How to apply Rule of 72 in trading?

After released of the Rule of 72 article, few of the readers send me email and asking how to apply it in the trading?

The article mentioned about how many years to double your money with the specific rate of return. As such, we can apply the same to the trading.

If we set our each trade with 5% return, then you used 72 divided by 5%, you will get around 14.4.
It just simply means that you will trade 15 times with each time 5% return, your money will be double.

Refer to table below, if you only have 2 counter to trades and only trades 2 times per week, you will just need 7 trades to double your money. Is it tough?

In the past few articles, I wrote a few trades counter like Parkson, CCK-Wa and Ucrest. These three counter can be easily trades by achieving 5% each trades.

For example, CCK-Wa can be buy at 10 sen and sell at 10.5 sen. The return is exactly 5%. If you can sell at 11 sen, you are going to double money faster.

For Parkson, can buy at 25 sen and sell at 25.6. The return is 6%. Do you get the idea?

The Rule of 72

Do you know how long it may take for your investments to double in value? The Rule of 72 is a quick way to figure it out. The rule of 72 is the most important lesson on investing that I ever learnt. What does this means?

It just simply mean that if it take 72 divided by annual return you are getting from any investment instrument. Then it will come out the number of years it to double your money.

For example, used Fixed Deposit as an example, the current 12 months Fixed Deposit Rate say is 4%. Then 72/4 = 18. It means that you need 18 years to double your money with 4%.

If you are savvy investor and you are able to make 12% per year, then 72/12=6 years. You will just need 6 years to double you money!

If you think this is still not good enough and we only can reference to Warren Buffett which his annual return is about 21%.

Buffett's biggest claim to fame is the track record of strong returns that he's put together at Berkshire Hathaway. Over a history that spans more than 50 years, Buffett has more than doubled the overall stock market's return, producing average annual gains of nearly 21% compared to the S&P 500's 10%.
With this return, 72/21 = 3.4 years

For example, you have RM50,000 and with annual return of 21%, your money will grow to RM100,000 in 3.4 years.

Vice versa, The Rule of 72 can also be used to estimate the interest rate necessary to double the value of an investment in a particular number of years. For example, to double an investment in 6 years requires an interest rate of about 72/6 = 12 %.

Why is this important?
A lot of people wanted to become millionaire, but how? Through saving? Through business? through employment? Everyone become a millionaire has to start from somewhere. Refer to the tabulation below.

This table just an illustration if you have RM1,000 and you double it every time, you will become Millionaire after 10th double. After understand this table, what is in your mind?

The chances of you having RM1,000 saving in your bank is high now. If you are working adult, or colleague student, RM1,000 is an easy job. If you do not have it, you can easily earn this in 2 to 3 months by just doing a GRAB driver!

For those working adult, you do not need to have 10th times to double your money, chance that you are having saving of RM16,000 or RM32,000 if you are working adult for sometime. So you are only 5 times away to become a millionaire. If you do not have that amount after working for few years, then I will say that you do not have investment problem but money management problems. Make sense? I will not go into this for this article here.

Let's focus on the rule of 72 here now. From RM1,000 to RM32,000 is very easy to reach. You do not need any investment vehicle to do that. You can work hard, work extra hours, work 2-3 jobs a day etc in order to save that amount of money.

However, if you want to grow your money from RM32,000 to RM1,000,000 it is very tough and the only way to reach there is through investing. From RM32,000 to RM1,000,000, you only needs five doubles to reach millionaire.

For those who have saving of RM128,000, you only requires three double to become millionaire! Do you get the idea of the table? Look at the table again and check your bank account now, how far is it for you to become millionaire?

Now the next table I will put in the annual return rate to see how will it turn out to be?

 Okay, let's go down to the reality, if you are having RM128,000 in your bank now with FD of 4%, you will need 3 times of double to reach million dollar. Each double going to take you 18 years. That means 18 years x 3 = 54 years! Do you have time to enjoy your million dollar by then? You better have a better return rate to work for you. My guess is at least 12%. So that three double will take you only 18 years to become millionaire.

How do we sum up here?
We know that we are about three to five double away to become a millionaire. Then the annual return you get is important factor to reach your million dollar goal. Do you get this interesting concept?

Start investing as early as possible with decent annual return today.

What has been done for past month?

For start, quick market update for last week:
- The market pulled back to a three-week low last week after climbing to its highest in four months about two weeks ago.
- The local market performance was in line with most of the markets globally except for the US market which climbed to a historical high. This indicates weak market confidence and the FBM KLCI remained in the red year-to-date while other markets are in the black.

What above to do with us if we are not in the market?

One of the readers of our blog share with us his trading track record by following the trading ideas.
He has been trade on the CCK-WA since April

The article he follow is Trading Ideas - LIONIND (4235), MRCB (1651) and CCK (7035)

Below is his result of the past 3 months trade.

Refer to the Table of his trade, he is doing pretty well and able to trade it wisely. I asked how does he do it since it almost Buy at the lowest and Sell at the highest. Refer to the chart below for better illustration.

His response is, he only set his desired Price to BUY or to SELL till GOOD IS DONE.
GTD is available in all local trading platform and it last for 30 days. He is saying, sometime he did not know the trade is done until the email is prompted. The moment he see the notice of contract done in his mailbox, he sill set the next trade accordingly. As such, he did not monitor the market closely and just leave it till done.

Homeriz (5160)

Hi Readers,

I would like to share this counter after reading its latest Q3'19 report. I find it interesting and can be a good addition to your dividend stocks collections. For your information, furniture counters were the darlings of 2016 as it recorded impressive gains on the share price. Since then, many were hoping for the return of furniture counters and many false start. It is understood because there wasn't much boost on the sectors. However, with recent trade wars whereby 25% tariffs were slapped on furniture from China and MYR weakening to beyond 4.10, it is helping to boost many of the furniture counters earnings. I have shared Liihen previously and would like to bring your attention to Homeriz. 

Homeritz Corp Bhd an investment holding company, designs, manufactures and sells upholstery furniture products. The company provides upholstery home furniture products consisting of leather and fabric-based sofas, dining chairs, and bed frames; and lifestyle furniture products under the Eritz brand. It is also involved in the property investment activities; and design, manufacture, and sale of furniture and furniture parts. The company’s majority revenue comes from Asia and Pacific market.

Why Homeriz? I read its latest QR and the net profit margin of 18.6% caught my attention as shown in Image 1. The company has been investing on automated equipment to minimize the dependency on human labor; foreign workers mainly which is subjected to levy. Though government has announced reduction of levy, it will be a bonus in the short term for the company. The on-going effort in cost reductions has to continue. Current quarter result is also boosted by MYR weakening and lower raw materials. Additionally, the company announced a $0.02 cents of first interim dividend. This is also a positive development as 2018 total dividend payout was $0.025 cents with first interim dividend at $0.01 cents. With the on-going development, there is a possibility of Homeriz to pay total dividend beyond $0.025 cents. 

Image 1: Homeriz Last Two Years Quarter Report Results 

Technically, the chart is showing double bottom at $0.58 cents as shown in Image 2. Price has since moved up again recently and with the better prospects, there is evidence that it will move higher.

Image 2: Double Bottom on Homeriz at $0.58 cents

As the company has announced a $0.02 cents for first interim dividend, the target price based on its cash flow is trending at $0.82 cents based on the previous target set by HLG, the intrinsic value is $0.66 cents at 15% rate of returns and total dividend of $0.025 cents. What it meant is that when the price is below $0.66 cents, it is a strong buy from dividend perspective. Any increase in dividend payout and target price will yield higher returns from Homeriz investment. 

Possible trade setups:
Entry: Below $0.66
Stop loss: $0.58 and below
Target profit: According to your rate of returns or the levels above
Remarks: As this is considered a dividend stocks from my perspective, one should hold as long as the company continues to pay dividend at minimum of $0.025 cents per year. One can leverage the power of zero cost averaging when the price hits your own target or when it hit the target valuations to generate additional cash flow.

Good luck and all the best!!!

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence as this article is not a recommendation to buy/sell.

Power of Zero Cost Averaging

Hi Readers,

It was a slow month for us due to school holiday, Raya festive seasons and weak market breadth despite uptick in KLCI index. The last few weeks market movement was mainly driven by local institution such as EPF and KWAP swooping in on selective blue chips and selling positions at the same time. Foreign fund continued to shy away from Malaysia as can be seen below extracted from MIDF Research Report.

Image 2: Net Flow of Foreign Fund into SEA Emerging Markets

Image 1: YTD Performance of Major Market

As usual, there is always much abuzz whenever big institutions like EPF and KWAP buying or selling. Buying is always seen as good thing and possible good news coming while selling is always seen as bad thing. However, if we really look at it closely, what EPF and KWAP did is a mere zero cost averaging or risk management or generating cash flow. How can we adopt the approach and does it really beneficial for us as retail investor? Have you been using the zero cost averaging method to manage your positions?

By definition, the idea behind zero cost averaging is to sell enough shares for a profit to equal the cost of those shares without selling them all. As retail investor, the bottom line for us is profitable positions and generating extra cash - cash flow. Our wish is always to ride the trend to the maximum and staying as long as possible with minimum emotional decisions - buy and sell. Hence, zero cost averaging is a powerful method that should be adopted by retail investors as well. In general, there should be sufficient diversification in our portfolios to minimize risk. There are 3 types of portfolios that we should all have in the long run:

1. Growth Stocks:
• Riding the growth of the company; sales growth outpaced profit growth; sustainable growth
• Accumulating over a period of time, accumulate during weakness
• Typically positions held is more than 3 years
2. Dividend Stocks:
• Company that distributed consistent dividend payout yielding more than conventional fixed deposits. Capital appreciation from the stock price is a bonus.
• Accumulate during weakness when it is selling below its intrinsic value
• Positions held as long as there is continuous dividend payout
• This portfolio tends to perform well during period of uncertainties 
3. Trading Stocks
• Short term holdings riding the bullish sentiments with the main purpose of generating cash flow
• Positions held can be minimum of 3 weeks to 6 months

For all the readers that have been following us, you will noticed that we have been sharing stocks that falls into the 3 categories above. You can use the zero cost averaging method to manage all your positions in your portfolios and growing it over TIME. So, what it takes to do so:

1. Create a portfolio tracker
2. The information below should be in your tracker
• Initial cash allocated per stock
• Last price
• Cash balance
• Shares value
• Unrealized profit/loss
• Buy and Sell Transactions (price and quantity)
• Dividend received
• Profit/Loss
• Balance of Investment (quantity and value)
• Average holding cost (Balance of investment value - Dividend Received)/Bal. quantity
3. The tracker can be used to manage the situations below:
• Record down dividends received - bring down average holding cost
• Locking in profits to generate cash flow - bring down average holding cost
• Reducing positions for losing positions to minimize risk - increase average holding cost temporarily, reduced quantity and reduced further losses, lower the average holding cost in future when opportunity arises
• Regardless whether its a winning or losing positions, you will have full visibility on the current status and understood what it takes moving forward
• Staying in a position as long as it takes while bring down the average holding cost, to the extend of zero cost / free shares

Therefore, big institutions like EPF and KWAP buying or selling is not as scary as we thought. The reason behind is that their fund managers are managing the positions that they are holding. Many of retail investors failed to understand the power of zero cost averaging. When we exit a profitable positions, we will never be able to buy back at such lower price again. 

I hope this article will give you a guide on how to create a simple portfolio tracker and apply zero cost averaging method to manage your positions.

Good luck and all the best!!!

p/s: We will be sending a sample tracker that we have created to assist you in creating the tracker that suits your own needs. We will send it to the email that was deposited via our blog (on the right side of the blog page). Please be on the lookout for our email that contains the sample tracker. Have fun in learning the method of zero cost averaging. 

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence as this article is not a recommendation to buy/sell.