With the global financial crisis showing no signs of ending, I thought I should continue my research into stocks and shares, so that you too can continue to get half-baked financial information.
I'll have you know that half-baked financial information is very fashionable these days. Many successful bankers and traders have only the vaguest idea what they are doing.
Go ahead and ask one what a credit default swop is.
Sure, all this confusion and mis-information may be how we got into this mess in the first place, but darn it, if they didn't make a lot of money along the way.
So if you too want to make a lot of money, you have to expect a certain level of confusion.
Confused yet? No? Well, then you are in good hands.
In my last column, I provided a rough, bare-bones guide to buying stocks.
No doubt, those of you who followed my advice are now basking in wealth (provided you were already wealthy to start with), or hiding from your loan shark.
This time around, I thought I would go more in depth into the world of trading in stocks and shares, starting with a story about my personal experience.
About a week ago, after the stock market caved in, I said to myself: 'Jeremy, now would be a good time to nip in and pick up some blue chips at bargain prices.'
Of course, I had no idea why I said that to myself. I don't even know what a blue chip is.
But no matter, the point I was making to myself, is that I should go ahead and buy some stocks while they are cheap.
This is also the approach I take when buying toilet paper.
If I'm in a supermarket and I see some toilet paper on sale, I have to buy it. I buy it even if I know that I have something like 24 spare rolls at home.
There's no such thing as too much toilet paper. You never know when you are going to have a toilet paper emergency.
For example, let's say you've been invited to a Halloween party at the last minute and you haven't had time to get a costume. What do you do?
One good option would be to go dressed as an Egyptian mummy. You can just pop into any costume store and get one at the last minute. It's a very common costume. No sense going to a party wrapped in toilet paper.
Still, you'll be glad you had the extra rolls if you eat some bad prawns at the party and get a bad case of the trots.
Anyway, moving on. As I was trying to pick which stock to buy, I realised that all the criteria I used for selecting toilet paper - number of plies, whether there are pictures of seashells, how soft it is when you squeeze - were not directly transferable to selecting stocks.
I'm told that a 4-ply share is not necessarily a better buy than a 2-ply share.
Instead, I'm supposed to consider things like earnings per share, par value and cashflow. There was also a mention of risk appetite, but who can eat at a time like this.
While I was thinking about all this financial stuff, one day passed and share prices suddenly shot up. The sale at the stock exchange had ended and I had missed the boat. So I was sad.
While I was being sad, another day passed and the stock market suddenly crashed again. So I quickly started reading up on companies again, which took time, and prices shot up again, and I got sad again.
The wild mood fluctuations had me confused. I couldn't understand what was causing them. For a while, I was convinced the whole movement of the markets was handled by a gerbil.
Every trading day, some workers would activate the SGX Stock Market Gerbil. They would sprinkle some gerbil nibblets over a calculator and let it go. Whichever numbers it steps on, that will be the percentage increase or decrease.
Of course, I eventually realised that this cannot be right. It probably has more to do with bulls and bears which traders are always talking about, although I'm not sure how either animal might operate a calculator.
Anyway, it became obvious to me that I do not know enough about stocks and shares to make informed decisions. So I went and did some research which I will now present to you.
STOCKS 101: When people are buying and selling stocks and shares, what they are trading is essentially pieces of paper that say they own a small proportion of a company.
Although, in practice , this is not exactly true. Just because you own shares in say, Coca-Cola, it doesn't mean you can walk into a 7-Eleven anytime and take one bottle for free.
No, in practice, all you really own is a piece of paper saying you own a share. This piece of paper is worth something only in as much as somebody else is willing to pay you money for it.
Most investors are very aware that their entire business is set up on the exchange of little bits of paper, so they tend to behave like nervous little gerbils.
The slightest provocation - like if someone mentions the word 'recession' - will send investors scampering under the nearest fridge, driving markets down.
It's not a perfect system, but it can be a way to make money if you buy prudently, invest in the long term and have the right risk appetite.
Otherwise, you may be better off using your money on a different kind of paper.
I recommend the 4-ply.
This article was first published in The Straits Times on November 01, 2008.
