Adam Khoo Piranha Profits (review and notes)

Here's my concise notes after learning about the Stock Market Basics, Exchange Traded Funds & Steps to Profitable Investing from Adam Khoo's Wealth Academy Course.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6

Keys to profitable investing

  • What to buy
  • How much to buy
  • When to buy

Helpful websites are available for each section of my notes.

Stocks in the HK market: AA stocks

Stocks in the US market: Finviz

Helpful indicators for Facebook Stock (Data is shown for 9th Sep 2021)

Earnings per share

EPS or profit per share = (Income or profit or Net income)/shares

10x P/E means share price is trading at 10x the earnings

P/E dun take into account growth rate of earnings

Interpretion of P/E (12X) = earnings growth rate (12% growth per year)

PEG ratio

PEG ratio takes earnings growth rate into account

PEG ratio = P/E ratio/earnings growth rate

Earnings growth rate: EPS next 5Y

PEG ratio>1: overvalued

PEG ratio<1: undervalued

PEG 1-1.6: still reasonable to invest in

Common indexes in US market

  • The Dow Jones Index (30 largest companies)
  • The S&P 500 Index (500 largest companies)
  • The Nasdaq Composite Index (average of all stocks listed on the Nasdaq stock exchange)

Useful facts

  • Stock markets are in bull mode 91% of the time, with impulse and correction patterns
  • Corrections: buying opportunities, with temporary dips of 5 - 15% and last ~1- 2 months
  • Bear markets come every 6-8 years, last ~ 6 months - 1.5 years
  • Stock prices drop an average of 36% (50% in a severe bear market)

Type of ETFs

  • Market Index
  • Sector/industry
  • Bond
  • Foreign currency
  • Commodity
  • Inverse
  • Leveraged

Market index ETFs

  • SPY: S&P 500 Index ETF
  • DIA: Dow Jones ETF
  • QQQ: Nasdaq100 ETF
  • GXC: S&P China ETF
  • EWG: iShares MSCI Germany ETF
  • ASHR: DBX Shanghai A Share ETF
  • Hang Seng technology ETF: 3033 ETF
  • BKF: ETF covering Brazil, Russia, India and China
  • EEM: Emerging Markets ETF

To find ETF for a specific country, in the case of China - here is the link

ETF Information: State street SPDR (Global Advisors)

Sector/Industry ETF

Information about Sector ETF: Sectorspdr

  • Healthcare (XLV)
  • Materials (XLB)
  • Energy (XLE)
  • Financials (XLF)
  • Industrials (XLI)
  • Technology (XLK)
  • Utilities (XLU)
  • Consumer Staples (XLP)
  • Consumer Discretionary (XLY)
  • Communications (XLC)
  • Real estate (XLRE)

Types of Sector

  • Healthcare
  • Financials
  • Energy
  • Consumer
  • Technology
  • Industrial

Industries with growth potential

  • AI (BOTZ)
  • Cybersecurity (HACK)
  • Robotics (ROBO)
  • Cloud Computing (SKYY)
  • Clean Energy (ICLN)
  • Solar Energy (TAN)
  • Disruptive Technologies (ARKK)

What to take note before buying an ETF

  • Fund size (AUM)
  • Reputable fund maangement companies
  • Number & % allocation of each company
  • Diversification of companies
  • Expense ratio
  • Average volume (>100K shares traded per day)
  • Past performance

Types of Bond ETFs

  • Treasury Bonds (TLT, IEI)
  • Emerging Market Bonds (EMB, JNK)
  • Corporate Bonds (LQD, VCSH)

Types of inverse ETFs

It is designed to perform opposite of the underlying index. They are used to "short" the index. it's used during bear market as it goes up while market goes down.

  • Short Dow Jones (DOG)
  • Short S&P 500 (SH)
  • Short Nasdaq-100 (PSQ)
  • Double Short S&P 500 (SDS)
  • Double Short Financials (SKF)
  • Double Short Bonds (TBT)

Commodity ETFs

Used to invest in physical commodities, such as agricultural goods, natural resources and precious metals. It can be focused on either a single commodity or track the performance of a commodity index. Commodity prices are driven by demand and supply (geopolitical events) and the strength of the US dollar.

  • Gold (GLD)
  • Tracks light sweet crude (USO)
  • Sugar ETN (SGG)
  • Commodity (DBC)
  • Silver (SLV)

ETF Portfolio Allocation (Equity only)

SPYSPDR S&P 500 ETF Trust 25%
QQQInvesco QQQ Trust 25%
ASHRXtrackers Harvest CSI 300 China A ETF 15%
VNQVanguard Real Estate ETF 10%
EEMiShares MSCI Emerging Markets ETF 10%

ETF Portfolio Allocation (Multi-Asset)

This is also known as the All Weather Portfolio, invented by Ray Dalio. AWP is a passive, buy and hold strategy designed to perform well under all market conditions. It achieves moderate returns with minimal volatility.

Entry strategy: dollar cost averaging and rebalance portfolio annually

SPYSPDR S&P 500 ETF Trust (Stock)30%
TLT iShares 20+ year Treasury Bond ETF (Long term bonds)40%
GLD or IAUSPDR Gold Shares (Gold)7.5%
DBCInvesco DB Commodity Tracking (Commodities)7.5%
IEIiShares 3-7 year Treasury Bond ETF (Intermediate bonds) 15%

To test the returns of various portfolios: Portfolio Visualizer

Steps to successful investing

  1. Identify very good businesses
    • Increase in value overtime (higher sales, earnings and cash flow from operations)
    • Economic Moat
    • Brand Monopoly
    • High Barriers to Entry
    • High Switching Costs
    • Network Effect
    • Conservative Debt

2. Invest when the stock is undervalued

3. Sell when fundamentals deteriorate or when stock is overvalued

When does a stock trade below its value

  • Investors have negative perception of company
  • Error that affects short term profitability only
  • Bear market
  • Industry recession
  • War/disasters

When to buy or sell

Investment strategies recommended

1) Dollar cost average for buy and hold stocks

  • Invest a fixed dollar amount at regular intervals

2) Trend following

  • Identify trends using moving averages and price action
  • Buy when the index starts an uptrend or is making a dip on the uptrend
  • Sell when the index reverses into a downtrend

3) Hybrid approach

  • Only dollar cost average when price is making a dip on an uptrend or when prce is at the support level of a consolidation
  • Avoid DCA when price is on a downtrend trend

General principle: buy when there is a reversal or trend signal

  • Buy when the price is at the dip of an uptrend, at the support level of a consolidation, buy at the dip where it bounce off MA support or reversing into new uptrend
  • As the share price increase, wait for retracement and buy at the support level
  • Avoid buying at the highs of uptrend (far from moving average)
  • Avoid buying shares on a downtrend, as the low can go lower

Sector Rotation

Read more about sector rotation model here and here

How to DCA when the stock price is falling

One of the definitions of a bear market: when stocks, on average, fall at least 20% off their high.

When the market drops 90 degrees, the price is likely to shoot up. The average bear market drops 36%

Imagine you want to buy 100 units of a stock. Consider to buy in when the market drops by

  • 25% (add 1 quarter of your position = 25 shares)
  • 35% (add 1 quarter of your position)
  • 45% (add 1 quarter of your position)
  • 55% (add 1 quarter of your position)

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