your account out. As humans, we are psychologically predisposed to be excited when we see the small gains. But when there is a losing trade on hand, we become optimistic and hope that it will eventually reverse. Its known as prospect theory people value gains and losses differently.

A simple example to demonstrate this theory would be the following scenario:

Imagine if you could either have $100 now or a 50/50 chance of either getting $0 or $500. I'm pretty sure most of you would just take the $100 although logically, you should pick the second option.

I think I might have a solution to help you cope with sticking to stop losses.

The term "Stop Loss" has a negative connotation to it. It makes us feel like we've made a mistake.

"Stop playing with your gameboy!"
"Stop watching tv!"
"Stop adjusting your stop loss!"

Just things I've heard my mum tell me growing up. Okay, maybe not the last one, but you get where I'm going with this.

"Loss" is pretty self-explanatory.

So instead, let's rename "Stop Loss" to "Start Save". Adhering to the stop loss levels enables you to prevent additional losses saving your capital. It also gets you out of trades that are not going in your favour and frees up your capital for other opportunities that might present themselves.

I hope this has helped you to understand why following your stop loss start save level is crucial to trading.

As always, happy trading.

Cheers.

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Why Starhub Ltd is a BUY

I recently finished an equity report with my group mates and the target company is Starhub Ltd.

The current price of Starhub Ltd as of the time the report was done was $3.61, Our target price is $3.90 which equates to an upside of about 8.3%

Below is a snippet from our equity report, feel free to take a look at the whole report that can be downloaded here.

P.S. "Cerebral" is just our group's name and not an actual company or firm.

Investment Summary 

 Emerging 4th Telco likely to meet operational challenge 

 The push for a 4th mobile network operator (MNO) in the local market has managed to attract two bidders, MyRepublic and OMGTel. Upon announcement of the news, Starhub’s share price declined to reflect this information. However, under IDA’s requirements, the successful bidder will have to fully develop the mobile network infrastructure by September 2018. We believe this poses a challenge for the current bidders, since neither of them has direct expertise in building a full network. While the two bidders have promised low prices to gain market share, this notion is likely to be discouraged by the high initial investment outlay to rollout the network nationwide, at least in the early periods. Therefore, we see that there will be little or no threat to Starhub’s revenue at least in the 4th telecom’s early stages.

 Starhub is Mispriced Due to China’s Devaluation 

On August 10, 2015, China devalued their currency that caused a large selloff in the equity markets including the Straits Times Index. Starhub’s share plummeted 13% following the announcement of the devaluation as investors sentiments shifted. However, the fundamentals of Starhub has not changed which leads to the conclusion that the stock is currently undervalued and should correct itself in the short-term.

 Hubbing Strategy Shifts Focus to Enterprises 

 Starhub’s hubbing strategy focuses largely on home consumers in the past. The recent shift to concentrate more on leveraging its growing enterprise customers to gain consumer sales indicates a lower acquisition cost and higher retention rate. We foresee that this strategy of integrating their various revenue streams will positively impact the company’s performance because there will now be lower volatility when it comes to profit.

View the full report here.

As always, happy trading.

Cheers.

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Why Do 90% of Traders Lose Money?

You've probably heard this phrase and because of that, you felt that the stock market is against you. There are so many books out there about investing, why is it that so many people still make losses in the long run?

In my opinion, the books out there can only teach you the technical part of trading and investing. Just like the stuff I am studying in school. Everything I learn is considered knowledge and information. But what sets you apart is how you use this knowledge and apply it to the real world situation.

Secondly, people let their emotions get the better of them. Trading has a very psychological effect on humans. Greed and fear of losses affect how we trade, but in order to make money in the stock market. We have to ignore those human instincts and stick to our individual trading plan.

Now I am not saying that if you are a emotionless trader, that guarantees profit. The market will against you and it will do it often. What you have to do is to limit those losses and in the long run, you should make a profit. Even if you don't make money in the first month, you have to keep trading according to your plan!

I say this over and over again because I feel that it is the single most important advice I have ever received.

Some people get emotionally attached to their trades. They feel that they have a need to be right and they cannot accept the fact that the market has not moved in their favour. I am guilty of this at times. Sometimes the trade setup is perfect but yet, when I enter, the market decides to go in the opposite direction leaving me stranded in disbelief. (That's why stop losses are important!)

The last reason why traders lose money is due to the fact that they believe trading is simply gambling. Making money is as simple as pressing buy and sell and hopefully they are right. If this is the mindset you adopt, I suggest you stop trading and start gambling instead, you can save the brokerage fee. 

Do not let the title affect you when you trade. Ignore this statistic and just remember to.. you guessed it. STICK TO YOUR PLAN.

As always, happy trading.

Cheers.

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3 Reasons Why You Should Not Paper Trade

Before I begin, for those of you who do not know what paper trading is, it is basically trading on a simulator.

Investopedia defines it as 

"Using simulated trading to practice buying and selling securities without actual money being involved."

Shouldn't it be a good thing to practice with virtual cash before moving on to the real thing? I beg to differ. I will share with you 3 reasons why I think paper trading is not just ineffective in teaching you how to trade, but also detrimental.

Learning To Deal With Losses

When you make a loss with virtual money, it is not even remotely similar to making a loss with your own money. The psychological stress you face when you see an unrealised loss in your account can make you do things you might not do if it were fake money.

When you make a loss on the virtual account, at the back of your mind, there is this "safety net" that is telling you that you can always restart and try again. Try telling yourself that when you have are actually at risk of losing your capital. You can easily brush aside losing virtual funds, but no one ever forgets losing real money. 

One must learn how to deal with losses properly and the only way to do that is by actually losing real money in the market. There's no substitute for that.

Risk Management

This is kind of related to the first point. Without that fear of losing money, paper traders will be more willing to take on bolder decisions, make high-risk decisions and even trade outside their trading plan. Over time, these can become bad habits when transitioning to trading with real money. If not, they will change their entire strategy to fit their risk level. Either way, what have they learnt?

Unrealistic View

For those of you who play Zynga poker, you know that it is all too easy to go all in with $10000 and earn a huge profit. But would you really go all in with $10000 in real life? It is the same with paper trading. Trading with $10000 virtual funds is not the same as trading with $10000 real cash. It simply isn't. If you paper trade for too long, I can assure you that when you transition into a real trading account, you will be making drastically different decisions and there will be a lot of conflicts with your trading strategy. 

Of course, there are benefits of paper trading, but I believe that one should only use it to get familiar with the functions of the platform and how everything works. Once you get comfortable with the platform, move on to the real account. If you are afraid, risk lesser. It is still better than paper trading for a long period of time. 

Just like life, failure is inevitable. But the point is to learn from it and avoid making the same mistake twice. Similar to trading, making mistakes and losses are all part of the process. How you deal with it and incorporate it into your trading philosophy and strategy is what makes the difference.

As always, happy trading.

Cheers. 

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