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A capital question: how much to have or how much to use?

Saturday, February 6, 2010

I remember reading a book titled "The Swiss Family Robinson" in my school going days.  It was one of many classics such as "Black Beauty" and "Call of the Wild".  

It is very strange but most people who are younger than me by just, say, 6 or 7 years have never read these books before.  Classics, they are.  Anyway, I digress.

The book in question is about how a family got shipwrecked on an island and had to to use whatever was available there to build a life for themselves and over time, they did quite well.  Very resourceful family.  The father would praise his children if they came up with a good idea by saying: "That's a capital idea!".  

I have yet to come across anyone in real life who would use the word "capital" in the same way.  It might be a very English or a very archaic usage since the book was written in the 19th century.  

Now, that brings me to the topic of this post: capital.  Specifically, capital for investing in the stock market.

Now to do my impression of Forrest Gump: 

"My mama told me that I must pick the right people when I want to talk about stocks which are undervalued as not everyone has the ability to buy."  

Very true but it is hard to identify the "right" people, you might agree.

So, there is an advantage about sharing ideas in a blog.  Visitors who come to my blog are probably interested in investing and making money in the stock market and probably have the means to do so.  

I hope I am right and not being delusional on this point though.

I like the saying that we can bring a horse to water but we cannot make it drink and I've had more than my fair share of horses which do not drink.  Maybe, they were actually camels and my ageing eyes mistook them for horses. 

I digress again.

Back to the topic.  

Now, having some capital is one thing, a question often asked is how much do we need to have exactly before we start investing in the stock market? I have been asked this a few times before.  

A hairstylist asked me if S$10k was enough.  The concept of "enough" is relative like so many things in life.  Very few things in life are absolutes.  However, the question of whether something is "enough" is a very prominent one in life.  

How much to have?

I will use a real life example which happened to someone I know as an illustration.  He had only $5k in savings and went into the market in 2008.  Even with the market running up in the last one year or so, his initial investment is still worth less than $5k today but having used up all of his capital in 2008, he could only watch silently as the market recovered.  Well, he wasn't very silent about it but you get the point.

Then, am I suggesting that if we had only $5k in capital, we should not participate in the market, that we should have more capital before buying shares?  

No. Spare cash that is not needed in the near future or is not part of an emergency fund (e.g. 6 months worth of expenses to be put aside in case of unemployment), should be made to work harder for us.

It is, quite simply, a question of proportion.  Of course, with only $5k, the choices are more limited but the idea is the same as for someone with $50k or $500k.  

Don't plonk all of it down at the same time on one counter or a few for that matter. Always hedge since nothing is ever for sure.  

The question is how much to use for each trade, 10%, 20% or 30%.  

This is up to the individual.  The idea is to reduce risk and taking small steps reduces the probability of a fall.

There is nothing wrong with a $1k value for each transaction and in the process incurring a 3% cost (based on a minimum of $28 brokerage fee per transaction plus other costs) if you were to make more than 10% per annum on that decision.  Nothing wrong at all.  

Rome was not built in a day.  

Wealth building takes time, realistically.  More haste, less speed.

Over time, as our capital grows due to increased savings through employment, capital gains from investments, dividends from investments or some other means, we should not forget this very simple concept.  

"How much to use?" is very often a more pertinent question than "how much to have?".  If you think about it, it applies to other aspects of life as well.

Related post:
Excuse me, are you an investor?

12 comments:

CL said...

FOr me i fall into the 5k cat, y? House coming in 2 years time, wedding dinner near that time frame also. So 5k is my spare cash. hehe but its a bonus to earn or a lesson learned if i lost. :)

AK71 said...

Hi CL,

Congratulations in advance. You are approaching this with the right spirit. Good for you! :)

CL said...

Thks:) for now cold hard cash is more important to me... if nt gf will run away..haha

AK71 said...

I am almost sure that you will make money in the stock market this year, if you do it right. :) Your commitments are coming in two years from now. Plenty of time.

CL said...

Yea after i save up the committed sum of money of yearly target. The rest will be for investment. :)For now still waiting for my 0.13 to come true..hehe..but will hedge once its near that to that price.

AK71 said...

You are referring to Healthway at 13c? I know a few people who are desperately praying that it would not happen. Haha... It doesn't matter to me. I just act accordingly as and when things happen.

13c is a strong support but it does not mean that it would hit 13c. So, you're right to hedge. It is the right approach, I believe.

Anonymous said...

Hi AK think possible to short healthway ??? thru cdf

AK71 said...

Hi,

Sorry, I didn't get your name. ;)

I don't short the market and I don't use CFD. Not the right person to ask. Maybe, you could post the question in the Forum at NextInsight. ;)

la papillion said...

Hi Ak,

Looks like you're a "horsey" person :) There are already 2 references to horses in the articles you blogged here, haha!

AK71 said...

Hi LP,

It depends on the language I'm using. In English, it's a horse. In Chinese, it's a cow as in "Niu Bu He Shui Qiang An Tou". ;)

好人 said...

ok. I think u want us to buy capitaland.

Heh...

AK71 said...

Aiyoh, you are going to get me in big trouble with that comment! -.-"

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