Speculation Vs Investment

Trading is speculation whereby you buy and sell stocks for short term gains. Speculation is when you buy something without solid justified reasons.

For example, PBA Bhd shares as of late suddenly had a surge in price upon news of high chances of a rate hike. The higher share price now can only be justified as an "investment" if;
1) the rate hike is executed
2) the current price does not yet reflect an increase profits to be realized
3) etc.
PBA graph:
[http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-profile.html?stock_code=5041]

However, a bursa Malaysia graph of PBA would show a price movement from RM1.16 to RM1.65, beginning of April to its peak towards the end of the month. That is a 42% increase. Could the new rates YET to be implemented have a 42% increase in profits (assuming the company is worth RM1.16 as of end of March 2014) ? And if the answer is yes, will the profit be distributed to the shareholders via dividends amongst other ways?

A simple solution, have a look at this digram (nicknamed Trader's Graph)
[http://www.businessinsider.com/how-not-to-invest-2014-4?IR=T&]

I'm sure many if us can relate to this diagram for it shows when most traders execute their trades. Of course there will be a small number of successful traders that had the mental (& financial) stretch to make use of such news-caused-fluctuation-effect.

Studying PBA's graph and also another, Datasonic Bhd would show a proper method for traders: Buying after a 'sudden decrease' in price. However so, note that such a method can prove unsuccessful if the company traded Stops giving out Exciting news.

Despite the above, it is seen that a purchase on a upward trend is most likely to give negative results if the trader fails to sell "in time". When is it time then? Well, there is no answer to this question but this remains the highest contributor to non successful trading and a cause of mental stress, sleep disorder and other anxiety related problems.
[Interestingly, insider trading is the best form for successful trading. However, it is illegal but note, with low conviction rate]

Datasonic is a great case study. An initial price of just above RM2 in May 2013, a high of RM10 at the end of 2013, share split, then an increase back to a high of RM4.87, then a sudden drop of 26% to RM3.58, a rise back to RM3.91 followed by a 27% drop to RM2.85. In short, the investor for the long term (May 2013-May 2014) would have reaped a gain of approximately 1200%. This company has one of the highest 1 year return stock. Despite the gains, if one observed the Trader's Graph, many would have fell into a disfavourable situation for investments made in 2014 (due to the warrants exercised and sale by those reaping their huge returns) until new Exciting news emerged yet again.

On an investment basis, it is least mentally taxing and financially beneficial to purchase stocks that have value; the means to continue successful operations at a low price that distributes profits generated to shareholders - the rightful owners of "Public" companies and recognises shareholders contribution (by not making unfavorable deals that would undermine shareholders). Businesses finance expansions via shareholders contribution thus it is only natural for the above suggestions.

This is rather a short post, for the Trader's Graph above summed up quite a lot.
Happy investing till next time.

First published on 27/04/2014.