Friday, July 3, 2009

Am I Gambling or Speculating Intelligently?

As I observe the market movements of certain stocks listed on our Bursa Malaysia, I begin to discern that the ups and downs of the market are highly erratic and somewhat illogical. In fact, there are times when I wonder whether I have entered into a gambling den where my gains or losses are based on the whims of Lady Luck rather than on my analysis of the fundamentals of these companies.

For instance, look at the shares of Genting Berhad below. The share price has almost doubled within the span of three months from March to June 2009 i.e. RM3 per share to RM6 per share.

However, when one takes a long hard look at the financial results, you will find that there’s really nothing optimistic about Genting that can justify the doubling of its’ share price. In fact, the results are quite disappointing. Why then has the price gone up?

Should you have bought Genting’s shares in March 2009? You would have made almost a 100% gain within three short months.


As an investor, I feel that there is nothing more dangerous than venturing from intelligent speculation to outright gambling.

So, what’s the difference? Just stop and ask yourself this one critical question:

Are there any good reasons to buy the shares in Genting at RM3 three months ago?

If there is none, you are merely gambling away in the Bursa Casino. Yes, in hindsight the price has gone up. But don’t forget, the price of Genting shares could have gone down significantly as well.

Speculating Intelligently?
If yes, take a long hard look at your reasons. Are they based on good and fundamental reasons? Even if you hear rumors that the company will secure a large project, consider the reliability of the information first. More importantly, take a long hard look at the share price of the company for the last few days. Somebody might have already purchased the shares in that counter and are looking to sell it to some naïve investors. Don’t be one of them!

Internal Benchmarks
A more reasonable approach is to use look at the PE ratio or dividend yield of these companies. If the PE ratio is less than 10x or dividend yield is 8% or more, it may be a good investment. Further, do your own homework and assess the liquidity and gearing of such companies before investing in them.

Try not to buy shares of companies just because its’ prices are going up. And don’t sell shares you hold, just because the prices are going down. Following the crowd will get you nowhere except losing your hard earned money. Make sure you have good solid reasons for investing in the first place and equally good reasons before selling the shares that you own.


Damien Tan

I'm not a player but is it possible for someone to buy a big tranch of shares, chase the price up and then sell it off? Can't see that happening unless it involves an 8-digit purchase though. I've always thought that as far as retail buyers are concerned, market movements are influenced more by sentiment than fundamentals and that's not about to change anytime soon.


Dear Damien,

Buying up tranches to boost up stock prices quite easy for thinly traded stock (i.e. those with low volumes). For Genting, that might be more difficult since the volume traded is reasonable and stock price is quite high.

Yeah, markets are always affected by speculations and sentiments. Avoiding getting caught up with the 'stock fever' is an important thing for rational investors. It's all too tempting to throw fundamentals out the window and buy certain stocks just because they've shot up in value.



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