Having devoured most of the mainstream investing literature by my late teens (yeah, I am a real geek), I realised that there were basically two different philosophies governing the entire investing universe.
No, I am not pitting growth investing against value investing. That’s really a much smaller battle compared to the real war of Bogleheads vs students of Buffettology. And three years ago, even before putting a cent into the market, it seemed that I had to make this decision that was pretty much as tough as choosing between saving my mum or my wife in that typical drowning situation.
The most difficult part is that both camps make so much sense.
Warren Buffett made his fortune picking stocks, buying exceptional businesses at bargain basement prices and then simply holding the shares forever. Many academics who cling on to the efficient market hypothesis attribute his six decade-long success to a 3 or 4 or 5 or 6 (you get the drift) sigma event or simply luck. But that’s simply absurd. He and his buddies have repeatedly achieved higher returns than the market average (we’re talking about decades here). But the important question is, am I as good or even nearly as good as him?
Probably not. It’s also true that mathematically, it’s impossible for everyone to perform above average although there’s nothing to stop everyone from thinking that way. So, John Bogle introduced passive index investing funds to save the average Joe from himself. His argument was that if most of the fund managers (with all their powerful tools and brilliant theories) have statistically underperformed the market return in the long run, what chance do the average Joes have? In comparison, Bogle’s Vanguard funds or similar instruments like ETFs would achieve average market returns since they are buying all stocks in proportion to their weight in the market. No stock picking here. Investors also save on the high management fees that’s typically charged by the mutual funds.
So, unless you are convinced that the fund manager is the next Buffett, Lynch or Templeton, you should really avoid paying a huge fee to someone else to manage your heard-earned money. That’s the common ground both camps are firmly on, since even Buffett admitted that retail investors who behave like children in the market are probably better off with index funds. So if you’re average or have no interest in understanding stocks beyond the superficial, it’s really best to stick with Bogle’s suggestion: Passive Investing.
But I am not content with being average and I do have a keen interest in businesses. As I always believe that I have the capacity to perform above average in anything I strive to do, it was really natural for me to try my hand at building my own portfolio of stocks. But whether I could climb to the top 5% of the investor pile was another story. There’s also a statistical chance that I could perform much worse than chimpanzees throwing darts at stocks.
Before you get infuriated with me sitting on the fence and being non-committal (girls hate that), I would like to point out that many of us behave this way. You want stuff to be cheap and good. You think of yourself as an above average stock picker but at the same time, would like to limit your chances of getting your fingers burnt by your own potential inadequacy. You want to achieve higher returns with lower risk. So I try to get the best of both worlds by using both Bogle and Buffett’s strategies!
What I Did
First, I started the Philip Sharebuilder Programme, where I could accumulate the STI ETF on a monthly basis, leveraging on any potential benefits of dollar cost averaging at the same time. I put in a fixed amount of money and there’s no market timing. I buy more of the market when the index is priced lower and vice versa. To limit the costs and fees to 1%, my wife and I decided to put in $600 a month. This account was slated more for retirement at 65 then, since passive investing has proven to be much more conservative and less volatile compared to investing in individual stocks. This was supposed to be that solid foundation which I could rely on if I overestimated myself at Buffettology.
Reading books on value investing that studied Buffett’s principles and strategies made stock picking and value investing appear really simple. But those stuff were all hindsight and I only began to test my own foresight with my first share purchase in November 2010. Although I do have some background in accountancy, I admit I find little joy ploughing through the annual report numbers in great detail. Being more of a macro than a micro person, I prefer to read others’ analysis (ok, I admit being a bit of a free loader here) to find out more about a company. And judging by my performance thus far, I do have some knack at picking out good analyses. Special thanks to Valuebuddies, a place where I have learnt and benefited much from (I am slightly embarrassed to be this passive member without even a single comment).
After almost 3 years, by my rough calculations, while the Sharebuilder has largely remained flat, I have made more than 10% (including dividends) on an annualised basis for my own portfolio. Although it’s still a tad too early to give up on being a Boglehead and proclaim myself the Man with the midas touch, due to my 15 HWW goal, more attention and moolah will be channeled towards individual stocks with sustainable and more generous dividend policies (already evident from the My Passive Income page).
The point is, I began investing relatively early at the age of 24 and if you have procrastinated because you’re not sure about being a Boglehead or studying Buffettology, that’s really not an excuse. Just do BOTH as a start.