Measuring Our Stock Trading Profit

The Starter Investor Measures Trading Performance

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

KEEPING TAB OF OUR TRADING PROFIT is more about tracking our success in the stock trading game. But how do we measure our accomplishments?

Reinvestment

"In a continuous program" says Benjamin Graham, the author of The Intelligent Investor: The Classic Text on Value Investing, "no market profit is fully realized until the later reinvestment has actually taken place."

Trading profit

In more concrete terms, the "true measure of the trading profit" Graham says in Chapter Two entitled The Investor and Stock-Market Fluctuations, "is the difference between the previous selling level and the new buying level."

For illustration, let us use the completed stock trading operating cycle mentioned in a previous post on  BPITrade Updated Fee Structure:

This shows a trading profit of almost 8 percent based on our previous total sell price. Just maintain similar results in the next 9 to 12 stock trading roundtrips and you are on your way to doubling your money probably.

Buy Stocks or Hold Cash in High Market Levels

The Starter Investor Buys Stocks

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

DECIDING TO PUT YOUR MONEY IN STOCK OR KEEP YOUR CASH ON HAND during high market levels may not be an easy task for the marginal investor.

But the following insight should help: "On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is higher than can be justified by well-established standards of value" says Benjamin Graham in Chapter Two of his book The Intelligent Investor: The Classic Text on Value Investing.

Sometime in February 2007, we needed to make a choice between keeping our cash on hand or making an investment and buying 10 shares of Ayala Corporation at 630 pesos per share when the general market level is high by my reckoning.

Deciding to invest in stocks

Keeping the money with me will expose my funds to the greater risk of tempting alternatives like buying a digital camera, eating out and going shopping, or enrolling in that short course for a home-based business. I ended up buying the Ayala Corporation stock and assuring myself that it is better to have a long-term investment and a possible paper loss of 50 percent that can be fully recovered over time than no investment at all.

Stock and cash dividends

By the end of March 2009, I had received 4 shares for stock dividends, about 137 pesos for cash dividends, and 128 pesos for value of fractional shares from the stock dividend.

Based on the closing price of 206 pesos, the nominal valuation of my investment portfolio is about 3,150 pesos. The total cost, however, of my investment including BPITrade upliftment fee is 6,515 pesos. This meant I had a paper loss of nearly 52 percent.

Precisely, my paper loss is almost the value approximated by Benjamin Graham that an investor may experience in a well-defined bear market.

Therefore, so long as there is no "convincing indication that the underlying values have been permanently affected" - this Starter Investor has no worries.

How to Build Equity for Your Speculative Stock Trading

The Starter Investor Strategy for Building Equity

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

STRATEGIES FOR BUILDING YOUR EQUITY for the purpose of stock trading are derived from what I shall call the Marginal Investor Triangle.

We start out with generating savings being our main objective, hence making us Savers.

Since savings does not offer protection against inflation, we seek a complementary activity that shall serve as a hedge. Thus, we become attracted to the hedge provided by capital gains obtained from engaging ourselves in the stock trading business, partly transforming us into Traders.

When the saver and the trader are placed in the presence of each other, they attract one another and from their union is born the Investor and his investments. This point completes the formation of our Marginal Investor Triangle. 

Saver

Clearly, the starting point for the investor described in my previous post Finding the Money for Investment is generating savings. Set aside no less than 275 pesos monthly and within a year, we shall have a desirable balance for opening a BPI Expressteller Savings account: 3,000 pesos.

Investor

Continue with your savings program and by the second year, we shall be ready to open our BPITrade account in preparation for our stock trading operations.

 

The First Step: Starter Stock Trader

By the third year of our savings program, we shall have the equity for speculative stock trading. From being savers, we now become swing traders looking for buying opportunities and capital gains by investing in the Philippine Stock Exchange.

The Goal: Intermediate Stock Trader

We shall continue with our saving and trading activities until we can build a fund of over 50,000 pesos. Why this amount? Because this is the minimum price of our ticket to the world of BPI Investment Funds.