The worst investment experience is holding stocks that are not performing. While seeing other stocks that you could have invested in are moving higher. We always question the decision we made on the stocks we invested in & why we didn’t invest into those that are marking higher right now. All the stocks that you have researched about have good fundamentals too! But why are other’s investments actively moving higher but those that we invested in are not?

The reason some good fundamental stocks move, but some don’t is because fundamentals measure only the business performance. Which is often used to safeguard our investment by knowing the companies, at least, it will not go default in the short time frame. 

But when it comes to the performance of the stock price it doesn’t have a direct relation with the business performance. The force to move the stock price is not the “on-paper performance” in the financial reports, it is the demand & supply of the listed floating shares. 

We all know the basics of demand & supply, higher demand will cause the price to go higher if the supply stays the same. Example : Surgical masks during a pandemic were not enough of supply for the sudden spike of demand. Causing a box of masks to sell at RM 100 per box during early 2020, before the government intervenes. There were many opportunists during that time who were late into the trend and bought these masks at the high price, hoping to profit from the margin. But end up having to sell at the loss to cash out after the government intervenes & supplies increase to coup with market demand. 

This happens a lot in the stock market too, but the difference is many of us can see the surgical mask trend is just a short term hype for the huge margin. But many investors failed to see this in the stock market & constantly putting hope on the business fundamentals will lift the stock price higher. Without or didn’t know the big boys are selling their shares for distributions. 

We are not going against fundamental analysis or value investing. We are trying to share what influence the stock price is, not just the fundamentals of the companies, it is more of the big boys intention to increase the stock’s value (institutional funds, directors, shark, or whatever terms you like to use).  

For example : Some stocks have good fundamental value by the public, but the stock price is always not liquid like the chart below : 

***illiquid stocks**

This happens because the company shareholders are not providing enough supplies of shares to the market for the big funds to invest in. Big boys will not favour these kinds of stocks, if they bought 1 million units of shares from the shareholder. They can only sell the 1 million shares back to the shareholders & they will only want to buy back at the lower price. Which makes the big boys not able to make profit from the investment. (Selling in the market will cause the huge price fall because retail investors will be afraid to enter into low trading activities & volume stocks.)

This will cause the stock price to have little trending price movement due to the share supply being controlled. Investing in these kinds of stocks when they are not liquid will cost us a huge opportunity cost in waiting for it to become liquid. You can’t sell at the desired price that you want, forever queue at the price but no one is buying at such a high price. 

Forget about the dividends, a dividend is just the bonus when we invest into a stock. Whether you are a value investor or short term trader, the objective is capital gain. If you invest in a stock at RM 1 & gives you a 20% dividend yield at the time you invest. The stock price continued to trend lower to RM 0.30 in 3 years. Do you make profit from this investment?

Loss : Invested price RM 1 x 10,000 units

1st year share price falls RM 0.25 = -25%

2nd year share price falls RM 0.25 = -25% 

3rd year share price falls RM 0.25 = - 25%

Cumulative losses - RM 0.75 = -RM 7,500

Annual dividend assume RM 0.2 per share

1st year dividend = RM 2,000

2nd year dividend = RM 2,000

3rd year dividend = RM 2,000

Cumulative dividend received = RM 6,000

Total losses with dividends = - RM 1,500

Above calculation assumes the same dividend payout every year, in actuality it can be different every year & price down or up in a straight line method. 

You might find the losses are still bearable, but the opportunity cost that incur while you are losing in these 3 years will cost a lot. You can save your time & those emotional moments by entering at the right time, when the price starts to move higher. 

Profit : Invested price RM 1 x 10,000 units

1st year share price up RM 0.20 = +20%

2nd year share price up RM 0.20 = +20% 

3rd year share price up RM 0.20 = +20%

Cumulative profit from capital gain + RM 0.60 = RM 6,000

Annual dividend assume RM 0.2 per share

1st year dividend = RM 2,000

2nd year dividend = RM 2,000

3rd year dividend = RM 2,000

Cumulative dividend received = RM 6,000

Total profit with dividends = RM 12,000

Total opportunity cost RM 10,500, which is 105% of your capital. This is how much you will lose out if you invest at the wrong timing when the stocks are not ready to mark up. Also, how many years of dividend do you need to earn back the losses?

It is about the timing

Most of us know we can apply technical analysis to time the entry for long & short term trades. However, retail investors are losing confidence in the traditional technical analysis to find the entry point for their investment. If either you get trapped at the high price or not able to tell where the real bottom is, making the investors never ending average down their holdings. 

This is because the traditional TA’s signals when the price has reacted, instead of before the price reacts. For more read up on how to avoid & find the solution for not getting trapped in technical analysis, you may follow link below to our YouTube & blog : 

Blog : https://www.roundnsurge.com/news/identifying-the-true-chart-pattern-breakout-in-klse

YouTube :
https://youtu.be/0J1l-KRR4fQ

Now that you have understood, the stock market pricing mechanism is not purely based on the fundamentals of it. We need to find out how to spot these big boys who are ready to mark the price higher in the long term. Know the listed companies’ characteristics of the stocks that have the intention to increase their valuation in the long run, rather than a short term pump-n-dump. 

Join our upcoming webinar to find out the characteristic of a good value investing stocks with the big boys intention : 

Description : 

You will learn the characteristics of stocks that will mark higher in the long term by knowing the corporate purposes & the timing to find the rebound for lower cost of entry. 

Date : 

19 DEC | MONDAY 8:30PM

21 DEC | WEDNESDAY 8:30PM

22 DEC | THURSDAY 4:00PM

Registration link : https://www.roundnsurge.com/events

Disclaimer :

This blog is for sharing our point of view about the market movement and stocks only. The opinions and information herein are based on available data believed to be reliable and shall not be construed as an offer, invitation or solicitation to buy or sell any securities. Round & Surge and/or its associated persons do not warrant, represent, and/or guarantee the accuracy of any opinions and information herein in any manner whatsoever. No reliance upon any parts thereof by anyone shall give rise to any claim whatsoever against Round & Surge. It is not advice or recommendation to buy or sell any financial instrument. Viewers and readers are responsible for their own trading decisions. The author of this blog is not liable for any losses incurred from any investment or trading.