Basics of stock trading 101: Stock traders and Mono to me!

[Monoriu]

I don't understand what you mean.  Regardless of whether the P/E that you calculate is higher or lower than 18.5, you won't get a "good deal" out of it.  It just means that the company's way of calculating the P/E is different from yours.

Gotcha. So if there is a difference, I will take that in account without judging if it is better or worse. After all, it is only one indicator.

So what would be a good average for P/E to aim for when I search for a decent share to stake in? I know it depends of the share price, but what would be an "acceptable" multiple, or an "acceptable" dividend yield?

P/E is a tool, but one that we need to be very careful with.  You don't go "P/E = <14 = must buy".  Say, there are two large banks, one with a P/E of 10, and the other has a P/E of 30.  Are you better off with buying the apprently cheaper one?  Not necessarily.  People aren't stupid, the market isn't stupid.  The one with a high P/E may have very good prospects, so that its earnings will increase substantially in the next set of financial statements.  In that case, the P/E is expected to come down significantly.  The reverse can be true of the "cheaper" one. 

Having said all that, historically, the P/E of the general market tend to be between 10-20.  The average is somewhere around 14-16. 

When it comes to P/E, there are also two versions - historical, and forecast.  Historical P/E is just based on past information, which may or may not be relevant to the future.  Forecast P/E are just guesstimates, but some could find them more relevant. 

In HK right now, the "average" dividend yield of stocks tend to be between 1-5%.  Stocks with 4-5% dividend yields tend to be stable cash cows (e.g. utilities).  Few stocks can have a dividend yield above 5%.  The yield is affected by a large number of factors - e.g. special one-off dividends, extreme volatility in share prices, etc.  I'm sure there are stocks out there with a 10% dividend yield.  Just be careful - that could be because management had nothing else to invest and distibuted a one-off special dividend that could not be repeated in the future. 

[Malthus]

Some random thoughts on investing.

1. Do everything online.
2. Start reading the news daily.
3. Live below your means. 
4. Remember: high risk, high return; low risk, low return. 
5. Anyone who tells you otherwise is lying.
6. Don't lend money to friends and relatives, or in fact any individual.
7. Your investment strategy should help you achieve your overall objectives in life.
8. Always keep at least 3 months of expenses in cash, preferrably more.
9. Don't start business partnerships with anyone and expect to make money by doing nothing except contributing capital. 
10. No one can beat the market in the long-run.
11. Diversification is an effective means to reduce risk.
12. Fees and expenses matter hugely.
13. Never buy life insurance.
14. All get-rich-quick schemes are scams, and there is no exception to this.
15. A camel can beat a financial professional in picking stocks.
16. Default risk is real.
17. No one is interested in your financial well-being except yourself.
18. Never grant discretionary mandates to anyone, especially your spouse.
19. Financial professionals always have their own interests in mind, not yours.
20. Long-term investment is no gurantee of success.
21. Never invest on margin.
22. Pay down debt before investing.
23. Avoid trading odd lots.
24. Automation is your friend - set up your accounts so that you pay your bills automatically, and stash your money away automatically.
25. Figure out what your risk tolerance level is, and invest accordingly.
26. Passive investing beats active investing most of the time.
27. Allocation of asset classes matter hugely.
28. Stock dividends matter - the value of a stock is the discounted value of its future dividend stream.
29. Take advantage of all tax incentive schemes.
30. Never listen to financial advice from anyone.  Including me.

I agree with almost all of this. Am I: turning into Mono? 



I suspect where whe disagree is in the extent to which we wish to live below our means. I certainly do, but not to the same extent as you appear to.

For example, I was reading an article the other day about why a house is a lousy investment. What the writer had to say had some truth to it - houses cost money in lots of ways (taxes, heating, repairs) which have to be off-set against the capital appreciation - but the writer never mentioned the fact that, unlike a pile of stock certificates, you can *live* in the house. In short it may be a lousy investment but it also covers an expense you would need to incur in any event ...

My personal investment strategy is aimed at paying down real estate debt and taking advantage of tax incentives. I set up a system to automatically skim a certain amount out of my account every month into my ING savings account, and from there I split it: half goes to quarterly extra-payments on mortgage, half goes into RRSP, TFSA and RESP accounts.

By far the most significant aspect of my investment plan is skimming the money out *automatically*, so I get used to living with an apparently lower income.

'Set up an automatic savings system" is just about the only bit of financial advice that is good for pretty well everyone.   

[Drakken]

So, a good plan would be either to

A) Open a TSFA account with the bank which offers the best bang for the buck and regularly inject money in the account and buy the ETF or fund I want to invest in and happens to be compatible with TFSA?

Or

B) Open a Direct Brokerage Account with my current bank, without any intermediary, and just buy the ETFs or stock I wish to invest in?

Or

C) Both at the same time?

As a small investor, I can easily place money in a TFSA and seldom max out, because my net income is rather small great to begin with. However, can more than one fund, stock, or ETF can be included in the same TFSA? Are TFSA flexible as far as type of investments are concerned?

[Malthus]

So, a good plan would be either to

A) Open a TSFA account with the bank which offers the best bang for the buck and regularly inject money in the account and buy the ETF or fund I want to invest in and happens to be compatible with TFSA?

Or

B) Open a Direct Brokerage Account with my current bank, without any intermediary, and just buy the ETFs or stock I wish to invest in?

Or

C) Both at the same time?

As a small investor, I can easily place money in a TFSA and seldom max out, because my net income is rather small great to begin with. However, can more than one fund can be included in the same TFSA? Are TFSA flexible as far as type of investments are concerned?

Many of your TFSA questions answered:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

I honestly don't know off the top. I do know that you can have as many TFSA accounts as you want, as long as you don't go over your limit.

[Drakken]

Many of your TFSA questions answered:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

I honestly don't know off the top. I do know that you can have as many TFSA accounts as you want, as long as you don't go over your limit.

I'm strongly inclined to go toward a self-directed TFSA, then. I don't want to take TFSA with plans that are decided for me. I want to take it slow, a first lump sum of 1000$, plus 200-300$ per month in investments I choose.

The thing is, though, I still have my student loan to repay. Like I said to Mono, it repayment is covered in my monthly expenses, so any net income I invest is after loan repayment. Aside of that, no debt: no mortgage, no credit card debt, no liability. And any money I want to invest is money earned, not from margin.

If I wait until I repay my loan, however, I won't be able to invest before the age of 37. It makes no sense. 

[alfred russel]

Forget trading stocks, just put the money in a low fee no load broadly based mutual fund (eg, an S&P 500 tracker). Within a tax advantaged account to the extent possible.

$3k isn't enough money to effectively trade stocks: the fees will take too big of a percentage of your investment and the gain isn't worth the headache. If you really want to trade stocks with $3k, be honest with yourself that you aren't investing, but gambling.

[Drakken]

Forget trading stocks, just put the money in a low fee no load broadly based mutual fund (eg, an S&P 500 tracker). Within a tax advantaged account to the extent possible.

$3k isn't enough money to effectively trade stocks: the fees will take too big of a percentage of your investment and the gain isn't worth the headache. If you really want to trade stocks with $3k, be honest with yourself that you aren't investing, but gambling.

I fully accept that part of my money will be in speculative venues  - even if not day trading.

Not all of it, of course, but some of it. My first priority is to build up some capital, hence our talk about the TFSA. And from that capital, a certain % will be placed into riskier securities while the rest is left to stu and mature.

Even through direct brokerage? Of course brokers on the stock exchange floor extract fees for the trades they do, it's normal, but I thought going the self-directed way cut through the other administrative fees that I would usually pay to both bank and intermediary brokers if I dealt through the bank.

[alfred russel]

Forget trading stocks, just put the money in a low fee no load broadly based mutual fund (eg, an S&P 500 tracker). Within a tax advantaged account to the extent possible.

$3k isn't enough money to effectively trade stocks: the fees will take too big of a percentage of your investment and the gain isn't worth the headache. If you really want to trade stocks with $3k, be honest with yourself that you aren't investing, but gambling.

I fully accept that part of my money will be in speculative venues  - even if not day trading.

Not all of it, of course, but some of it. My first priority is to build up some capital, hence our talk about the TFSA.

Even through direct brokerage? Of course brokers on the stock exchange floor extract fees for the trades they do, it's normal, but I thought it cut through the other administrative fees that I would usually pay to both bank and intermediary brokers.

Imagine you are so smart you can beat the stock market by 5% a year. That would make you one of the savviest investors in the world.

If the average stock market returns are 10%, then with a 10% return on $3,000 you would get $300. With a 15% return, you will get $450. For a $150 extra gain, I would question whether it is worth your time to even bother trading stocks.

But there are a few other factors: if you are paying $7 a trade (dirt cheap, and about the lowest I know of), then every position you take and then exit will cost you $14 (plus there will be a spread that will cost you, but we'll ignore that). Even if you enter a new position every month, that will be $168, more than wiping out your extra profit. Also, your gains will be considered active trading gains, which are both immediately taxable and at the ordinary income rate (passive gains aren't immediately taxable and are taxed at the lower cap gains rate--at least in the US).

So even assuming that you are one of the great investors of our era, you lose. If you are just another person without any great investing knowledge? You don't get any extra gains, but you still have the fees and the tax disadvantages.

[Tamas]

Well, you can buy an ETF and forget it for a year, even. Yet, you are investing in an area, as broadly or as specialized, as you want.

[alfred russel]

My advice:

1) make sure you have $10k put aside (or six months living expenses) in a money market account.

2) pay off all credit cards or other debt that has a high interest rate (this excludes a mortgage and possibly a student loan, depending on the terms)

3) put aside money in safe investments such as CDs for living expenses that are coming up (a down payment for a house, tuition for a master's degree, etc.)

4) max out all tax advantaged retirement accounts with investments in broad based mutual funds with low fees (this should contain a mix of stock and bond funds, depending on your age--probably mostly stock for you)

5) With any left over money, continue investing as in #4

[alfred russel]

Well, you can buy an ETF and forget it for a year, even. Yet, you are investing in an area, as broadly or as specialized, as you want.

But why not a no load mutual fund? I know it isn't much money, but why even spend the extra fees to buy an ETF?

[Tamas]

Well, I dont pose to be an expert, especially since I live in an other country.

By the way, to counter my own point: it seems my pension fund has made some pretty neat profits, especially considering the nosedive it took during the recession panic time. Basically what option you have with your mandatory pension is to choose between a few (usually3) portolios at your bank of choice, one very conservative (state bonds and such) and very stockmarket-oriented, and one in between. I am in the riskiest of course, figuring I have about 40 years left, and as I said it has been paying off very nicely, so maybe there is nothing wrong with an "autopilot"

[Drakken]

Well, you can buy an ETF and forget it for a year, even. Yet, you are investing in an area, as broadly or as specialized, as you want.

But why not a no load mutual fund? I know it isn't much money, but why even spend the extra fees to buy an ETF?

Don't ETFs have maximum annual fees? One such ETF had a maximum annual fee of 0.650%.

[Drakken]

My advice:

1) make sure you have $10k put aside (or six months living expenses) in a money market account.

2) pay off all credit cards or other debt that has a high interest rate (this excludes a mortgage and possibly a student loan, depending on the terms)

3) put aside money in safe investments such as CDs for living expenses that are coming up (a down payment for a house, tuition for a master's degree, etc.)

4) max out all tax advantaged retirement accounts with investments in broad based mutual funds with low fees (this should contain a mix of stock and bond funds, depending on your age--probably mostly stock for you)

5) With any left over money, continue investing as in #4

So, in short, if you do not have income that classes you at least in the "middle" middle class, don't bother.

But the thing is, I don't want to let my savings stu in some checking account with abysmally low interest rates, like your common Joe. I want it to grow. But I need to work with my income as it is now.

My personal income (30K gross) would class me in very low middle class, but I have next to no passive (I just have my student loan, but as I said, the repayment is accounted in my expenses already). I'm living low, but comfortable lifestyle.

So already 1) is out (10K?! That would be saving for years at my current income and I'm 30 already), and I'll never be able to max out at 4).

[alfred russel]

Don't ETFs have maximum annual fees? One such ETF had a maximum annual fee of 0.650%.

Basically all my personal investments that are in stocks are in two mutual funds with Vanguard: one is an index fund tracking all US stock, the other is an index fund tracking all international stock excluding the US.

Here is a close analog to the US stock index fund:

https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT

The annual expenses are 0.18%. Quite a bit lower than your ETF--even if it has low fees too. Also, when you buy into the vanguard fund it is completely free. For the ETF going through a broker, you are going to have to pay a fee (maybe a low one of $7 or so, but why even pay that?).