Successful Investing (Part 2 - Opportunity, Strategy and Capital)

In my previous article titled Successful Investing Part 1, I covered two things that you will need to be successful in investing. They are passion and common sense. These two are the most crucial and fundamental things that you will need to have and to continually improve wherever possible.

The next three things that you will need to be successful in investing are: opportunity, strategy and capital.


3. OPPORTUNITY (and the ability to identify the opportunity)

There are many opportunities out there and we need to be able to identify those opportunities to be successful in investing. First, we need to figure out what our circle of competence is. Basically, what area do we know more than common people (or the average). Make sure our assessment is accurate about our circle of competence. Those area can be general or specific but the higher the level of expertise and the more accurate the assessment is, the more useful the circle of competence is. I happen to choose a broad circle of competence which is the microcap capitalization companies (and I try to increase my expertise in this area through other people experience and my own experience). But there are many areas (with it's sub-categories) that you can choose to focus on such as:

- Capitalization (Large, Medium, Small, Micro)
- Industry (Oil and Gas, Healthcare, Technology, Internet, Consumer products, Biotechnology, Banking, Marketing, Consulting, Service, Metal, Currency, Commodities, etc.)
- Asset Classification (Common equity, Convertible debentures, Commercial Paper, Bonds, Mortgage backed securities, Treasury, Money market etc.)

And you might ask what could be considered a good circle of competence. Here are some of the examples that one needs to know (about a particular company, industry, capitalization or asset classifications):

- What the company/industry produces
- Who are the players (and the leaders)
- Who are the users/consumers
- What drives supply and demand (and the elasticity)
- What are the criteria to survive (and excel)
- What is the best and worst case scenario (and the triggers)
- How the change in economy cycle will impact this area
- How the profit is made
- How is the balance sheet
- How far leverage is used and whether capital is used efficiently
- How's the quality and integrity of those who run the business
- What are the Porter 5 forces analysis for this area (related to competition threat and substitute products)

Once you know what your circle of competence is, try to stay within the circle of competence. Of course as times go by your circle of competence can change/expand your circle of competence where you will be able to spot opportunity in new areas. A lot of times, an opportunity is not open for too long as many other people are also lurking around trying to capitalize on these opportunities, and if you miss the opportunity, don't force or chase it. As I mentioned earlier, there are many opportunities out there everyday. This is also called strategy which is the next topic.


4. STRATEGY (and the discipline to follow the strategy)

Let's say that you have identified a perfect opportunity, now you will need a strategy to realize the benefit of the opportunity. Just like a famous saying in Wall Street that bull makes money, bears makes money but pig gets slaughtered, we need a sound strategy so we won't be the pig of Wall Street. There are many strategies that you can adopt and usually if we analyze and optimize our strategy correctly, the risk that we take will correlate with the potential return that we will get (except on perfectly risk-free or arbitrage opportunities which nowadays aren't too many out there). Some of the strategies that one should think about carefully before executing any transaction:

- Long or Short position
- Long term or Short term holding period
- Common stock or derivatives (option, futures, forwards)
- Investment style (speculation, growth, income, capital preservation, hedging, or hybrid)
- Asset allocation (portfolio management, percentage of asset class)

I strongly believe that whichever strategy (or combination of strategies) that we choose, as long as we are diligent and good at it, we will be succesful. Again, as I mentioned earlier, knowing what will impacts this strategy and how to make this particular strategy work is important. Once we find our sweet spot , we need to be discipline to stick with it and resist temptation to execute transaction outside our strategy (this usually happens when we are already/recently successful and feel invincible).

Creating a strategy that works is more art than science. There is no one size fits all strategy. Learning from other's experience, and experiencing ourself (trial and error) could be one way to help us formulate our strategy. In the end, you want to feel comfortable (and know the ins and out) and confident with the strategy that you choose. My strategy is long term hold common equity (growth equity with potential income in the future), and so far it has been working for me and I'm planning to stick with it. I found out about this after doing a lot of trial and error (and losing a lot of real money in the process which is not a necessary requirement . Fortunately I found a strategy that works for me in the process, so it is not all wasted). Once you have the opportunity and streategy, you will need capital before you can join the action.


5. CAPITAL (and I don't mean debt or margin)

It should be a common sense that it takes money to make money. Although I understand the potential benefit of using leverage, in my opinion, we should our own money in Investing (at least to begin with). A lot of people (such as Robert Kiyosaki and Michael Lecther) advocates the usage of other people's money (OPM) to make money, but borrowing money to invest in stocks (the heavy usage of margin) is generally riskier compared to borrowing money to buy a house or grow your well established business (to some extent). Sometime, I think those who recommend people to borrow money (without explaining the risk related to it) are trying to attract those who wants an easy way out. In general, I would recommend people use their own hard-earned money to invest because from my experience, they will be more careful about investing it (and do all the due diligence needed). Once we become an expert (and know all the risk), then we can use some leverage to try to increase your return. And for those who don't have the capital to invest yet, please do start saving some money now.


Once we have opportunity, strategy, and capital, we are ready to invest successfully.
Next, I will mention one other area that can help improve our circle of competence and strategy.

Part 3 - to be continued...