Stock investment, with safety

By Siriporn Chanjindamanee The Nation Published on May 20, 2008

While there has been plenty of advice to investors lately that they should put their money into stocks to beat inflation, it perhaps should be pointed out that making a profit from the equity market is easier said than done.


The Thai equity market has been volatile because of both local and external factors, and these have affected the market in both negative and positive ways.

Investors need to reduce these risks by allocating their investment portfolio to suit the current situation. However, while investment in blue-chip stocks with strong fundamentals may be a good buffer, it does not always guarantee capital gains. Despite dividend payments, there are some cases in which sluggish stock sentiment means the returns do not justify the investment.

Many stockbrokers advise their clients to invest in accordance with certain portfolio models, in order to ride volatility successfully. For those who want to invest on their own without advice from brokers, one expert recommends a model called "Smart" investment. In his use of the word "smart", S is for stock selection, M for market timing, A for Asset Allocation, R for Risk Management and T for Tax Planning.

The idea came from Thanachart Securities executive vice president Pichai Lertsupongkit, who said market timing and asset allocation were the most important aspects but that the timing for selling or buying stock was the most difficult thing. This is because the most suitable time for buying or selling equities can never be predicted.

Asset allocation helps balance an overall investment portfolio, because investment in different sectors and different stocks brings about different results.

Pichai recommends that an overall portfolio consist of big-capitalisation stocks, small-capitalisation stocks and "trading stocks" - stocks in which you have invested for the short term - in a proportion of 30 per cent, 25 per cent and 20 per cent, respectively. The remaining 25 per cent should be invested in a retirement mutual fund, long-term equity fund or insurance policy, in order to benefit from tax privileges.

For example, if you have Bt500,000 to invest, you should allocate 25 per cent of it, or Bt125,000, for retirement mutual funds or long-term equity funds, to reduce your risk and to receive the tax benefits.

Then you should allocate Bt150,000, or 30 per cent, for investment in big-cap stocks. Many big-cap stocks are growth stocks, including oil, banking and commodity companies. Choose the best stocks from each group, with a dividend yield of at least 5 per cent.

Another 25 per cent, or Bt125,000, should be invested in small-cap stocks. Most of these are usually shrugged off by investors, who believe smaller stocks are riskier. But in fact, these small stocks have positive growth and offer high dividend payments.

When setting out to choose small-cap stocks, investors should first ensure that the companies are expected to show a profit over the next two or three years. Pichai gives the green light to small stocks that have annual profit growth of about 20 per cent, with undervalued stocks and expectations of dividend payment.

The final 20 per cent of the portfolio, or Bt100,000, should be allocated to trading stocks that give an investor flexibility by allowing profit-taking from capital gains in the short term. Without such speculative trading, overall returns may not reach the target, because it is recommended that 80 per cent of the portfolio be invested for the medium and long term.

Pichai says interesting stocks in the Market for Alternative Investment include Thai Plastic, Unique Mining Services (UMS), Unimit Engineering (UEC) and Inoue Rubber (Thailand) (IRC).

Thai Plastic produces packaging, including plastic bottles and caps, as well as other plastic products and has annual profit growth of about 20 per cent, with a dividend yield of 8.3 per cent per annum.

UMS imports coal. It makes a yearly dividend payment of about 7 per cent and has profit growth of more than 10 per cent a year.

UEC provides engineering design and production services and installs equipment for manufacturers. It offers a dividend payment of 6 per cent a year and has average profit growth of 20 per cent.

IRC pays a 4-per-cent dividend per year, while last year's net profit grew 69 per cent from 2006.

Although you may find several stocks interesting, it is recommended that you not buy more than 10 at a time, because you will not have time to follow the movements of more than that. It is also recommended that you follow the performance of your companies each quarter, in order to ensure that they are meeting their targets. If anything goes wrong with any stock, you will then have time to divest it.

If you follow this "Smart" investment model, you can expect to be safe from risks and enjoy satisfactory returns.