kind of stock it is.

Category 1: Dividend Cash Cows Dividend Cash Cows are stocks of companies that pay high dividend yields but do not appreciate very much in price. These companies are usually market leaders in slow growth, mature industries. A company usually pays a high dividend rate when they generate a huge amount of free cash flow and do not need the cash to grow and expand their operations anymore. As a result, they are able to return all this cash to you as a shareholder in the form of a dividend. Dividend cash cows are ideal for investors who invest with the primary aim of earning passive income. Many of my students who are retirees prefer to invest in this category. Although these stocks do not increase in price very much, they do not fall very much during a downturn either.

The chart shows Singtel, a typical defensive dividend cash cow stock. During this 3-year year period, the Singtels stock price rose from $2.50 to $3.20, an annual compounded rate of return of 8.57%. However, during that period, you would have collected a total of $0.62 of dividends per share, bringing your total return to 15.18%. That is not too bad! For dividend cash cows, I usually look for companies that have a dividend yield of 5% or more, is in a defensive sector, and has a large capitalization (Market Cap of at least $10 billion). I would classify certain kinds of REITs as dividend cash cows as well. Some of my favourite avourite dividend cash cows are: Stock Exchange Starhub Singapore Singtel Singapore

is highly unpredictable. It is in an exciting but unpredictable business. If it is able to continue to innovate breakthrough products, then its sales and profits will continue to increase exponentially and its share price will continue to skyrocket. However, if a competitor like Samsung, Microsoft or Google comes out with an even better phone, Apple may then lose a huge amount of market share and see its share price go into free fall. This is exactly what happened to Nokia! Nokia used to be a market leader in phones and boasted a share price of $35. After people started to dump their Nokia phones for Androids and iPhones, Nokias share price has fallen to only $2.38! On the other hand, can we be sure that 5-10 years from now, people will still eat at McDonalds, drink Coca Cola, Use their Visa Credit Card, brush their teeth with Colgate, get a bank loan from UOB bank and take

Proctor & Gamble Nike McDonalds Campbell Soup SMRT Vicom DairyFarm Asia Pacific Breweries Starhub/Singtel

US US US US Singapore Singapore Singapore Singapore Singapore

* Note that Starhub & Singtel are both Dividend Cash Cows and Large Cap Predictable stocks. Category 3: Large Cap Growth Warren Buffett would never invest in stocks like Apple, Google, Baidu,

you can bet that people will still be using credit cards 5-10 years from now. Category 4: Deep Cyclicals This category of stocks is relatively more risky but you can make huge profits from them if you know how to invest in them (and sell for profits) at the right time. Deep cyclical stocks are stocks of companies that are in capital-intensive and highly cyclical industries. This includes airline companies, shipping companies, property companies, commodity companies, construction companies, banks and manufacturers. Since these companies are highly capital intensive, they are not able to respond to demand changes quickly. For example, during a recession,

when it is near the historical lows and to sell for profits when it is near the historical high. You should also make use of indicators like Moving Averages to help you enter when the uptrend starts and exit when it starts to go into a downtrend. I love to start buying Deep Cyclical stocks when they are near the bottom of their chart ranges and see my investment increase 100%-300% when the economy starts to recover. At this time (June 2012) during the European Debt Crisis, many Deep Cyclical stocks like Diana Shipping (DSX), Neptune Orient Line (NOL), Alcoa (AA), Haliburton (HAL) and Transocean (RIG) are selling near their historical lows and could present a great investment opportunity once they start their new uptrend. Category 5: Turnarounds Have you ever read about well-known companies that have bit hit by

BP share price fell from $60 to a low of $28. I saw that as an opportunity to buy a great company at a temporarily depressed price. I knew that the oil spill was a temporary problem and although the company may lose billions of dollars in damages, it would eventually make it all back. It was is one of the largest oil companies in the world and had the financial strength to survive through the crisis. I was well rewarded when BPs share price eventually rebounded back to $50. These are my rules for investing in turnaround companies: Rule 1: The company must be a Large Cap with a sustainable competitive advantage. It must have the financial strength to withstand the temporary loss in profits. Rule 2: The bad news must be temporary in nature and should not affect the companys sustainable competitive advantage and long-term

McDonalds before they became world famous. If you invest in the right Small Cap, you could see your investment multiple a few hundred-fold to a Large Cap. While the idea seems exciting, small/medium companies are usually much risker than established blue chip stocks. These smaller companies usually have narrow economic moats (they are not market leaders yet) and may be less financially strong. Many small caps have been known to go bankrupt or get delisted when they run into cash flow problems or are unable to pay their debts during a recession. When you consider investing in small/medium cap stocks, always ensure that they dominate a niche, have little or no debt and have a healthy level of cash flow. I have personally made huge profits in small/medium size companies like Osim International, Goodpack, Raffles Medical Group and FJ Benjamin. All the above-mentioned are small/medium size

relatively safest to invest in. When you invest in ETFs, you are investing in a basket of hundreds of companies. Hence you do not have to calculate individual companys intrinsic value and be afraid of company specific risks. When investing in ETFs, you only have to concern yourself with the ETF price trend; that is to invest only on an uptrend and to sell when it starts to reverse into a downtrend.

Building a Winning Portfolio For Yourself

Now that you understand that not all stocks are built the same way and that different stock categories have different levels of risk and potential returns, you can begin to build a portfolio that will help you achieve your

crashing down during its oil spill disaster, stocks of Conocophilips, Shell, and Exxon Mobil came down as well. When investment Bank J.P. Morgan lost $2 billion in 2012 as a result of a bad trade, its stock came crashing down more than 30%. This caused stocks of related banks like Citigroup, Bank of America, Morgan Stanley and Goldman Sachs to crash down as well. This is known as movement in sympathy. If you had invested half your portfolio into 4-5 bank stocks, then your portfolio would have taken a very big hit! If you had only 1-2 bank stocks and invested in rest of your money into other sectors like consumer goods stocks, industrial stocks, oil stocks or technology stocks, the rest of them would have cushioned the blow. 3) Invest In No More Than 3 Turnaround Stocks and No More Than 4 Deep Cyclicals and Small Fast Growers At Any One Time Dividend Cash Cows, Large Cap Predictables, ETFs and Large Cap

When the market is at the top of its cycle (when stocks are overpriced), I would start to selling to lock in profits and raise cash. In fact, when the stock market starts reversing into a downtrend from a high, I would usually sell everything and keep 100% of my portfolio in cash. As an investor, you do not always have to be invested in the market. When the situation is not favourable, it is better to hold cash and wait for the right time to put your money back to work. 5) Your Portfolio Should Be Aligned To Your Lifestyle and Risk Appetite Many people make the huge mistake of blindly following the investment advice and stock picks of experts. This is the worst thing you can do. The expert you listen to may have a totally different risk profile, investment holding period and lifestyle as compared to you.

For investors who have very little time and inclination to study financial statements and who fear picking the wrong stocks, then their portfolio should consists only of ETFs and REITs. An example of an ETF/REIT only portfolio is shown below:

Portfolio A S&P 500 SPDR ETF (SPY) S&P 400 MidCap ETF (MDY) S&P Technology ETF (XLK) Morgan Stanley China A Share ETF Singapore STI ETF Suntec REIT K-REIT Ascendas REIT CapitaMall Trust

Colgate Palmolive (US Large Cap Predictable) Kimberly Clarke (US Large Cap Predictable) McDoanlds (US Large Cap Predictable) Clorox (US Large Cap Predictable)

MasterCard (US Large Cap Growth) Nike (US Large Cap Predictable) Proctor & Gamble (US Large Cap Predictable) Asia Pacific Breweries (Singapore Large Cap Predictable) Vicom (Singapore Large Cap Predictable) Jardine C&C (Singapore Large Cap Growth)

Diana Shipping (US Deep Cyclical) Osim International(Singapore Fast Growers) Goodpack International (Singapore Fast Growers) Visa (US Large Cap Growth) Bank of America (US Deep Cyclical/Turnaround) Noble Group (Singapore Deep Cyclical)

6) Adapt Your Portfolio to The Market Cycle You have learnt in a previous chapter that the stock market goes through cycles of highs and lows, leading the economic boom and bust cycle by 6-9 months. When the stock market is recovering from the bottom of the cycle, there