Tin tức

The discipline of due diligent analysis in investment

Viết bởi: Lê Quốc Chơn, 11 01 2021

Great thinking generates great result. For example, in financial investment, real estate investment, business investment, learning investment and many other fields.

What is quality of thinking in investment? Thinking must be optimal. It means accurate and efficient in terms of time, associated effort and resources. For instance, in financial investment people buy stock, hold and sell. They must select the best stocks, then buy at the most optimal moment, decide whether to hold for how long or sell at the suitable price and timely. The criteria of this investment decision are the profit made per upfront capital per period of time.

  • Profit/capital (vnd) ratio
  • Profit/capital/period (hour) ratio

Then, compare these criteria with other benchmark performance in the whole stock space.  And with other investment opportunities: starting businesses, partner in businesses, real estate, currency, bonds and other instruments of making money.

For example, money deposit in bank with annual interest about 7.5%. Suppose, we deposit 100 million vnd in the bank on the first of January. At the end of the year, on 31 December, we collect all the money including the principal and interest. The money we obtain is 107.5 million vnd.

  • Profit/capital = 7.5/100 = 0.075
  • Profit/capital/period = 0.075/8760 (hour-1), or 0.075/365 (day-1) or 0.075/52 (week-1) or 0.075/1 (year-1).

The higher the ratio, the better is the investment. We must, however, compare these ratios with other opportunities. Suppose, we invest that money into stock instead. And the profit is about 20% per year. Those ratios are 20/100 = 0.2 and 0.2/52 (week-1) respectively, must higher than putting money in the bank which is passive investment and receive lowest profit as a result.

To capitalize on the opportunities, the decision must be timely. Since opportunities come and go, if we do not grasp them, they fly away.  Timely is therefore a critical factor.

This indicates that optimal investment needs due diligent analysis. This analysis is crucial to ensure the success of decision making or at least reduce the involved risk. We can call this investment strategy as Active Investment. Due diligent analysis prevents us from gambling, letting emotion influences our decision. We must discipline ourselves to enhance quality decision.

The other factor is scale of investment. The bigger the capital you invest, the larger profit you earn. Therefore, you must have big amount of capital available for you to deploy at any moment to capture the opportunities in the market. Otherwise, you can make optimal decision but gain little at small scale. You should try to benefit from leverage. Borrow cheap capitals in the market and make big profit, pay small cost to use those capitals.

Quality thinking needs discipline.

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