How much to invest? Nibbles, gobbles, values and prices.

I have blogged about my nibbles and gobbles in the stock market before and although it might be quite intuitive to us, what exactly is a nibble in terms of numbers? 

I received an email from a reader asking if I could blog about this in greater detail. 

So, this is my attempt to give some notable form to the concept of nibbling in the stock market.





When I have identified a business I would like to invest in, I should also decide how much money I want to invest in it. 

Now, how do I do this? 

Hint: Remember the pyramid? 

Cannot remember? Go to related post number 1 at the end of this blog post.

So, based on my own unique pyramid, I would be able to estimate (yes, it is always an estimate for me) how much I want to invest in the business. 





Example 1:
If it was an investment for income and growth and if I had allocated, say, $200,000 for that kind of investments in my portfolio and if there should be $50,000 left in unused funds earmarked for the same, then, that should be the upper limit of my investment in the business.

Of course, we can have variations. 

Example 2:
If I had decided that no single investment in this layer of the pyramid (i.e. my portfolio) should exceed $25,000 in size, then, that $50,000 left in unused funds for this layer would have had to find at least two businesses to invest in, not one.






Now, let us say that I had decided that $50,000 was a good amount to invest in a business I had researched that had a PE ratio of 12x under more normalised circumstances and generated a dividend yield of 3% based on a pay out ratio of about 35%, I might start nibbling at a PE ratio of 12x. 

Pay a fair price for a wonderful business? I can accept that.

To me, a nibble should be a single digit percentage of the total amount earmarked for the investment. So, in this case, it would be under $5,000.





When do we stop nibbling? My take? 

When we have already invested a third or so of the funds earmarked for the purpose.

Then, what about the rest of the money? 

The rest of the money is reserved for gobbling. 

What is a gobble? 

A gobble is bigger than a nibble. 

50% bigger? 100% bigger? 

Well, I am not prescriptive.

One instance in which I would gobble is when I feel that the stock has become undervalued.

So, for example, if a stock which usually traded at a PE ratio of 11x to 13x should be offered by Mr. Market at a price that translated to a PE ratio of under 10x, to me, that would be undervalued. 





The closer the PE ratio declines to crisis valuation, the more undervalued the stock becomes, all else remaining equal.

Now, this is just me talking to myself. Definitely, there is nothing sacred about the numbers. They are just examples. 

The philosophy that is the foundation of this blog post is, however, quite timeless. 

I hope this blog post has thrown some light on the matter of nibbles and gobbles.




Specific numbers and percentages? 

You know your circumstances best. 

That is your job.

Related posts:
1. Investing and position sizing.
2. AK went shopping in the (stock) market. (Nibble.)
3. Saizen REIT: Why did I buy? Buy more? (Gobble.)

Another step towards retirement adequacy taken.

My voluntary contribution in 2015 to CPF is done:

With this, I will enjoy the risk free interest rates of 2.5% to 4.0% earlier.

Sit back, relax and wait for the magic of compounding to do its work.

Related post:
Retirement: AK is buying a AAA rated bond.

Friend selling exclusive investment with 6% a month return. (Could this be a great investment?)

"Those at the bottom are left with a loss."

This is another example of my ignorance:

Hi S,

Welcome to my blog. :)

What you have described is something very esoteric. Well, at least to me, it is.

I am afraid I know nothing about something like this. If you would like me to blog about it to see if other readers might be able to throw some light on the matter, let me know. :)

Best wishes,
AK


What was this in response to? This:

Hi AK,

Just a basic introduction of myself, I am a 21 year old teenager, I have been reading your blog since I was 19. I made my first small sum investment when I was 19 too.

Here is my query:

Recently, a friend of mine contacted me to sell an investment policy to me. It was described as an "exclusive" investment. Here is how it goes.

- Minimum sum invested must be at least SGD $2 million dollars

- Period of investment is 25 months

- The investor will get a return of 6% a month (4% being the capital return, 2% being the interest of the sum invested)

- There is a banker's guarantee attached to this investment for the capital return too

So I did my simple math and calculated, if someone invested 2m, by the end of 25 months, it will be 3 mil. I was very skeptical about it at first, but after consulting one of my friend from the bank, he said there are such things. Why is there such an investment instrument in the market? What's more the security is there with a banker's guarantee attached. Can investment like these be trusted just because there is a banker's guarantee attached? We all know 2m is not a small sum, therefore I am humbly enquiring about this with you. Could you give me some opinions on this?

Thank you:)

Best regards,

S

Sure thing, share it with the readers. I am really curious, is there really such thing as a "almost-zero-risk" investment like this?:) thank you AK.

Much appreciated.

Sounds too good to be true? A healthy dose of skepticism is likely to improve our chances of survival in the field. However, what if it were true?

If you have any idea what this is or if you have something to say about this, please leave a comment for us. Thank you.

A useful reminder as we are offered opportunities:
Advice from a fraudster.

Bread ends are the best!

I actually know people who don't eat bread ends and would throw them away! For me, bread ends are the best and I always look forward to when only the bread ends are left in a loaf.

Bread ends are really delicious if we apply some margarine on them and leave them in a hot frying pan for a bit so that they become warm and toasty.

Today, I included some honey baked ham and ginger in the pan:

Guess how much I paid for this non-stick frying pan?

Pan fried honey baked ham on a toasted bread end.

Then, I sprinkled the ginger strips on top.

A slice of low fat cheese.

Voila!

A stupendous home made sandwich, nicely toasted, for lunch. Soooo very good!