By Ben Fok
CEO, Grandtag Financial Consultancy (S)

MANY of my clients have expressed a desire to change their approach to investing, after having gone through the financial crisis. They are considering abandoning their long-term approach in favour of more active investing. During a seminar, an audience member asked me if he should sell or hold his stocks, now that the market has rebounded strongly; while he wants to realise the profit, he does not want to miss out on further possible upside. When I asked if he was trying to time the market, he replied that there was nothing wrong with timing the market. He said even the Government of Singapore Investment Corporation (GIC) times the market and managed to cap further losses on its portfolio. More significantly, this is the first time that GIC has used market timing as opposed to its long-term view on investments.

The stock market is made up of bulls and bears. Some investors reckon quality companies are cheap now and warrant a buy, while others anticipate a double dip and are looking to sell. So how do we manage this buy-sell decision?

A rule of thumb that many investors use is to sell at least enough to recover the initial cost of your investment. You simply sell part of your holding to lock in a profit; that way, you are gambling only with your gain.

My experience as a stock dealer allows me to understand how professional investors make such decisions. Usually, they decide based on their assessment of the company concerned, the economy, the political environment, interest rates and market conditions. They are often called 'fundamentalists' and macro-focused. These people are very skilful and trained to sniff out good stocks based on fundamentals. I called them 'skills-based' investors.

When analysing stocks, fundamentalists fully understand the underlying fundamentals of the companies whose stock they buy. These include the markets these companies are in, their balance sheets - and their competitors. The fundamentalists also examine past and present earnings and how these relate to the number of shares outstanding (earnings per share), not to mention an array of other financial ratios. All these are closely watched numbers among professional investors.

On the other hand, others make their decisions based on preset rules - and these people are referred to as 'technicians'; they look at volumes, chart patterns, moving averages, relative strength indices, graphs, etc. These people have a set of rules to follow. For example, they will buy only when there is an uptrend. So I call these people 'rules-based' investors.

In reality, both methods require special skill, experience and knowledge to deliver outstanding results on a consistent basis. To be successful at this, you need to be a full-time stock analyst. If you are working during the day, do you have the time to do the research? Hence, few people succeed in trading the market.

Don't decide on price alone

Buy-low-and-sell-high is the ultimate guide to successful stock investing; it is also the reverse of what many investors do. It's not that investors intentionally buy high and sell low. But too often they use price (and, in particular, price movement) as their only signal to buy or sell. Some of you may be smart investors who made the right call recently - but do not overestimate your ability; more often than not, recent gains are mainly attributable to the global stockmarket rally. At times, if you keep betting on it, you will somehow get it right. Even a broken clock is right twice a day.

During the recent market rally, many companies announced positive news. People get excited about what they read and see, and want a piece of the action. They jump into a stock that is already trading at a premium - and in so doing, they buy high.

The other side of the coin is when a stock has fallen. Most investors may want to sell, along with the rest of the market. If you go by price alone, this can be a bad decision (sell low). There can be many reasons why a stock's price drops and some of them have nothing to do with the soundness of the investment. This is why, if you only follow price, you may miss opportunities. After a stock's price has fallen, it can be a great time to buy (buy low) - but only if you have done your research.

Experienced traders can make money by jumping in and out of a stock that has caught the public's attention, but this is not a game for the inexperienced - and it is not investing. There is risk involved, and it comes with consequences and other issues that mean most investors should leave this activity to short-term traders.

Studying the fundamentals of a company will enable you to set a target price for when to buy and sell.

If you base your decision simplistically on stock price alone, you may - and likely will - make investing mistakes. Remember, if a stock has had a good run-up, it may be time to sell, not buy (sell high); similarly, if a stock has dropped like a rock, it may be a good time to buy, not sell. The benefit of this approach is that it keeps emotions out of the equation. Some may term this approach as being contrarian.

It has been a painful 12 months for equity investors, but this is not the time to make drastic changes. If you took a long-term approach to investing before, don't abandon that approach now; you probably had a balanced approach for good reason and it will likely serve you and your family well for many years. A long-term approach reduces risk and allows for growth. Yes, it has bad - even terrible - years. But over your lifetime, such an approach should continue to serve you.

That is why the deputy chairman and executive director of GIC cautioned against reading too much into GIC figures, emphasising that GIC is a long-term investor not distracted by short-term market volatility.

Perhaps it's time to rebalance your stock portfolio. Today, a host of quality companies are still attractive. The trick is to recognise them, take a sober view of your existing holdings and take advantage of any down market to upgrade your portfolio. If you are in doubt, always consult a financial adviser.

The writer can be reached at ben.fok@grandtag.com

This article was first published in The Business Times.