I believe that more often than not, you skim through most of these (not exactly short) posts of mine. I know that because occasionally, I succumb to that too. 😳
In a perverse way, there’s simply too much information to digest online these days and I honestly don’t expect you to read through every word of every article on this blog, especially with so many other impressive bloggers out there competing for your eyeballs. 😉
However, I do hope it will be different for this article, especially if you’re a novice investor. Besides the fact that I have spent many hours drafting this post, I think the entire post (comprising many external useful resources) will be really helpful for you on your investment journey.
In case you’re offended by the word “novice”, let me clarify that I regard myself as a novice investor too. That’s not surprising since I only have about 4 years of experience in the financial markets (with my skin in the game).
So, I still have much to learn. In the past two weeks, I have re-readed several investment-related books (most notably “The Intelligent Investor”) and read through the history of many of the better local investment blogs.. Not to mention investment websites and some of the useful threads on investment forums.
I have proceeded to organise the best of them in a sensible way to make it more comprehensible to the beginner. And you shall see below that this post piggybacks on some of the amazing works done by others. (And you need not click on all these external links. There’s quite a few. 🙂 Even though I feel all are very useful, just do it for those you are interested in.)
A Basic Guide
“Investor’s Handbook” by Value-Edge
This handbook is the catalyst behind the post as I wanted to share this beginner write-up (co-authored by one of the local bloggers) with you. If you only have less than an hour to spare over the weekend, then just click on this link.
The first 3 pages provide a list of books to read and the authors have even categorised the books according to how palatable it is likely to be for a newbie. There’s also some descriptions of key accounting terms and good explanations of investment terms and trends like Mr Market & Intrinsic Value.
Obviously, it’s not all-comprehensive but it’s a good start if you’re next to clueless about value investing.
What Kind Of Investor Do You Want To Be?
This is probably the first question every new investor should ask himself. And it shouldn’t depend on the returns that he want or even need.
I know $100,000 invested with 8% nominal returns only compound to an amount of $466,000 after 20 years, compared to $3.8 million if you can achieve a nominal return of 20% over 2 decades.
But that’s really besides the point.
Instead, you need to ask yourself how much effort you want to put in for your investments. Are you prepared to put in the same effort as superinvestors like Warren Buffett when it comes to analysing and researching stocks and their industries? And even so, there’s no promise of superior returns as you might not be as gifted as him. Many have realised that after decades of trying. Unless you enjoy the process much more than the rewards, it’s probably better to be a defensive investor.
Anyway, the last sentence above isn’t my advice. This is from Ben Graham, who is Buffett’s mentor. When people talk about “The Intelligent Investor”, Chapters 8 and 20 often gets the most mentions. However, I thought that equally important chapters for the typical investor include 1 and 5 which discusses who a defensive investor is and what he should do. I have little doubt that if Ben Graham was around today, he would advocate index investing for a conservative defensive investor.
You could perform dollar-cost-averaging (DCA) in a regular savings plan and a comparison of the plans available in Singapore has been done here by BigFatPurse. As for constructing a portfolio of ETFs heavily rooted in the indexing philosophy, you can find some examples with a home bias from cheerfulegg.
Selecting Stocks: Exercising More Prudence?
You can probably skip the this section if you have decided to be a defensive investor. But hey, doesn’t hurt to know a little bit more, right? 😉
So you have decided to be a more enterprising investor and after going through all the financial ratios and performing a qualitative analysis of a stock (iikely after a couple of weeks), it appears that every signal points to a buy.
But before you do it, the most important thing you can do could be to listen to somebody who insists you are wrong. That’s Jason Zweig’s (renowned finanical columnist and editor of the revised edition of “The Intelligent Investor”) recommendation which I tend to agree.
Let’s illustrate with an example. Dairy Farm appeared to be an attractive proposition when I started out investing 4 years ago. However, the high cost needed to purchase one lot put me off. The price then started shooting up. Recently with the price coming down to a lower valuation, I am taking a closer look again.
And how timely that Motley Fool Singapore presented a bull argument and Share Investment producing a bearish analysis at the same time. I am a big fan of their tug of fools series and hearing from both sides of the coin would likely help one to stay more grounded. If an investment is still made in the end, it’s likely to be done with more conviction too.
Diversification & Leverage
If you’re a believer in putting all your eggs in one basket and watching it very carefully as opposed to spreading them over many baskets, good for you. But even so, you’re likely to have more than 1 stock in your portfolio in the steady state?
Because if everything is invested in 1 stock which also incidentally relies heavily on 1 customer, this could happen to you one day.
Besides losing everything, one could actually be even worse off if one traded (invest is probably not the right word here) with leverage. Leverage in the financial markets is best treated with caution and really should just be reserved for professionals. Even then, Wall Street is littered with stories of professionals blowing up.
Fully Invested or Not?
So from the above, does it follow that if I diversify, I can be fully invested?
Well, there appears to be some merit to this argument with these two very recent articles (here and here). It appears that both Mr Money Mustache & Dividend Mantra are more or less fully invested in the stock market.
And even though I adopt a slightly different view than them, I really think such a strategy could work out well for them. Afterall, both of them are producing good income from their writing and side projects and are still relatively young in their early and mid-30s. Coupled with good dividends coming in from a well-diversified portfolio at the same time, they would probably be able to sleep soundly even if the stock market corrects by a hefty 20% over the next few months.
But is this strategy suitable for you? Or should you listen to what Ben Graham says and put at least 25% of your portfolio in bonds or cash as a conservative measure to preserve your sleep and mental health, in case a bear market arrives unexpectedly?
So well, we come back to where we started. What kind of investor are you and how well do you know yourself? 😉