Sunday, December 14, 2008

Investment, Speculation, Gambling

What are the differences between investments, speculations and gambling in the stock market?

In my opinion....

"I buy into that stock because I believe in its fundamentals. The price is also oversold."
"The technical indicators showed that the price has consolidated, and will be on a upward trend soon."
"I based my purchase on the price to earnings ratio and intrinsic value of the stock."

"I invest in that stock because I think the price will go up. It's intuition."
"Everyone tells me it will go up."
"I have a hunch I will be able to earn within a short time."

"I'm betting that it will go up."
"I don't understand why I'm buying, but I will sell it as soon as it goes up to make a profit."
"I watch the price everyday, hoping it will go up and let me make a quick profit."

An investor knows why he's buying, when he/she made a mistake in purchasing, and learned from the mistakes. Strategies are followed, and rules are set. There's no feelings or emotion for any stock. The company/stock does well, and the investor take it that his/her judgement is correct. But if the company/stock goes bad, the investor will learn from the bad decision, tweak his/her strategies for the better, and use the new strategies for the next investment. Investors thus improve over time.

A speculator or gambler knows little or nuts about what he/she is buying. When a mistake is made, he/she will think: "damn, should have bought at this price, and I would have earned." There are many what-ifs scenarios. The company/stock does well, and the speculator/gambler will give himself/herself a pat on the back and congratulates himself/herself for being "smart". But if the company/stock goes bad, the speculator/gambler will start blaming people he/she believes in, believe that it was just a stroke of bad luck, thinks that it will recover soon. He/she does not have any strategies to tweak, and would most likely not learn any lessons. The cycle usually continues on and on for them.

Friday, December 5, 2008

My thoughts on Passive Income

Why create passive income?
Creating a passive income source helps us leverage our earnings per unit time better. It also contributes an additional stream of income for us.

Passive income is generated when you are earning an income without having to do much work for it. There are a few types of passive income.

1) Private Business
If you own a business that you have setup to run completely on its own, or perhaps a piece of real estate that generates capital or rental returns, it is a good source of passive income.

2) Investments
Shares of companies that pay annual dividends (like Singapore Press Holdings), or shares of REITS, are sources of passive income.

Capital appreciation can also be considered a form of passive income, but until you sell the stocks and lock in your profits, the money is still not yours.

3) Fixed Deposits / Money Market Fund
Guaranteed zero risks low rates way to grow the numerical value of your money. You lose out to inflation.

4) Blogs
Placing advertisements or affliate marketing is a great way for blogs or websites to generate passive income. Wonderful examples include Yaro Starak and John Chow.

5) Intellectual Property
Write a book or an ebook. Everytime it is sold, you get paid. Great source of income that recurs even though you had only spent the time to write it just once.

For me, I have applied 2), 3), and 4) in my quest for financial freedom. An example would be my dividends coming from SPH (total of $760) this december, and looking at a possible 6~7% yearly dividend rate for my average purchase price in 2009.

I have quite an amount in Fixed Deposits and MMFs. Blogs wise, I have ExamWorld and WealthBuch, with ExamWorld earning a few bucks monthly at the moment.

I would love to have 5) in my portfolio as well, but what I would really really really want to have is number 1). Guess it's time to whip myself up further to generate some new ideas to startup for 1).

Monday, December 1, 2008

The diamond dust story

Got this story from here: http://www.sgforums.com/forums/2092/topics/338804
I find this story interesting, and hence share it here.

There was a story that happened back in the late 1990s, depicts of a young man who got hired as a maintenance worker (cleaner in short) in a diamond refinery factory in Japan. His daily job scope was to make sure, the factory was clean and free of dust before and after the factory closes.

Diamond refinery operations back in those days were still somewhat medieval; there were no machines, no proper cutting tools, everything from the unloading of raw diamond rocks to the crafting of diamonds where done by hand.

Because the factory was huge, everyday the young man would sweep for hours upon hours and carry tons of plastic black bags, filled with dirt and dust to throw into the nearby dumping container. But there was one evening he noticed that one of the bags he was about to throw into the container, had a small cut underneath and shinning dust was flowing out, in small gentle amounts on the ground.

Sensing an opportunity, the young man took one of the bag of dirt, home and started sifting through the dirt , painstakingly separating dirt from diamond dust. Eventually after 68 days of doing so, he managed to come out with a bag of diamond dust, that was eventually sold to a underground dealer. This resulted in a huge inflow of cash for him that was enough to get him through his university education.

So, what can we learn from this story?
(1) Opportunities are always present. We need to open our eyes to see it and take it. Do not let opportunities slip away when they come to you.
(2) Even when opportunities are present, hard work and discipline are still required.