Showing posts with label My Investing philosophy. Show all posts
Showing posts with label My Investing philosophy. Show all posts

Sunday 18 February 2024

"Tunnel-vision" investing

Investing is simple but not easy.  

It is important to have a strong philosophy, strategy and method.  Stay discipline. 

 

Stock Selection

Just follow the teachings of Charlie Munger and Warren Buffett.  They teach their 4 tenets:

  • 1.      Know the business
  • 2.      The economic moat of the business
  • 3.      The integrity of the managers
  • 4.      Always buy with a margin of safety.

Their focus is on great businesses with strong economic moats managed by honest managers bought at fair or undervalued prices.  Their teaching is so simple, and they are surprised not many follow their investing style.

Invest for the long term.  Also reinvest all dividends and returns for the long term.  Why long-term?  The power of compounding is truly magical and this is especially so after a long period of investing. 

Only invest the money that you do not need to use in the short term, e.g., the next 5 years.  This is to avoid you having to sell to raise cash for emergency use at the time when the market prices may not be favourable for you.  You should have a sum of money set aside for emergency use.



Portfolio Management

Monitor the business of the companies you own.  Keep track of their quarterly results.  Read the news that are relevant to your companies.  This will not take up a lot of your time.

In general, for the majority of the well selected stocks, you can hold for the long term. 

There maybe an uncommon occasion when a particular stock need to be sold urgently due to permanent deterioration of its business or fraudulent accounting (dishonest management).  Sell early.

Sometimes, a stock has risen to a very high price.  Yes, you may wish to sell some or all of the stock.  Yet, if you choose not to sell, it is also alright too, especially if you are holding the selected great company for the long term.  You may find that in a few years, the stock may have risen to new high prices.

Very occasionally, you have identified a fantastic new great investment with very high upside and low downside relative to your present stocks in your portfolio and which you wish to put in a lot of capital. You may wish to sell some preexisting stocks in your portfolio to redeploy into this new investment. 

Sell and replace your losers and underperformers, let the winners run.   

These strategies ensure that your portfolio is high quality and well managed optimally, to meet your investing objectives.

 

 

Investing style of Peter Lynch

Yes, Peter Lynch is a great investor and teacher, and you can benefit from employing his methods too:  cyclical plays, asset plays and turnarounds.  

You have to think differently from the crowd.  Get in ahead of the smart investors (institutions) and the herd.  By the time they spotted these and repricing comes around, you are ready to cash out.

[GCB, Hai-O, APM, KAF, and others were among these types of stocks that have been rewarding in the past. ]

  

How many stocks are investable for the long term in the stock market?  

Around 2%.  That is, in Bursa, just around 20 stocks.   You just need 7 to 10 stocks in your portfolio and you are well diversified.  Focus investing.  Invest a meaningful amount into each stock.

Worldwide, there are about 36,000 stocks.  Only 900 are investable, that is, 25 out of 1,000 are investable for the long term.   

 

Speculation / Intelligent speculation / Short term trading

For those who must play, ensure you set aside a sum of money separate from your long-term investing for the above purpose and most importantly, never add more money to this activity.  This is to avoid permanent harm to your financial health.  Majority of players historically lose money in these activities.

 

Stay within your circle of competence

Very important to know the company you invest into.  Must know the boundary of your own circle of competence and never stray outside it.  Keep educating and learning.

 

Know yourself

Know yourself.  

  1. What is your financial capacity?  
  2. What is your tolerance to risk?  
  3. What is your investing time horizon?  
  4. What are your investing objectives?

 

Keep your investing simple and safe (KISS).  

You do not need to spend excessive amount of time analysing a company if you have a well defined philosophy, strategy and method.  Use check lists.  

Organise the analysis of the stock in the format you like.  Better still, seek out the sites where the information are available in the format you like:  pay if you must.   

20% of the time spent provides you 80% of the information on the company.  Be disciplined.  Be smart.  

 

Be decisive

When the opportunity presents, and with your right preparations and knowledge, have the courage to act.  Be decisive.

 

 

Happy investing for the long term.   Yes, you also need a bit of luck .. just a wee bit.    😊

Thursday 5 April 2018

How can you achieve consistent, high-level returns?

How can you achieve consistent, high-level returns?

Students of investing look for a formula.  Many students read both technical works and the retrospective testimonies of high-performing investors.

1.  The technical approaches:  A few good books have been written.  But reported technical investment approaches rarely, if ever, lead to consistent, high-level returns.

2.  The investment memoirs:  They tend to be long on philosophy and short on advice for how to buy particular securities.



Thus, in both areas, the students are largely disappointed.





Investment memoirs of successful investment practitioners

However, as the works of successful investment practitioners, the memoirs do have much to recommend them.  They describe non-specifically, investment approaches that worked in practice.  They capture an important aspect of investment success:  that it depends more on character than on mathematical or technical ability. This is the consistent message of investment memoirs of a group of successful investment practitioners.

The problem is that each memoir presents a unique perspective on the character traits necessary for investment success.  Different authors emphasize different characteristics:

- patience,
- coolness in a crisis,
- wide-ranging curiosity,
- diligence in pursuit of information,
- independent thought, broad qualitative as opposed to detailed quantitative understanding,
- humility,
- a proper appreciation of risk and uncertainty,
- a long time horizon, 
- intellectual rigour and balance in analysis,
- a willingness to live outside the herd, and 
- the ability to maintain a consistently critical perspective.


Unfortunately, an investor with all these qualities is a rare bird indeed.

Thursday 14 December 2017

The FIVE KEY DECISIONS every investor needs to make

The 5 key decisions every investor needs to make:

1. The Do-It-Yourself Decision
Do-It-Yourself
Retail Brokers
Independent, Fee-Only Advisors
How to Select an Independent, Fee-Only Advisor
Investment Philosophy
Personal Connection and Trust


2. The Asset Allocation Decision
The Impact of Volatility on Returns
Risk and Return are Related
The Asset Allocation Decision
Cash, Bonds and Stocks
Small vs. Large Companies
Value vs. Growth Companies
Your Emotional Tolerance to Risk
Your Age


3. The Diversification Decision
Positively correlated, uncorrelated or negatively correlated.
Domestic or International Stocks
Domestic or International Bonds
Portfolio Risk and Return


4. The Active versus Passive Decision
Active Investing
Passive Investing
Cash Drag, Consistency, Costs Matter


5. The Rebalancing Decision
Rebalancing = Buy Low and Sell High, minus your emotions
Rebalancing Methods
The Benefits of Rebalancing
Rebalanced Annually
Never Rebalanced


Everyone who takes the time to address these five investment decisions can have a successful investment experience.

The elegant truth of economics is that the return on capital is exactly equal to the cost of capital.

Wealth is created when natural resources, labour, intellectual capital and financial capital combine to produce economic growth.

As an investor, you are entitled to a share of that economic growth when your financial assets are invested in and used by the global economy.


So, how can you best capture your share?

The most effective way is to deploy your capital throughout the public fixed income and equity markets ### in a broadly diversified manner designed to capture a global capital market rate of return.

With the proper time horizon and discipline you can reach your financial goals and outperform most investors with less risk.

Remember, do not focus on what you cannot control. You cannot predict the occurrence of an event like the mortgage crisis, the sovereign debt crisis or an oil spill in the Gulf of Mexico.

You can control your costs, diversify properly, establish the right asset allocation, and maintain the discipline to stay the course.

Going forward, when you see the investment predictions on the cover of the latest financial periodical, watch the talking heads make their forecasts on TV, and listen to your friends and neighbours boast about their latest great investment scheme, you will understand that they are speculating instead of investing.

You know a better way and you have the answer.




Appendix:

###
Fixed Income Asset Classes
Cash Equivalents
Short-Term U.S. Government Bonds
Short-Term Municipal Bonds
High-Quality, Short-Term Corporate Bonds
High-Quality, Short-Term Global Bonds

Equity Asset Classes
U.S. Large Stocks
U.S. Large Value Stocks
U.S. Small Stocks
U.S. Small Value Stocks
International Large Stocks
International Large Value Stocks
International Small Stocks
International Small Value Stocks
Emerging Markets Stocks (Large, Small and Value)
Real Estate Stocks (Domestic and International)



The 5 key decisions every investor needs to make:

1. The Do-It-Yourself Decision
[Should you try to invest on your own or seek help from an investment professional? And if so, which type of advisor is best?]

2. The Asset Allocation Decision
[How should you allocate your investments among stocks (equities), bonds (fixed income), and cash (money market funds)?]

3. The Diversification Decision
[Which specific asset within these broad categories should you include in your portfolio, and in what proportions?]

4. The Active versus Passive Decision
[Should you favour an actively managed approach to investing that seeks to outsmart the market, or a more passive approach that delivers market-like returns?]

5. The Rebalancing Decision
[When should you sell certain assets in your portfolio and when should you buy more?]


Each of these decisions has a significant impact on your overall investment experience.

Whether you know it or not, every day you are making these decisions.

Even if you decide to just stay the course and do nothing with your investment portfolio, you are inherently answering all of these five questions.

By learning how to make five informed investment decisions that capture the essence of investing you will never again be afraid of financial markets or uncertain about what to do with your money.

You will no longer be a speculator .. you will be an investor.



Reference:
The Investment Answer
Daniel C. Goldie & Gordon S. Murray

Friday 28 April 2017

The Investment Policy Statement

The Investment Policy Statement (IPS)

An investment policy statement is an invaluable planning tool that adds discipline to the investment process.

Before developing an IPS, an investment manager must conduct a fact finding discussion with the client to learn about the client's risk tolerance and other specific circumstances.

The IPS can be thought of as a roadmap which serves the following purposes:

  • It helps the investor decide on realistic investment goals after learning about financial markets and associated risks.
  • It creates a standard according to which the portfolio manager's performance can be judged.
  • It guides the actions of portfolio managers, who should refer to it from time to time to assess the suitability of particular investments for their clients.

Major components of an IPS
  • An introduction that describes the client.
  • A statement of purpose.
  • A statement of duties and responsibilities, which describes the duties and responsibilities of the client, the custodian of the client's assets, and the investment manger.
  • Procedures that outline the steps required to keep the IPS updated and steps required to respond to various contingencies.
  • The client's investment objectives.
  • The client's investment constraints.
  • Investment guidelines regarding how the policy should be executed (e.g., whether use of leverage and derivatives is permitted) and specific types of assets that must be excluded.
  • Evaluation and review guidelines on obtaining feedback on investment results.
  • Appendices that describe the strategic asset allocation and the rebalancing policy.

Wednesday 19 April 2017

Achieving 100% increase in portfolio value over 5 years


My Investing Objective

My objective in investing is to double my portfolio value every 5 years.   Essentially, this means a 100% return on my investment every 5 years.    What does this mean in practice?

Payback period of 5 years:   It means getting a payback on my investment every 5 years.  If I invested $1000 today, I hope to receive back $1000 over the next 5 years, excluding my capital.  My payback period is 5 years for the investment.

Return of Investment of 100%:   Another way is saying my return on investment over 5 years is 100%.  This means at the 5th year, my investment of $1000 should have grown to $2000.  This will give a return of investment of 100% over 5 years or a return on investment of 20% per year in simple average terms.

Discount cash flow method (CAGR of 15%):   I can also use the discount cash flow method too.  For my initial investment of $1000 to grow to $2000, what is the compound annual growth rate required to achieve this return?  Alternatively, working backwards, if the expected final value of the portfolio at the 5th year is $2,000, what is the discount rate that will give a Net Present Value of $1,000 (the initial investment amount)?  The answer to both questions is about 15% per year.



What is the average return of the stock market annually for the historical long term basis?

It is about 10.5% annually.  If one invests into the stock market for the long term, one can expect to compound at an annual return of 10.5% over the long term.

However, this market return is a highly volatile one, especially for those with a short investing time horizon.  In a 1-year investment time horizon, the return of the market can be an upside of 50% or the downside equivalent of 1/3rd.  That is, your portfolio value of $1000 can gain $500 (giving you a final portfolio value of $1500) over 1 year or your $1500 portfolio value can lose $500 (giving a final portfolio value of $1000) over 1 year.

However, if your investment time horizon is 10-years or more rolling, the market volatility is less and you can expect no losses.   Over a 10-years time horizon, the returns of the market are as depicted in the chart below, ranging from a high of  19.4% to a low of 1.2% , with the average at 10.5%.  Over a 25-years time horizon, the returns of the market are between the high of 17.2% and the low of 7.9%, with the average at 10.5%.


























Two Prongs Approach

How to achieve the 100% increase in portfolio value over 5 years?

For this, a two prongs approach is employed.
  • (A)  Stock selection is an important part of this.  
  • (B)  The other equally important, is portfolio management.  
Both are important in your investing.  Many focus a lot of their time on stock selection and failed to realise the importance of portfolio management in achieving their investment return objectives.



How can one achieve a compound annual return of 15% per year or an annual return of 20% per year in simple average terms for periods of 5 years running in stock market investments?


What strategies should be employed to achieve the 100% returns on your investment every 5 years, consistently and safely (without taking excessive risk, that is, low risk and high return situations)?

A.  Stock Selection 

1.  Asset allocation

Asset allocation is important.  If you allocate 100% of your investment into fixed incomes (like bonds or fixed deposits), you are unlikely to achieve this 15% compound annual return over 5 years.   These fixed income products protect your capital (but not against inflation over the long run) but their returns are too small to achieve your objective.

You have little choice but to allocate your asset into products that can give you higher returns over time.  I suggest an asset allocation of 40% Equity and 60% Fixed Income Products for those who are conservative and loss adverse.   For those who are super-conservative, maybe in the early learning stages of their investing or those in retirement, a 20% Equity and 80% Fixed Income Product portfolio can be employed.   For super-investors, the like of Warren Buffett, who knows what they are investing, the asset allocations are little in cash/ cash equivalent/ fixed income products and mostly into equity.  Buffett keeps enough cash to take advantage of opportunities that can present unexpectly at any time.


2.  Fixed Income Products

This have been mentioned above (1).  These include your fixed deposits and bonds.  Preferred shares are included here too.


3.  Blue chips bought at reasonable prices

These are companies that have done well over a long period.  They are profitable and their businesses are predictable.  They also give regular dividends.  They are generally matured companies that have captured their share of their business in their market sector.  They do grow, though slowly when compared to their early days or to the smaller successful companies.  Most of these companies grow at single digit growth rates.  Their business revenues per year generally exceed $5 billion or more.

You should choose one that has a minimum growth rate of 7%, preferably more.  Since most of these companies do give dividends (generally the dividend payout ratio in these companies are high), you can look for dividend yields of between 2.5% to 3.5%., averagely 3% or more.  Adding these two figures still fall short of your expected returns of 15% per year.  Yes, and if you re-invest your dividends (not necessarily into the same companies that give them), you can achieve this compound annual return of 15%.   In general, you can expect 50% of the total returns from these investments to be from the dividends and the rest from capital appreciation.  Don't ignore the impact of dividends on your total return, this can be significant indeed.




What other further strategies can one employ to achieve the compound annual return of 15% or more, doubling your portfolio value every 5 years?


4.  Buying blue chips at bargain prices during a market downturn or when the market is obviously low

The stock market prices are influenced by market sentiments.  There are periods when the market players are very pessimistic about the market.  During these times, good stocks are also sold down and their low prices in the market are unrelated to their business fundamentals.

Provided you as an investor can be disciplined and rational in your approach and know the difference between price and value, you are presented with this opportunity to buy good and great blue chips at bargain prices.   The lower the price you pay to own these companies, the higher you can expect your returns to be.  Yes, certainly buying these blue chips during market downturn will reward the smart or aggressive intelligent investor with higher returns, and deliver to them the compound annual return of 15% or more per year which they are seeking in their investing.


5.  Buying growth stocks at reasonable prices. (Growth Investing)

These are companies that are growing their businesses very fast (>15% per year or more).  Where can you find them?

A small startup company in the early stages without profits to show and sucking in a lot of capital is full of risk and with unpredictable future returns.  Those who invest in these should know the business well and be willing to take the risks.  They should be prepared to lose 100% of their money if things do not play out well.  Investing in these start-ups is speculation.   We shall focus on investing.

A successful startup will soon enter an explosive growth phase.  The growth can be very fast indeed (perhaps growing between 40% to 30% annually).  In the very early stages of this rapid growth, they absorb a lot of capital to support their fast growth.  Though profitable, they retain all the earnings and often need to sought new equity capital and also debt to grow their businesses.

This explosive growth phase will eventually attenuates.  They are still growing at a rapid pace, between 20% to 15%.  By this stage, these companies are profitable and generating positive (and hopefully growing) free cash flows.  They retain a portion of their earnings for growth and are now able to distribute some or more of their earnings as dividends.  In general, look for those companies distributing 30% to 70% of their earnings as dividends and are still growing rapidly between 20% to 15% per year.

For those whose objective is to achieve a compound annual return of 15% per year or more and doubling their portfolio value every 5 years, focusing their effort in this segment will be most appropriate and rewarding.  These are the small-cap and mid-cap companies in the stock market.  Always ensure that their businesses have economic moats that are deep and wide (these confer them their durable competitive advantage)   Many of these companies have business revenues less than $500 million per year (small businesses).  There are also companies with business revenues between $500 million per year and $5 billion per year (middle sized companies).


6.  Buying undervalued companies (Value Investing)

You can adopt the strategies of the bargain hunters (the value investors of Benjamin Graham).  Benjamin Graham uses the simple comparison of price versus the book value and buy with a margin of safety of 30% or 50% discount to the book value.  However, he also uses other criteria in his selection too (look these up).

When do bargains appear?

An obvious time, is during period of pessimism.  Think John Templeton.  "Buy your stocks during periods of maximum pessimism. "   The general market is sold down and you can expect to find more bargains during this time than during the period when the market is in an exuberant mood.

As for specific stocks, there are also times when the market may view these stocks very unfavourably.  The company may have run into difficulties during that period.  The fundamentals of the company maybe temporarily or permanently impaired.  There maybe some fraud discovered.  The company may have made an acquisition which is perceived negatively.  The company's product may be in the news for the wrong reasons.  There are so many reasons that can cause the company to be in the news for the wrong reasons.

To profit from these, the investor needs to assess the congruence between the news and the price.   Maybe the company is punished appropriately, and the price is reflecting its value.  On the other hand, the company maybe punished inappropriately and the price is too low relative to its given intrinsic value.  Here lies your opportunity to capture the gains offered by this bargain, should you be proven right and the other investors re-priced this company to its appropriate price.  A margin of safety of 30% gives you an upside potential gain of 50% and a margin of safety of 50% gives you an upside potential gain of 100% when repricing occurs.

I personally, feel it is more challenging to be a value investor than a growth investor.  You have to be right about the company that has recently fallen from grace.  You have to be right and others are wrong to profit from this opportunity.  What if, you are wrong and the others are right?  Also, it may take a very long time for the market to reprice your stock, even though you are right.  The longer the time for this repricing to occur, the lower is your annualised return.  These stocks generally need to be sold once their prices approached their intrinsic value.  You need to sell them at the right time too to capture the maximum potential gains.   All these difficulties are not faced by the growth investors who bought their high quality growth stocks at reasonable prices, and holding them for the long term, if not forever.

In the above paragraph, my thinking is guided by this quote from Warren Buffett:

"It is better to pay a little too much for something that is a very good business than it is to buy some bargain but really a company without much of a future."



All the above strategies can be employed regularly in the market.

There are also various strategies that can be employed to achieve 15% per year return over the long term to grow your portfolio value 100% over the period.  However, these are infrequent and often less accessible to me as a lay-person investor.   Among these are:

7.  Purchasing well-secured privileged senior issues (bonds and preferred shares) offered at bargain prices.

8.  Purchasing in special situations
which you have good knowledge of:  Mergers, arbitrages and cash pay-out.



I strongly believe that the paths below will not help me in my objective to grow my portfolio value 100% over 5 years with the degree of certainty that I want.  Accordingly, they are speculations which I would avoid.  These are:

A.  Avoid buying IPO.  "Its probably overpriced"!

B.  Avoid trading in the market.  This is a negative sum game in my book.  Those who indulge in this, as a group or aggregate, will generally lose money over the long term.

C.  Avoid buying growth stocks at high prices.  Growth stocks are liked by many and often maybe trading at high prices.  It hurts your portfolio if you pay a rosy price to acquire these stocks especially when they are popular and in the news.  "You can never get a bargain on a stock that is popular."  Be patient and disciplined, you will have the opportunity to acquire the same stock at a better price.


B.  Portfolio Management

This is equally important and contributes to achieving your investment objective of doubling your portfolio value every 5 years.

Maintaining a concentrated portfolio of stocks

I maintain a concentrated portfolio of about 10 carefully chosen stocks.   The turnover of this portfolio is generally very low indeed, reflecting the nature of the stocks selected.  I am not in a hurry to churn the stocks in my portfolio to grow my net worth quickly, as compounding over the long term at 15% per year translates into very big incremental absolute returns in the later part of the long period of my investing time horizon.

Having a few stocks allow me to focus and monitor the businesses of these companies more closely.  It also gives me the courage to put in large amounts of money into each of these stocks in my investing.


Why 10 stocks?   I will just invest in the best stocks that give the most upside to downside reward to risk ratio and potential high returns.   Over diversifying into too many stocks will give one the market returns, thus, maybe diluting your potential returns that can be derived from this strategy.

As there are only 10 stocks, each stock will have a potential value weighting of 10%.  Meaningful investing means investing at least 3% of the total portfolio value into each stock.  Too small an investment into a stock is meaningless as even a 100% gain in the stock contributes to an insignificant gain to the whole portfolio value.

Do I sell when a particular stock is proportionally too high in value in my portfolio?  Not really, unless for good reasons (see below for, when to sell).  In my portfolio, a particular stock has at one stage a 30% value of my whole portfolio and it was still undervalued.  I am willing to ride my good fortune or accept the risk of a over-represented good quality undervalued stock in my portfolio.

There are many benefits from having a long term successful portfolio.  It allows you to capture the capital appreciations and the dividends of the portfolio over a long time.  The dividends of the portfolio is a big amount and this attenuates the fluctuating returns of the portfolio in a bear market.  Compare to traders who bet a certain amount and made a 100% gain, their gains probably paled to insignificant to the dividends of a successful long term portfolio.  The dividends annually dwarf the gain of any single successful trade of a frequent trader.



When to sell

As mentioned, these stocks are rarely sold.  However, there are occasions when selling is needed.

A stock will be sold if its fundamentals have deteriorated permanently and the management is unlikely to turn it around anytime soon, example, in a year.  This stock should be sold quickly and the action requires one's urgent attention.  To not do so may cause financial harm to your portfolio.  On certain occasions, for example, fraudulent accounting, one should just sell first and think later.

Selling an overpriced stock is also a good portfolio management move.  The price is already too high and its upside potential maybe little or none and you are only facing its downside risk of loss, while invested in this stock.  You should sell partially or totally, and replace this stock with another with an equal or a better quality and with a better upside reward to downside loss ratio and potential higher returns.  This improves the quality and the potential returns of your portfolio.   This will ensure that you can achieve your 15% compound annual return in your portfolio value, doubling the value in 5 years.

On certain occasions, you may have identified a very good stock to invest into that is severely undervalued.  It is of high quality and the upside reward to downside loss ratio is very much in your favour.  It is selling very cheaply and your potential future return is going to be very very high.  You have great confidence in your stock pick and wish to put a lot more money to ride on this big bet that has presented itself.  You may then sell some of your existing stocks with still good upside to downside ratio to reinvest the money into this new stock with better upside to downside ratio and potential higher return.   Again, this will ensure that you are always improving the quality and returns of your portfolio.

Cash is also considered an asset class in the portfolio.  Where the market is so overpriced and you cannot find a stock that provides safety of capital and promises of a satisfactory return better than cash, building up a cash reserve is appropriate for that period.  The time when I was in 100% cash (or 0% equity) has never happened before and this should be a very unlikely event.  This probably can only happen in markets as was in 1996 or 1997 when the market was bubbly and irrational; even then, I was not 100% in cash then.


Confronting a Bear Market or severe Market Decline

Market price is volatile.  That is certain.  Also, a good quality growth stock over the long term should build its intrinsic value.  That is also certain to a high degree of probability.

Should I be in 100% cash when the market is a bubble in exuberant territory?  Should I sell before or when the market crashes?  Do I have the uncanny ability to time the market in these periods?

In general, it is very difficult to know if the market is fairly valued, overvalued or undervalued most of the time.  There are a few instances when you might know that the market is obviously too overvalued or too undervalued, however, these are extreme circumstances and rare events (example, in 1996/97 when it was obviously overvalued, in 1998 when KLCI was 300 points when it was obviously severely undervalued, and in Sept 2008 the Lehman crisis, when the market was severely undervalued and at the capitulation point.)

However, for one who is invested into individual stocks, these market fluctuations are meaningful to the extent that in a low market you have the chance to buy the stocks cheap and in a high market you have chance to sell the stocks at high prices.  You can adopt this strategy of pricing the market, that is,  buy low and sell high.  Equally productive and less taxing on your skill, is just buy low and do not sell; and of course, do not buy high.  The latter too is an effective strategy, especially since you are buying and holding only good quality growth stocks with durable competitive advantage.  You are betting on and aiming to capture the fantastic earning powers of your invested companies over the long term of 5, 10 or more years.

Even if the market is overvalued,  you can sometimes still buy undervalued stocks.  Of course, during this time, there are less of these undervalued stocks in the market.

Do you sell ahead of the falling market?   Only if you have the ability to know this with certainty.  Can you do so consistently?  Of course not.   A reasonable strategy is to make as much money as you can in any market, whether it is trending up or down.  Also, be prepared for the appearance of the bear when you are in the bull market period.  When the bear does appear, be prepared to see your portfolio value going down even 50% from its peak.  (For this reason, do not buy stocks on margins.  You never know when a bear market may appear decimating your net worth due to your leverage.)  Your consolation is you will have so much gains already in your long term portfolio, this 50% decline in portfolio value does not cause the loss of your initial capital.  However, your portfolio intrinsic value is definitely worth more than the market value of your portfolio in a bear market which is determined by the emotional market low prices of the period.  You can still sleep well and actually take advantage of the bear market to buy good quality growth stocks that are now offered at ridiculous bargain prices.  When the market normalises, as it should, you are once again, a winner.


The biggest threat to your portfolio - YOURSELF

The biggest threat to your portfolio value is actually yourself.  With the right knowledge and skill, you can invest safely and profit from the market over the long term.  The long period of compounding will certainly make you very rich indeed.



Conclusion

The above are my philosophy and strategies to grow my portfolio at a compound annual return of 15% per year, doubling my portfolio value 100% over 5 years.

Look at the single chart above that depicts market returns.  Over the 25 year long term investing horizon, the stock market has returned between 17% and 8% annually, averaging 10.5%.   By employing the strategies above, I have chosen to capture the gains offered by the top half of this range, that is, between 10.5% to 17%.  With dividends reinvested, this 15% compound annual return is achievable.

Of course, Benjamin Graham has counselled, "It is not difficult for the intelligent investor to achieve  modest returns (to get market return, use low cost market index funds) but when they aim for better returns, they might find that rather than getting better results, they might in fact fair worse than the average."

Those who are defensive investors should just stay with a simple asset allocation of fixed income (2) and blue chips (3) above.#   Those who are willing to put in the diligent effort, should still stay with an asset allocation of fixed income (2) and blue chips (3) and they can include into their investing all the others mentioned (4, 5, 6 & 7).

Be reminded to always stay within one's circle of competence.  You should be able to define the boundary of this circle and never stray out of it.

Finally, should a "big fat pitch" opportunity that is within your circle of competence appears, you should have the cash and the courage to take advantage of it.  I believe you can with the right preparation, philosophy and strategy.


May your investing be as successful, with a bit of good luck thrown in.



#(P/S:  For those who are not comfortable choosing their own stocks, they should choose a low cost index linked fund for the equity portion of their asset allocation.)






Tuesday 2 August 2016

The great investors tend to focus on the process more than the actual outcome.

Over time, the great investors tend to focus on the process more than the actual outcome.

If you have a simple, proven, repeatable system with the relevant mental models, the results will ultimately take care of themselves.

Having a sound philosophy and method will allow you to focus on the components that matter most to an investor's success.

By following this long enough, you will develop everlasting habits and positive feedback loops as you compound on your knowledge of investing and the businesses around you.

The more you invest now and get to know the underlying businesses and the stock market, the better you will be at investing long term.

Friday 18 December 2015

I have learned mainly by reading myself.

Buffett: "I have learned mainly by reading myself. So I don’t think I have any original ideas. Certainly, I talk about reading Graham. I’ve read Phil Fisher. So I’ve gotten a lot of my ideas from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”

"ORIGINALITY is overrated. I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart." Charlie Munger

"What’s really astounding, is how resistant some people are to learning anything … even when it’s in their self-interest to learn. There is just an incredible resistance to thinking or changing. Bertrand Russell once said: ‘Most men would rather die than think. Many have.’ And in a financial sense, that’s very true." Warren Buffett.

Charlie Munger Fan Club

Thursday 16 July 2015

Investment management process: 5 step procedure

Investment management process is the process of managing money or funds.

The investment management process describes how an investor should go about making decisions.

Investment management process can be disclosed by five-step procedure, which includes following stages:

1. Setting of investment policy. 

2. Analysis and evaluation of investment vehicles. 

3. Formation of diversified investment portfolio. 

4. Portfolio revision 

5. Measurement and evaluation of portfolio performance.


Ref:  http://www.bcci.bg/projects/latvia/pdf/8_IAPM_final.pdf

Sunday 4 January 2015

My investing philosophy revisited

Happy New Year 2015.

I thought it would be nice to recall how my investing philosophy comes about.

Being a non-financial chap,  it was difficult to understand investing in my early years.   Tried as I did, I found the acquisition of this knowledge to be challenging.  I started with various books and often find them useful but still lacking.  Many were written for financial planning, understanding businesses, economics and accounts.

My early years in investing were much guided by my friend.  A kind chap indeed who is obviously very knowledgeable was willing to share his recommendations and I bought his recommendations.  That was in 1993 and the shares that he recommended remain in my portfolio till today and have done extremely well, despite the volatility and turmoil associated with the Asian Financial Crisis, the Sars crisis and the 2008/2009 US subprime global financial crisis.  Yes, buy and hold for the long term works beautifully for selected stocks.

Of course, my pursuit of financial and investing knowledge continues till today.  Post 2000, value investing became fashionable again.  Books on value investing started to appear in our local bookshops.  The internet was a great help.  One could read numerous articles on value investing, on the gurus the like of Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, John Templeton  and many others.  Synopsis and articles on the classical books were readily available in the internet allowing one to continue to build up this financial and investing knowledge.   The classic must read books would include Intelligent Investor and Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher, One Up on Wall Street by Peter Lynch, Five Rules for Successful Investing by Pat Dorsey and many others.   All these readings, carefully and critically sorted, allow one to formulate a philosophy to suit your own investing objectives, your own investing risk tolerance, investing time horizon and  your investing financial capacity.

Guided by a sound philosophy, how can I put this into practice?  How can I approach investing without taking too much effort or time, and yet be productive in my investing?  Here lies the next challenge.  Again, being not so good in computing, I had to learn simple computing and microsoft excel to aid my analysis of stocks.  I searched for various programs that are available online and adopted these to my own self designed program.  Over time, through a bit of effort, some semblance of a simple program to guide and help my investing is realised.  This helps to cut a lot of laborious analysis of past historical data and allow one to see the big picture of the company that you wish to analyse for your investing.

Yes, essentially, you should choose your own investing philosophy.  I have recently met up with my good friend.  He has invested into index funds in his country.  That is intelligent investing too, as I realised he did not have the time nor the initiative to analyse stocks on his own.  He wished to be relatively free from doing all these for his investing; more importantly he wouldn't know how.  Yet, he was wise enough to invest in an index linked fund, knowing over the long term, his investment will be safe and with promise of a reasonable return after taking into consideration the low cost.  That is intelligent investing of the defensive type according to Benjamin Graham.

For those who are more enterprising, well, investing can be fun and exciting.  Embarking on my journey in investing has shown this to be true.  It is easy to get market return, but trying to better the market return can be more challenging than it seems.  But sometimes you are "lucky".   But luck should really not be a big element in your investing should you choose to invest on your own in an enterprising manner.  Learning from Benjamin Graham's Intelligent Investor will put you on the right track,  allowing you to formulate a sound investing policy for the long term.

Best wishes and may your investing be productive always.


http://myinvestingnotes.blogspot.com/2008/08/strategies-for-buying-and-selling-kiss.html
http://myinvestingnotes.blogspot.com/p/philosophy.html




Tuesday 24 September 2013

It pays to be eclectic

Markets change and conditions change.
One style of manager or one kind of fund will not succeed in all seasons.
You just never know where the next great performances will be, so it pays to be eclectic.


Some problems to look out for:
1.  Stuck in a situation where the managers have lost their touch.
2.  The stocks in the fund have gone out of favour:

  • A value fund can be a wonderful performer for 3 years and awful for the next 6 years.
  • Growth funds lost their advantage in certain years and then led the markets in certain years.



Definition
eclectic
adj
1. (Fine Arts & Visual Arts / Art Terms) (in art, philosophy, etc.) selecting what seems best from various styles, doctrines, ideas, methods, etc.
2. composed of elements drawn from a variety of sources, styles, etc.




Some basic approach to finding stocks:
1.  Capital appreciation stocks:  Buy any and all kinds of stocks that can give capital appreciation.
2.  Value stocks:  Invest in companies whose assets, not their current earnings, are the main attraction.  
3.  Quality growth stocks:  Invest in medium-sized and large companies that are well established, expanding at a respectable and steady rate, and increasing their earnings 15% a year or better.  [This cuts out the cyclicals, the slower-growing blue chips, and the utilities.]
4.   Emerging growth stocks:  Invest mostly in small companies.  
5.  Special situation stocks:  Invest in stocks of companies that have nothing in particular in common except that something unique has occurred to change their prospects.

Wednesday 31 July 2013

The importance of understanding your own behaviours in relation to your actions in investing; once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.

The  person capable of standing back may notice that change is the one constant.  

One might do well to stand back and consider whether a perceived truth is indeed so, or whether in fact the more things apparently change, the more some things do indeed remain the same.

Following the crowd and abandoning a commitment to a long-term approach in a business you bought into believing it to be sound could lead to a real loss, especially if, six months later, it turns out that the crowd consisted of ill-informed speculating lemmings and now the shares you sold have doubled in value as sanity returned to the market.

The importance of understanding your own behaviours in relation to your actions cannot be over-stated. 

Once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.  Something which is easier said than done.  

"An optimist will tell you the glass is half-full;
the pessimist, half-empty; and
the engineer will tell you the glass is twice the size it needs to be."

Tuesday 30 July 2013

"Money makes Money". Money can snowball.

You have an investment which you are now also getting a dividend yield of at least 7%, paid in regular instalments.  What do you do with the money after your tax has been paid?

What you don't do is withdraw it from your account and spend it.  You could do that, but that would be stupid because you can use dividend payments over time to start to accrue your wealth.  Over time, this can create a snowball effect as your wealth compounds.  Imagine getting to the point at which your dividend payments alone are becoming enough to make it worthwhile re-investing them alone, aside from anything you can top it up with yourself.

When you get to that stage, you will be on the verge of creating a self-sustaining money machine.  It is what is meant by the old phrase "money makes money".  In fact, it does.

Getting your money to work for you is indeed possible if you adopt some of the core principles of investing and apply them consistently and patiently over time.  The more time, the more money will compound. 

WHY NOT have a 100-year plan that would ensure that your children and grandchildren grow into very wealth people indeed.  Investing is a relay marathon, not a sprint. 

Be realistic and you will avoid disappointment

It is worth reflecting on what your objectives are in your investment journey.

Having a clear sense of what you REALISTICALLY expect to achieve will help you to focus on what types of shares you may wish to buy, and having already considered what type of investing personality you are, what behaviours to be aware of and what your risk tolerance is, you can start to search for your investments with a clear sense of why you are going down a particular road.

If you do not have a clear sense of what you wish to achieve, it will be much more likely that you will make a less than optimum choice of investments, and that you may become disillusioned with what you achieve.

Be modest in your ambitions and realistic about what can be achieved. 
-  Do not expect to be right 100% of the time.  Anything over 50% of the time and you are doing well.
-  One of the key skills to learn is a little about how to understand and appreciate a business, and not the share price.  This approach will serve you well.



You should be realistic about your goals.

"In this business if you're good, you're right six times out of ten.  You're never going to be right nine times out of ten."  Peter Lynch

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."   George Soros

"If you took our top 15 decisions out, we'd have a pretty average record.  It wasn't hyperactivity, but a hell of a lot of patience.  You stuck to your principles and when opportunities came along, you pounced on them with vigor."  Charlie Munger.



Expect some of your share to go down, and some to go up.  The more you do your research and the more you learn over time, the relative proportion of the latter in relation to the former should increase.  If it does not, you may want to step back and reflect on what might be going wrong.  

A tolerance for ambiguity will serve you well as an investor, as will an inquiring mind.








Thursday 25 July 2013

I have $ 50,000 to invest into stocks, what should I do?

This young lady has saved $ 50,000 since she started her first job 3 years ago.  She would like to invest this money in the stock market.  How will you advise her?

She should not invest the money in the stock market if she needs to use the cash for other purposes within the next 5 years.  Investing in the stock market is best done with money she does not need for at least 5 years or more.  The market can be very volatile in the short term and she may be cashing her stocks when the market is in a bear phase, to her detriment.

With the above provision, she can safely invest into stocks (assuming that she has acquired the necessary education or guidance).    Here are probably some issues she can consider:

1.  Since the market has a good run since 2009 and is at historical high levels, she would need to be careful as she will be investing in a market where the prices of most stocks are probably also too high.  She should allocate 50% of her cash to fixed deposits and 50% of her cash into stocks.

2.  The money she put into stocks, she can diversify these into 5 to 7 stocks.  This will diversify some of the non-systemic risks associated with individual stocks.  Her portfolio will still be exposed to the systemic risk of the market, which cannot be avoided.

3.  She should select her stocks carefully, using a bottom up approach.  Her stock selections will be guided by her investment objectives, investing time horizon, and risk tolerance.

I suppose these 3 simple steps will be an initial plan that she can implement with the help or guidance of her mentor.  Hopefully, she has one or will ask for advice from one who is willing. 

Monday 1 July 2013

Having Reasonable Expectations in Your Investing

Unreasonable expectations of how your portfolio should perform can lead to poor decisions, such as taking more risk to make up the difference  between your expectations and reality.

What is an unreasonable expectation?

1.  Expecting to gain 25 percent per year when the broader market is returning 8% is unreasonable.

2.  Expecting your portfolio to not fall when the market is down 35% is unreasonable.

3.  When investors fall behind in reaching financial goals, the temptation is to become more aggressive, which leads to unreasonable expectations.  If you choose more risky stocks (young technology companies, for example), you may have some winners that will help make up lost ground, but the odds are higher that you will simply fall farther behind.  The stock market and the economy don't care about your goals or investment choices.  They move due to a variety of actors and will go up or down with no regard to your plans.


What is a reasonable expectation of portfolio performance?

It depends.

1.  If your stocks are more heavily weighted toward growth, it is not unreasonable to expect to do better than an index of the broader market that is more heavily weighted toward growth.

2.  When the market is rising, your portfolio should also rise (and perhaps a little faster) and when the market falls, your portfolio should not drop as far or as fast.  That's the best you can hope for and if you hit, it, you are ahead of the game.

Thursday 18 October 2012

Ultimately, the best investment ideas will come from doing your own homework. You should not feel intimidated.

Investment success is not synonymous with infallibility.  Rather, it comes about by doing more things right than wrong.

The success in your investment approach is as much a result of eliminating those things you can get wrong, which are many and perplexing (predicting markets, economies, and stock prices), as requiring you to get things right, which are few and simple (valuing a business).

When purchasing stocks, you should focus on two simple variables:  the price of the business and its value.  The price of the business can be found by looking up its quote.  Determining value requires some calculation, but it is not beyond the ability of those willing to do some homework.

The wonderful thing is because you are no longer worry about the stock market, the economy, or predicting stock prices, you are now free to spend more time understanding your businesses.

More productive time can be spent reading annual reports and business and industry articles that will improve your knowledge as an owner.  The degree to which you are willing to investigate your own business lessens your dependency on  others who make a living advising people to take irrational action.

Ultimately, the best investment ideas will come from doing your own homework.  You should not feel intimidated.

Determining how to allocate your savings is the most important decision you, as an investor, will make.

Sunday 14 October 2012

My First Post in this Blog was on 1.8.2008 on the Investment Policies based on Benjamin Graham's teachings.

I started my blog on 1.8.2008 and my first post was:

Investment Policies (Based on Benjamin Graham)
Summary of Investment Policies
http://myinvestingnotes.blogspot.com/2008/08/investment-policies-based-on-benjamin.html

It was highly educational to blog during that period at the start of the global financial crisis.  There were so much uncertainties.  

However, when you have a philosophy and strategy to guide your investing that is sound and safe, it was a great time to see if this can withstand the onslaught of a severe bear market.  Actually, you should not fear the bear market.  You should fear the bull market instead.

In June 12, 2009, when the market had turned, I reviewed my investing for the previous 12 months.  Here are my lessons learned from the recent severe bear market.
http://myinvestingnotes.blogspot.com/2009/06/lessons-from-recent-severe-bear-market.html

Here are 2 articles to guide investing in the different phases of the stock market.
What to Do in a Up (Bull) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-up-bull-market.html

What to Do in a Down (Bear) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-bear-market.html

Wednesday 15 August 2012

My Investing Objective

My investing objective:  
To grow my whole portfolio by 15% per year over many years, that is, doubling the portfolio value every 5 years.











For every 5 stocks, expect 3 to do averagely, 1 to do exceptionally well and 1 to underperform.  Sell the underperformer and keep the winners.  By ensuring that you do not lose or lose small (not big), the modest gains from your stocks will translate into good gains for your overall portfolio.

For every 5 years in the stock market, expect 4 bull years and 1 bear year.  If you can avoid investing in a bubble market, you will often be safe with your carefully chosen and implemented philosophy and strategy.



There are many variables affecting the returns of your investing.

Choose a long term time horizon (>10 years) for your investing.  The reasoning is as below. 



You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.


The "Good Investment". Clarify your Investment Goals.

By pinpointing what you think represents value, you can now create your definition of a good investment.   You should be able to summarize it in one sentence.

Consider these examples:

Warren Buffett:  a good business that can be purchased for less than the discounted value of its future earnings.

George Soros:  an investment that can be purchased (or sold) prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially.

Benjamin Graham:  a company that can be purchased for substantially less than its intrinsic value.

A few more examples:

The Corporate Raider:  companies whose parts are worth more than the whole.

The Technical Analyst:  an investment where technical indicators have identified a change in the price trend.

The Real Estate Fixer-Upper:  run-down properties that can be sold for much more than the investment required to purchase and renovate them.

The Arbitrageur:  an asset that can be bough low in one market and sold simultaneously in another at a higher price.

The Crisis Investor:  assets that can be bought at fire-sale prices after some panic has hammered a market down.


Coming to your definition of a good investment is easy - if you're clear about the kinds of investments that interest you and have clarified your beliefs about prices and values.

Tuesday 14 August 2012

Your mental focus is: on YOUR INVESTMENT PROCESS

The Master Investor treats investing like a business: he doesn't focus on any single investment but on the overall outcome of the continual application of the same investment system over and over and over again.  He establishes procedures and systems so that he can compound his returns on a long-term basis.  And that's where his mental focus is:  on his investment process.  

Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.


Bottom line:  Focus on your investment process  to compound your returns on a long-term basis