Weekend Reading For Novice Investors

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.)

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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?  😉 

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Share!

    14 thoughts on “Weekend Reading For Novice Investors

    1. B

      Hi 15hww

      Good compilations out there, this is definitely for everyone, not just the novice as you mentioned in the title.

      One thing that people like Dividend Mantra is able to invest almost fully is that he really doesnt need the cash invested in the stock market, even if market tanks by 50%, his lifestyle would be completely unaffected, and he would probably add more to it.

      I think it’s prudent that young investor builds up some funds necessary for whatever use, then invests the unused portion to investment.

      1. My 15 HWW Post author

        Hi B,

        You are right about people like DM. Furthermore, his expenses are really low, so he really need not worry much. I notice you commented on that article too. =)

        If I am not wrong, you are also close to 100% invested in the market (refering to your investment funds). I think it could work well for you too with below average expenses and the fact that both you and your wife are working.

        To be honest, I wasn’t very comfortable during the middle of last month when the market was volatile. I was much more at ease when I converted 10% of my holdings to cash.

        The stock market can be a very expensive place to find out more about yourself. =p

        1. B

          Hi 15hww

          Yes, i’ve been following DM posts as well. They are motivational and entertaining 😉

          For myself, I’ve stayed almost close to 95% invested at all times. I am still working and my dividends payout should cover over the course of the months. If anything is bad about it, it is probably that I have run out of funds when the recession really happens. But they do come in months, so I will be able to participate in those moments as well.

          My wife doesn’t invest, so she had her money safely put in her bank account. We’ve covered ourselves pretty decent with all insurance and expenses (with kids) covered, so the planning is there.

          1. My 15 HWW Post author

            Hi B,

            I always feel it’s ok or maybe even good to have slightly different opinions. =p

            And as you have elaborated, maybe we are not so different after all. I am essentially the manager of the 15 HWW household’s funds and both of our savings are co-mingled. Think maybe if you include your wife’s funds, our asset allocation could even be the same.

            Ah… I wonder if a recession comes, would Mrs B. allow you to use a portion of her cash to invest? LOL.

    2. Tee Leng

      Hi 15HWW,

      Thanks for sharing my article! Personally, I do not really believe in index invested coupled with DCA. In the long run, given how we keep putting money back into the index it would smoothen out the returns making it pretty minimal. Especially compared to many simple & proven backtest strategies out there like investing in the lowest 30 P/E stocks would give an annualised returns of 17%~ over a 35 year period as shown by Graham.

      1. My 15 HWW Post author

        Hi Tee Leng,

        No problem. I think it’s well-written and that’s why I shared it.

        With regards to your strategy, I remember Graham mentioning that when there is a huge chunk of data, it’s always possible to back-test and tweak a set of criteria until you get very good annualised returns.

        So I am generally quite skeptical of such “mechanical” methods that is supposed to beat the market. A notable one that comes to mind is Motley Fool’s Foolish Four. It didn’t turn out very well even though it had delivered 25.5% returns for the past 20 years.

        And when a strategy becomes popular, it’s likely to lose its effectiveness. The Dogs of the Dow theory stopped working after it became popular in the 1990s.

        Granted, your suggestion does seem to involve some fundamentals. However, I doubt it would have worked very well in Singapore for the past decade. It would probably have picked up a lot of S-chips which exploded. Maybe you can do a back-test to verify.

        And most importantly, there’s no guarantee that what’s worked in the past will continue to perform well in the future. At best, one could use a small portion of his portfolio to test out this strategy going forward.

        For an investor who doesn’t want to study the business behind the stock, an average result is actually an exceptional result. And that’s what I would still recommend.

        1. Tee Leng

          True, when strategies becomes popular, it will lose its effectiveness. However, look at it this way. Like with value investing, the secret essentially is about taking a long term horizon with investments. However, why isn’t everyone adopt this mindset? E.g. Why do we have people panic selling when bad news arises/ buying on trends/ momentum trading/ high frequency trading etc. With these strategies, though widely known, not many are able to stomach the kind of companies trading at the first decile and they have to know how to really navigate this pool of stocks. Like I have seen companies trading below NCAV in Singapore, navigated well, most have performed superbly. It’s pretty hard to sell this idea to be honest, I’ve tried many times but people are highly skeptical with the method.

          1. My 15 HWW Post author

            Hi Tee Leng,

            As you have mentioned, besides knowledge, good investing also depends largely on mental fortitude and how one can control one’s primary instincts and emotions that lead to bad decisions in the financial markets.

            “Navigating” takes both skill and experience which the novice might not have and might not be prepared to pick up. I have seen friends who DCA happily and heck about their portfolio. That might not be a bad outcome.

            From what I have seen from BigFatPurse, their method of buying companies under NCAV coupled with a few more reasonable criterias as screens could work. I am definitely not so skeptical with these kind of methods. =p

    3. Rolf Suey

      Hi 15HWW,

      Always admirable to see you put in so much effort in your articles and comments! It is really useful. Re-reading or re-capping a book can be even more important than reading a new ones. It carves and crystallize your thoughts!

      Just to share what it always works for me. For me, prior to start learning to invest, first read/learn from people best in the field their “Mindset and Mentality”. Once you have the right mindset prepared, it’s easier to reference the experts’ methods, and then devised what is the best method for you.

      Just my views. 🙂

      Once again, thanks for the well written article.

      Cheers, Rolf.

      1. My 15 HWW Post author

        Hi Rolf,

        Thanks for your kind words. =)

        Besides making the effort to read, one also has to read “good” books to improve himself.

        Agree with the mindset part but I guess I would caveat that mindset does take time and practice. Hard to transfer immediately. Actually, thinking about it, that also applies to method too? =p

        1. Rolf Suey

          Hi 15HWW,

          Cannot agree more. But it is better to know or even smell where your path from start, rather than just hit as you go. Just my thinking of having (or at least knowing) right mindset, then go and do, practise, make mistake, learn and improve. Most important is to have a positive and open mind. Again mindset!

          Hahaha…forgive me for being “Lo Soh!”

          Rolf

          1. My 15 HWW Post author

            Hi Rolf,

            Nah, I understand. Sometimes, things are just so important that they have to be “drummed” in!

            Enjoyed the conversation. =p

    4. Jes

      Hi 15HWW,

      I like this basic guide as it summarizes the crucial points of the super-investors’ methodology. And yes, I skim through it =P

      Anyway, the books there are very informative but some are really quite heavy. I am speaking from a super-novice investor (if you are novice) who have stopped some books halfway as I kept falling asleep after a few chapters. Some are truly boring and not what I would recommend to people who have not started investing. Not saying which books though cos’ opinions do differ.

      1. My 15 HWW Post author

        Hi Jes,

        Glad you liked it (on behalf of Value-Edge).

        If you’re falling asleep reading most of the books, maybe that’s where passive investing (aka index investing) comes in. =p